101 ways. to make your business finances work for YOU! Practical tips on all areas of finance for business and charities.

Transcription

1 101 ways to make your business finances work for YOU! Practical tips on all areas of finance for business and charities.

2 GETTING STARTED 1. Choose the right structure for your business. If you want to keep things simple it s easier to get started as a sole trader than a limited company. Get some advice if you re unsure, particularly if you are starting a non-profit or charitable company. 2. Tell HMRC that you have started a business. How you do this depends on the type of business. There are penalties for failing to register. 3. Find out what taxes you will need to pay and make sure you understand what you need to do. 4. Every business has a date for the end of their accounting year not necessarily 5 th April. Think about this now you won t believe how quickly it comes around. 5. Consider changing your accounting reference date if it doesn t work for your limited company. It isn t set in stone but cannot be changed to a future date more than once every five years. 6. If your new business is a limited company it must have its own bank account by law. 7. Keep your Ltd company money separate from your personal money. Think of your Ltd company as child. Would you take a child s pocket money? 8. Avoid a potential fine of up to 3,000. By law you need to keep the right records to be sure your profit and tax is right. 9. Get the paperwork in order. If it in any way relates to money then punch a hole in it and file it, preferably in a sensible order, for example by date or reference number. 10. Make sure that you have the appropriate insurance in place. This isn t an optional extra. You will need public liability insurance, and employer s insurance if you are an employer. You may also need professional indemnity insurance. 11. Remember to register for data protection if necessary. GOOD HABITS THAT MAKE THE ACCOUNTS EASY 12. Generate your invoices daily if you have lots, or weekly if not. 13. Create a regular weekly slot for looking at the finances. 14. Chase your debts weekly. 15. Pay your bills weekly and on time. Late payment may affect your credit rating. 16. Reconcile your bank statement to your accounts at least monthly 17. Look at one aspect of your finances in detail every month. 18. Avoid HMRC penalties file your tax returns on time. There are automatic penalties for failure to notify and for late filing. 19. Don t wait until January to do your income tax return, you can start it any time between April and the January 31 st due date. How about setting yourself a deadline, e.g. 30 th June or 30 th September? 20. Imagine that someone turns up to your business with a year s worth of receipts and papers in a bag, all loose, with no reference and think about how long it would take you to sort out what belongs where. If you want to keep your accountant s bill low then arriving in January with an apologetic grin and a whirlwind of paper is not the way to do it. 2

3 ACCOUNTING SOFTWARE 21. Avoid using a spreadsheet unless your accounts are really simple, and I mean REALLY simple. Don t even think about it if you have registered for VAT. 22. Free software isn t free if it takes significantly more time than a paid-for version. If you don t believe me then just take a trial of a payroll program, like Moneysoft Payroll Manager, and compare it to the free HMRC RTI program. 23. Choose the best book-keeping or accounting system for you, not just the cheapest or best known brand. There is plenty of choice and most will let you have a trial version. 24. Do check that your chosen book-keeping package will run on your computer. A number of well-known packages won t run on Mac operating systems. 25. Try using a cloud-based system. It can be much easier for you to communicate with customers, suppliers and your accountant. 26. If you are on the move a lot then find an app that will help you capture expenses, or switch to a cloud based system. This could help you to process your expenses while you are out, or invoice a client while you are with them. 27. Think carefully about what you want the system to do. Does it have to be all singing and dancing? Don t buy complexity if you don t need it. 28. On the other hand, your business may be large so managing your information simply will be very important to you. The input experience may be slick, but how easy is it to get at the information you need to manage the business? Can you generate ad-hoc reports yourself or extract data to excel? 29. To integrate or not? that is the question. Just because you use Sage for accounts, do you have to use their payroll software? Not really. You may find a simpler system elsewhere with few downsides. 30. Get some help choosing your accounting package if you are replacing an existing system. Consider any opportunities to improve the surrounding paperwork and use systems consultants to help you to streamline the business processes. UNDERSTAND THE TERMINOLOGY 31. Turnover this is the amount you have sold or invoiced to your customers. This is not the same as your income. 32. Cost of Sales The costs you incur every time you sell something. This could be the cost of stocks you buy, fees you pay, transport, postage or even parking. 33. Gross Profit What is left when you take your cost of sales away from turnover. Gross profit is often compared for similar businesses by calculating the gross profit as a percentage of turnover. This can be high for businesses where the costs are fixed, or low if the business relies on buying and selling goods or services at high volumes. 34. Overheads The running costs of the business. They don t change every time you make a sale, for example, rent, telephone. 35. Net Profit What is left after you have taken all costs away from your turnover. 36. Breakeven - The number of units or value of sales needed before you make a profit. 37. Profit & Loss account A summary of the sales and costs of your business for a specified period of time, e.g. one month or a year. 38. Balance sheet - A summary of everything your business owns and what you owe to others at a specific point in time. 3

