Is your Credit Control System Working Well?

Is your Credit Control System Working Well?

To keep a healthy cash flow, every business, of whatever size, needs a really efficient credit control system. Unless its procedures are followed faithfully, it might not be long before a financial crisis occurs. So what are good credit control procedures?

New Customer Credit Checks

These are important. You can’t just trust everyone who wants something from you on credit. The safest way is to check formally through a credit rating agency or by asking the customer’s bank to give them a reference.

Sometimes you can find out informally via networking with their other suppliers and people who know them, whether they normally pay up on time, or if they are known to have financial difficulties. The grapevine can be helpful but you will need to be sure that what you hear is not just malicious gossip. Your outsourced bookkeepers are well placed to pick up on news like this via their networks, but they cannot, of course, pass on confidential information about their other clients.

Customer Administration

When you are confident enough to allow a customer credit, you will collect the information you need: the name and main address of the customer and the address for invoices, if different; the name of the person who should receive the invoices and a contact name and number for following up. This data must always be accessible, whether you store it electronically or in paper form.

You will also make decisions about the credit terms you will allow, and whether this customer should have your standard terms or be treated differently. It can be a good idea to make your terms shorter during the first few months of a relationship with a new customer. Whatever you decide must be communicated to your contacts and you need to be sure that the right people know and understand your terms for doing business with them. This should include whether and when you intend to charge late payment interest.

Send out your invoices promptly, with terms and late payment penalties clearly stated. Then put in place your reminder procedures, keeping notes and records of all follow up and chasing activities. You may like to have your bookkeepers undertake these, or to delegate them to a member of staff, or in some or all cases, you may prefer to do them yourself. But you need to be sure they take place and that you are informed of any actual or potential problems.

It’s worth asking your outsourced bookkeepers for their opinions on your credit control system, and whether they think it can be improved. Their experience with many different companies will make them good judges of the effectiveness of your procedures.

The Best Tax Structure for your Small Business

If your profits are £25,000 or more, you’d probably be much better off as a limited company than as a sole trader or a partnership. Experts believe that a sole trader who becomes a limited company can save up to 30p in the pound. You have to know how to do it though.

Drawings

As a director or shareholder of a limited company, you can choose to take the most tax efficient amount from the business as salary, and draw more as dividends. The most tax efficient salary amount is £7,956. Up to this amount no national insurance contributions are due, either from you or from the business as your employer.

Of course, you will need more than this to live on, but as a shareholder you can take more cash as dividends, provided you have made enough profit to cover the amount. They do not attract NICs, but will be subject to personal income tax by self-assessment. Currently, if you can keep your total taxable income in the basic tax rate band, you will only have to pay 10% tax on dividends, so they still leave you better off than if the amount was all salary. When you move into the higher rate tax band, the tax rate on dividends is 32.5% though, so it’s worth checking with your outsourced bookkeepers what is the optimum amount for your dividend.

Be Sure to Claim your Expenses Back

Don’t forget to keep all receipts for business expenses so that you can claim them against your tax liability. You must keep them for six years as the Revenue can request to see them up to that time in arrears. At the end of January each year, any with dates earlier than six years prior can be destroyed together with other financial documents such as invoices.

Should you Join the Flat Rate VAT Scheme?

If you are a member of this scheme, instead of working out the VAT you owe during each period, you pay a prescribed percentage of your turnover during the period.  Some businesses can be better off in this scheme, and small businesses can find it easier to manage their cashflow with flat rate VAT. It does mean less time is needed to prepare VAT returns.

It doesn’t suit all types of business, though. Your outsourced bookkeepers will be happy to discuss if yours is suitable and whether there would be advantages for you in joining the scheme.

The NIC Break for Employers - a Good Time to Employ?

If you have been considering taking on your first employee, now would be a good time to do it. This is because you could take advantage of the new national insurance contributions rules that came into force on 6^th April 2014.

You could pay someone up to £22,400 without having to pay any employers’ NIC for them. Or you could employ up to four adults full time on the minimum wage and still not pay employers’ contributions. If you wanted to have young people aged 18 to 20 on your payroll full time, you could have up to ten of them on their minimum wage and still not pay NICs.

The Benefit for Current Employers

If you already have employees, you will find that your NIC bill will go down. In his March budget, the Chancellor of the Exchequer, George Osborne, confirmed that the first £2000 of annual contributions from employers in businesses and charities would be waived. If you normally pay less than £2000, you could be one of the 450,000 businesses in the country that won’t be expected to contribute anything.

Benefit for Small Businesses

Called the Employment Allowance, it is, of course, part of the government’s strategy to get more unemployed people back into work. However, all hard pressed small business owners and their bookeepers recognise it as a godsend for anyone who is cash strapped or wanting to expand and recruit, but held back by finances.

This Employment Allowance is a new strategy because it covers the whole of the country, rather than being introduced in a few deprived areas which have been given certain tax breaks in the past. The government believes it will benefit around 1.25 million organisations in all.

How Will it Work?

Most people really welcome this move, but Patrick Stevens, President of the Chartered Institute of Taxation, offers a word of warning, when he said in response to the budget announcement, "There are mechanics to sort out such as whether a small business withholds up to £2,000 of NICs or has to pay first and reclaim later. We will be doing our best in discussions with HMRC to make sure this new scheme really helps employers and doesn’t tangle them in more red tape."

Businesses do have to apply, but government information stresses that this can be achieved by ticking a box on your PAYE return, which sounds simple enough. Your outsourced bookkeepers will do this for you, and will be carefully following the news on how this is all working out.