The 5 Financial Mistakes Service Based Businesses Make (And How to Avoid Them)

Running a service-based business isn’t easy! When you first started your business, you didn’t realise all the admin and red tape you’d have to contend with. Juggling all of that alongside your sales, client nurturing and your finances isn’t plain sailing to say the least.

After working with countless service-based businesses, I've noticed the same financial hiccups cropping up time and time again. The good news? They're totally fixable once you know what to look out for.

So let's talk about the five most common financial mistakes that could be quietly sabotaging your business, and how you can avoid them.

1. Not tracking your cash flow

You know that feeling when a big payment lands in your account and suddenly you feel like Richard Branson? Then three weeks later you're checking your balance twice because surely there's been a mistake?

Welcome to the cash flow rollercoaster, and it's not nearly as fun as it sounds.

Here's the thing: cash flow isn't just about having money come in; it's about knowing when it's coming in and planning for when it's not. I've seen brilliant businesses nearly fold simply because they didn't see a cash crunch coming.

What actually works: Start with a simple quarterly cash flow forecast. Plot out when you expect payments to arrive and when your bills are due. You'll spot potential problems months ahead rather than days.

And here's a game-changer: ask for deposits or milestone payments on bigger projects. Your clients won't mind (they're used to it), and your bank balance will thank you.

2. Charging for time rather than worth

Many business owners are charging for the time they spend on client work without factoring in the time they spend working on their business rather than in it. For example you want to earn £50k a year, you work out that you roughly work 40 hours per week which is just over 2000 hours per year. Yes 2000, that's a lot right? But here's the real problem: you're not actually working 2,000 billable hours a year. You're doing admin, chasing invoices, networking, updating your website, and about a million other things that don't directly generate income.

Plus, you've got overheads such as software subscriptions, insurance, etc. And let's not forget, you're running a business, not a charity. You need to make a profit!

The reality is that if you want to take home £50k and you can realistically bill 1,400 hours a year (which is pretty good going), you need to be charging at least £50-60 an hour just to break even. Add in your profit margin, and suddenly that £25 rate looks a bit unrealistic, doesn't it?

Don't be afraid to charge what you're worth. Your expertise has value, and your clients are paying for results, not just time.

3. The Personal vs Business Expenses

For limited companies it’s a legality to have a business bank account and all business expenses need to be accounted for. Even if you’re a sole trader we strongly recommend you keep all personal and business transactions separate.

Not only does this make your bookkeeping easier but you can track your expenses much more accurately.

If HMRC comes knocking, you want to be able to show them exactly what's business and what's personal without having to explain why you bought groceries on the company card.

4. Plan for your tax bill

Tax planning. Just reading those words probably made you want to scroll past this section, right? It's not exactly something we like to hear about. But ignoring it is like ignoring that weird noise your car's making. It might be fine for a while, but eventually, it's going to cost you.

I've lost count of the number of business owners who've called me in January, panicking because they owe more tax than they have in the bank. It doesn't have to be this way!

Every time money comes into your business, set aside a chunk for tax. I usually suggest 25-30% for most service businesses, but chat with your accountant about what's right for you.

Keep track of your expenses too – that business lunch, your laptop, even a portion of your home office costs if you work from home. They all add up and can significantly reduce your tax bill.

And please, please work with a good accountant. One who knows your industry just like we do at Pinnacle Advisory Services® . We’ve worked with service based businesses for over 20 years so we can give the best advice to help you plan ahead.  Yes, it costs money, but we can usually save you more than we cost through legitimate tax planning and making sure you don't miss any deadlines.

5. Not tracking what matters

Quick question: what was your profit margin last month? Which clients are most profitable? How much does it cost you to win a new client?

If you're scratching your head, you're not the only one! Most service business owners can tell you their revenue (the big, exciting number), but ask about profitability or key metrics, and things get a bit blurred.

Revenue is vanity, profit is sanity. You could have a £100k business that barely pays you minimum wage, or a £50k business that gives you a comfortable lifestyle. The difference is in the numbers you're not tracking.

Start with the basics:

●      How much profit are you actually making? (Revenue minus ALL your costs)

●      Which services make you the most money per hour?

●      How much do you spend to win a new client?

●      What's the lifetime value of your average client?

Just track these numbers monthly and you'll start making much smarter decisions about where to focus your energy.

Your action plan

Right, so how do you avoid falling into these traps? Set aside an hour each month to:

●      Check your cash flow forecast (and update it)

●      Review which clients and services are most profitable

●      Make sure all your invoices are out the door

●      Set aside money for tax

●      Categorise your expenses properly

●      Look at your key numbers and spot any trends

I know it doesn't sound like the most thrilling way to spend an hour, but it's probably the most valuable hour you'll spend all month. If you can’t find an hour to spare or believe these figures would be better coming from an accountant who really understands the figures then book a call with us today.

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Every successful business owner has made financial mistakes. The trick is catching them early and putting systems in place so they don't happen again.

Your business should be supporting the life you want to live, not keeping you awake at night worrying about money. With a bit of planning and the right systems, you can build a service-based business that's not just busy, but genuinely profitable and sustainable.