4 39. Cash accounting The system by which receipts and payments are recorded only at the time they are paid for. This applies only to very small organisations and often for small charities. Not allowed for limited companies. 40. Accruals accounting Used by most businesses and larger charities. Income and expenditure is accounted for as soon as it is legally owed. This usually means based on the date of the invoice. 41. Net and gross income Most of the time gross means the income received before tax has been deducted. However the 2007 Income Taxes Act also uses the term net income to mean a taxpayer s income less tax reliefs. VAT 42. Rule number one, the rule that must be obeyed. You must register for VAT if your turnover exceeds the VAT registration limit. If you have not registered for VAT make sure that you know the registration limit and apply for VAT registration BEFORE you hit the limit, or as soon as possible afterwards. 43. You can register for VAT even if you don t sell enough to reach the compulsory VAT registration limit. Filing VAT returns is a pain, but, there are several situations where this can increase your profits. For example, if you buy zero rated items from the EC, e.g. children s shoes, you have to pay VAT when you purchase them. But not if you are registered for VAT. 44. If you buy goods or services with VAT on them, you must have a VAT receipt or invoice. 45. There are just a few exceptions to the above. You can claim back VAT on toll bridge costs, vending machine purchases and off-street parking without a receipt. 46. There is no VAT included in on-street parking though. 47. Remember that VAT is a tax you are paying. None of us likes to pay tax unnecessarily so if you are VAT registered claim back all of the VAT you are legally entitled to claim. Look particularly carefully at cash payments. 48. Cash discounts for prompt payment reduce the value of supply for VAT. 49. There are alternatives to the standard VAT scheme, so if you are VAT registered, investigate the others to see if they could work for you. 50. VAT is paid on the difference between the value of your sales and the value of your eligible purchases. The flat rate scheme allows you to pay a fixed percentage of turnover and could increase your profits if your costs are low relative to the industry average. 51. Know the specifics of VAT for your industry. HMRC has a huge volume of information about VAT because it is so complicated. Take professional advice from a VAT specialist if you have any concerns. 52. If you trade in the EC then find out the VAT registration limits for the countries you sell to. You may have to register in those countries too. 53. EC sales have to be reported on an EC sales list until you reach the maximum limit at which point you need to report on an Intrastat return. TAX 54. In the UK, tax for individuals, limited companies and charities is calculated under a system called self-assessment. That means that you, not HMRC, have the responsibility for calculating what you owe in tax. So ask as many questions as you need to be sure that you understand what is being sent by your accountant. 55. If a member of your family does not have an income then you could consider employing them in your business to save your family tax. While you would 4

5 expect to take the national minimum wage into account you should also make sure that the level of pay is set at a commercial level for the actual work. It can be challenged by HMRC if set at an unrealistically high level. 56. Most people are aware that employees can claim a mileage allowance for motoring costs but did you know that there is an employee mileage allowance for cycling? 57. If your business provides company cars to employees consider whether a cash alternative would save both the company and the individual tax but do cost it very carefully and consider non-tax issues. 58. If you are the owner of a limited liability company make sure that you check the national insurance thresholds every year to maintain entitlement to state benefits before drawing dividends. 59. Remember that before you pay tax you have to make a profit. Align your business goals to profit generation rather than just tax reduction. PAYING YOUR STAFF 60. Know when you need to register as an employer. It doesn t just depend on the amount you pay. If an employee has another job or pension then you need to register, even if they only work a few hours. 61. If you are not sure whether a worker is an employee or self-employed, use the HMRC Employment Status Indicator to check their status. 62. Offering certain benefits instead of pay can help you to reduce your employer s national insurance bill and be valued highly by your staff. 63. Make sure that you file your RTI returns every time you pay an employee and before you make payment. HMRC will charge penalties for late submission. 64. Check the date of birth and national insurance number for all employees. Remember that employees stop paying national insurance once they reach retirement age. However employers continue to pay. 65. Be very careful when making payments to staff for expenses. You may have to pay national insurance even though you consider it a simple reimbursement. Get an accountant to help you with payroll expenses it can either be fiendishly complicated or very simple if you get it set up correctly. Talk to you accountant about getting a dispensation otherwise you will have to report expense payments to HMRC. 66. Consider the cost of auto-enrolment if you don t currently contribute to employee pensions. Find out your staging date and plan ahead so that you have budgeted for the cost as part of your remuneration strategy. 67. When making decisions about employee pay levels consider the total cost to your business including recruitment cost and productivity. Workers who feel that they are underpaid will always be demotivated. Is it really worth paying the bottom of the market rate if it means a high staff turnover? CASH-FLOW 68. The cash accounting VAT scheme can be useful if you have to pay suppliers quickly but have long payment terms for customers because you only pay over the VAT on your sales once you receive payment and claim the VAT on purchases as soon as it is paid your invoices to save time lost in the post. 70. Offer a payment discount if you have a high enough profit margin and cash is short. 5

