You’ve decided to branch out on your own. Your business plan is solid and you’ve chosen how to trade. You’ve sorted your bank account, insurance is covered and you’ve registered with HMRC. You’ve got a swanky new office, your employees are due to get paid at the end of the month and everything feels pretty under control. But, rest on your laurels you mustn’t; you need to lay the groundwork for effective management of your accounts and tax.
From getting to grips with your books and managing cash flow and from taking on an accountant to controlling costs, the more you can get ahead of the accounts and tax game now, the more longevity your business will have and the less stressed you’ll be in the weeks and months to come.
Here, Toby Ryland, corporate tax partner at HW Fisher & Company, looks at some of the key components of managing accounts and tax you need to get a handle on.
Mastering tax returns
The two words ‘tax return’ are enough to send many into a pit of despair, and there’s no denying they can be a minefield. But putting off getting to grips with your tax will only prolong the pain and planning upfront is crucial if you are to avoid a penalty. The most important thing is to familiarise yourself with the key dates and get them in the diary.
Generally, if you’re a sole trader, the deadlines for self assessment are the same for everyone but there are a few exceptions. For example, if you have additional earnings taxed under PAYE and you want HMRC to automatically collect tax you owe from your wages and pension, the deadline is slightly earlier. You can file your return yourself online but it’s worth noting that HMRC can fine you if they deem that you have not taken enough care in completing it. This, coupled with the time it takes, may mean that using an accountant becomes the most cost-effective option.
If you’re not a sole trader, things get a little more complicated. You’ll need to consider corporation tax, VAT, national insurance contributions, PAYE and income tax. There are third party software platforms available to help but they can be very costly. An accountant will consider your individual circumstances more carefully and do all the hard work for you. Most importantly, they’re likely to save you money.
Further reading on tax
Cash flow management
Clichéd as it may be, the old adage is true – cash really is king when you’re growing a business. Put simply, cash flow is the process of monitoring, analysing and optimising the timing of cash coming into your business compared to the timing of cash spent. Net cash flow is a crucial measure of the financial health of your company, so if your business constantly spends more than it collects, you have a cash flow problem. And poor cash flow management has spelled the death of many a small business.
For young businesses, the most important aspect of cash flow management is avoiding extended cash shortages. Shortages are caused by having too great a gap between cash coming in and cash leaving the business. No matter what you think is due in the future, you can’t rely on predictions. You won’t be able to stay in business if you can’t pay your bills.
To manage your cash flow, start with your business plan. Look at areas where you have to spend money, paying particular attention to large outgoings such as tax, VAT and payroll. When will you need to dish out this cash? Plan everything out in a diary so you know exactly when you need to have money in the pot. Prepare projections for next year, next quarter and, in the early stages of your business, next week. An accurate cash flow projection can alert you to trouble well before it strikes.
When you’re setting out and things are going well, it can be tempting to expand your business rapidly. But this is a cash flow danger zone. If you spend money more quickly than you receive it, you may find yourself in hot water.
Further reading on cash flow management
Beating late payments and minimising bad debts
Late payments and bad debt are linked directly to cash flow. If your customers don’t cough up it can cause huge problems. Similarly, bad debt can push companies to the brink of collapse and lead to unnecessary financial hardship. Regardless of demand for your services, it’s these cash flow problems that have the biggest impact on your bottom line.
And, while late payment affects businesses of all sizes, it’s not such a big problem for large businesses who often agree extended payment terms with their suppliers to offset the squeeze on cash flow. For small businesses this is almost impossible. Indeed for businesses in their infancy, it can be difficult to even obtain credit accounts.
And so, while staying on top of payments can feel like a laborious administrative task, it is one you can never afford to ignore. Right from the get-go, make sure you’re very clear with customers about credit terms. Spell them out on your invoices and put a system in place so you follow up on time. If you sit and wait, you won’t get paid. Be proactive. If you have customers who consistently delay payments, don’t bury your head in the sand. What can you do to tackle it head on? Can you consider withholding your service until they put their hand in their pocket?
Bad debt refers to payments that can’t be recovered at all and there are a few things you can do to prevent this happening if you’re proactive. Always look at the financial health of new clients. Are they registered with Companies House? Do you know others who have worked with them? What can you find out from a quick Google search? You can also consider agreeing on staged payments, or asking them to pay half upfront when you start working together.
Hiring an accountant
In truth, much of getting your accounts and tax in order involves careful planning and a healthy dose of organisational skill – not to mention dedicating a fair amount of time to the cause. As your business grows, particularly if you’re registered as anything other than a sole trader, there’s no escaping the fact that you’ll need an accountant to help you along.
Although cost is clearly important, what matters more is that you look at the bigger picture. Your personal relationship with your accountant counts for a lot and you’ll do well to find someone who shares the same outlook as you. Do you see yourself as a young entrepreneur? Then perhaps a more traditional firm isn’t the best fit. You should also look at their current client list. Have they worked with similar businesses in the past? Or even with competitors? Both will stand them in good stead to work well with your accounts. Try to find out if they’ll be proactive, too. Will they approach you with solutions or sit and wait for you to instigate things?
To cite another old adage, in accountancy, you really do get what you pay for. Loyalty counts for a lot in the field and the best firms may even consider a flexible fee arrangement. This can mean you get a discounted price while you’re just starting out but, in return, you commit to sticking around as your business grows.
Further reading on hiring an accountant
Getting to grips with tax codes
Tax codes are part of the Pay As You Earn (PAYE) tax system, so you won’t have one for your self-employed income. However, there are still a few need-to-knows.
HMRC uses tax codes to tell business how much tax to deduct from their employee’s wage through PAYE. If you’re self-employed, you pay tax on your self-employed income through self assessment rather than PAYE.
However, if you have money coming in from other sources besides self-employment – for example a job or a pension – you will have a tax code. This means you could end up facing incorrect tax deductions from salaries or pensions, and consequently be paying too much tax. You will then have to recover it through your tax return, meaning your personal cash flow is badly affected. To prevent this from happening, make sure you’re on the right tax code and, crucially, make sure HMRC knows your status.
The bottom line with accounts and tax
While keeping your books in order is absolutely vital for the financial success of your business; accounts and tax needn’t be the headaches they’re sometimes made out to be, as long as you don’t bury your head in the sand. Be organised, plan in advance, and be sure to keep your eyes on the prize.