6 71. Alternatively, look at invoice discounting as a way to release some of the cash held as debtors. 72. Monitor the different elements of your balance sheet to predict cash-flow problems. 73. Analyse your cash-flow and balance sheet forecasts as a starting point to identify the most appropriate way to resource your business plan. 74. Consider the risks of your venture and whether debt or equity financing is most appropriate. GETTING PAID ON TIME 75. Discuss payment terms before you start the work. Make sure that your customer understands and agrees to those terms. 76. Set appropriate terms. Obtain standing orders for ongoing services or ask for payment in advance if it reduces the risk of non-payment. 77. Set a credit limit and stick to it. This should relate to the payment terms and the maximum anticipated monthly sales. Use a credit rating agency to help you decide an appropriate limit. 78. Make sure the invoice is clear, easy to understand and states both your credit terms and payment details. 79. Make sure your invoice is accurate. 80. Send your invoice to the person who makes the payments. 81. Get to know your customers who pays only when asked or even threatened? 82. If you threaten a sanction then follow through. 83. Have a defined debt collection procedure and keep notes of who you have spoken to and what was promised. 84. Chase the biggest debts first. 85. Using a third party can help if your customer ignores you, or you find it difficult to ask for money. It can also be very effective with overseas customers. 86. Invent a fictional employee for debt collection if that helps to separate customer service and debt chasing. MAKING MORE PROFITS 87. Make sure that you keep management accounts. If you don t keep your accounts up to date, then you won t know whether you are making a profit or not. 88. Remember that you are trying to make the highest profit, not the most sales! Calculate your breakeven point. How much do you have to sell before you make a profit? To do this you need to know which costs change for every unit you sell compared with those that remain the same. 89. Target setting is a well-known method of improvement. A budget is simply a target and is a useful way to keep you on track. It should be linked to your long-term strategic plan. 90. Many methods of budgeting have evolved from activity based to zero based. Just remember to think about the motivational impact of your chosen method on your team and involve them in setting the budget where possible. You can t achieve the results on your own. 91. If the budgeting process is failing your organisation then consider rolling forecasts instead. You do need to take action though when the forecast shows a problem don t just blame the forecast. Also take into account the 6

7 frequency of update. You would only prepare a budget once a year but would want to update your forecast more frequently. 92. Track where you and your employees spend time if this is your biggest cost, even if you don t charge by the hour. 93. Analyse your profits by customer, sector, product or even time period. Try to find the trends that will help you maximise the profit. 94. Ask yourself the question what is it that stops me from making more profit? This is your limiting factor. You need to maximise the profit for this factor. 95. Get to know your costs and what influences them. Find a sensible way to work out what your products cost. How do your pass your overheads on to your customers? 96. To help you understand your costs better you could calculate the cost of the different activities you carry out and charge these to your products to build up a total cost for your product. 97. When deciding between two alternative proposals quantify the benefits and make sure you take account of the impact of time. Calculating how long it takes to pay back the cost of an investment is a simple example. 98. When comparing the purchase of two assets it is tempting to look solely at the purchase cost. It is worth calculating the costs over the whole lifecycle of the assets as running costs and residual values can vary considerably. 99. Reducing the waiting time in a process can have a dramatic effect on both sales and costs by increasing customer satisfaction and reducing inefficiency Mature industries can benefit from the Kaizen approach to profit improvement in looking for small improvements to measurements leading to a larger overall effect KPIs Rather than generate a rash of random key performance indicators include both leading and lagging measures. This will help to measure the impact of past actions and give an indication of future performance. KPIs should be linked to your strategic plan and cover areas that are most important in achieving the plan. PUBLISHER DETAILS This guide is published by Millbrook Financial Management Limited, Millbrook, Runcton Lane, Chichester, West Sussex, PO20 1PT. 101 Ways to make your Business Finances Work For You First published in February Copyright The right of Millbrook Financial Management Ltd and Helen Alexander to be identified as authors of this guide has been asserted in accordance with the Copyright, Designs and Patents Act 1988, England. All rights reserved All rights reserved. No part of this guide may be reproduced or transmitted in any form or by any means, electronically or mechanically, including photocopying, recording or in any information storage or retrieval system, without prior permission in writing from the publisher. Disclaimer 1. This guide is produced for general guidance only and professional advice should be sought before any decision is made. Individual circumstances can vary, therefore no responsibility can be accepted by Millbrook Financial Management Ltd, or Helen Alexander for any action taken or avoided by any readers of this guide. 2. Tax rules and legislation are constantly changing and therefore the information printed in this guide is correct at the time of writing. 3. To the fullest extent permitted by law Helen Alexander and Millbrook Financial Management do not accept liability for any direct, indirect, special, consequential or other losses or damages arising from using this guide. 7