The Difference Between your Profit and Loss Account and your Balance Sheet

When you peruse your accounts, do you know what you are looking at in your profit and loss report (P&L) and in your balance sheet? This is something that is important for every entrepreneur to understand. Even if you leave dealing with the detail of the finance side of your business to others, these two reports will help you to keep tabs on your performance and to know when to put the brakes on and when to surge forward.

What they Represent

The main difference between them is that the balance sheet gives a snapshot of where you are at time the report is produced, while the P&L covers transactions over a period of time. So if you want a measure of the company’s financial health, you look at the balance sheet, while if you want to know how profitable you’ve been over the last quarter, you turn to the P&L for that period.

Why you Need them Both

Your outsourced bookkeepers will tell you that the reports need to be viewed together to get the big picture, because you could still be in trouble even if you have made good profits recently. It depends on what else has been going on.

You may, for example, have decided on an area of growth that needed a large initial investment in stock or materials. Your liabilities could exceed your assets. If you don’t make as much profit in the next period, where will the cash for the payments due come from? Keeping tabs on the big picture will stop you falling into traps like this. Most accounting systems will produce a P&L with comparable figures from the previous period, so you may be able to identify trends and potential opportunities or pitfalls.

If you are seeking finance, possible lenders will also want to examine these reports. They will think twice about lending to or investing in your business if you can’t show consistent profitability and sensible decisions in response to the figures. With an up to date balance sheet and a periodic P&L, you can see whether it’s a wise time to apply for funding. When you see that the time is right, you’ll have no problem giving potential lenders confirmation of your liquidity.

Regular Monitoring

When your accounts have been brought up to date by your bookkeepers, they can produce the reports swiftly from your accounting software by entering the period or date and clicking run. It’s a good idea to schedule this activity at regular intervals and sit down together with your bookkeepers to discuss the implications of the results.

The Dreaded HMRC Enquiry

Recent publicity surrounding tax avoidance by Gary Barlow and two other members of the Take That band shows that HMRC can get tough. The misdemeanours are reported to be costing the band members around £20 million, following a prosecution.

Everyone dreads the tax man coming, because if HMRC find deliberate inaccuracies in your returns, the penalties can be severe. They can fine you up to 200% of the tax due, so it clearly isn’t wise to incur their interest.

Some errors are innocent, of course, and if they are satisfied that they were not intended, you won’t be fined, but just cautioned and required to pay your tax promptly with any interest due. Innocent errors, though, are not likely if you have the help of your outsourced bookkeepers.

What to Expect

HMRC has risk assessment and intelligence teams, which analyse company tax returns. If they decide to set up an enquiry, they will write to let you know within 12 months from the date your return was submitted. Their letter should tell you what they are enquiring about, what information they need by when – usually within 30 days. If you fail to supply information requested in the allotted timescale, the standard penalty is £300, plus £60 a day until compliance with the request.

After the initial letter, the way they proceed may vary according to the severity of what they suspect. You may not have done anything wrong, but something about your return is not clear to them. If they are not satisfied with your response, they could ask to see all your accounts and records. Sometimes an error may have recurred from earlier tax periods, which means that there will still be tax due from those years. Occasionally, they may find you have overpaid and issue a repayment, which would be a great relief.

On the other hand, during the enquiry, you may be asked to pay some extra tax on account. This will not be obligatory but it will reduce the amount of interest you have to add to any amounts they find are due. Interest will be charged from the day after the deadline for paying the tax. If it also relates to earlier periods, this can rack up to significant amounts.

Mitigating the Consequences

If any of this does happen, it’s advisable to cooperate by owning up to any mistakes you know about and helping the investigating officer to understand and quantify them. Then you could be rewarded with less heavy penalties.

Knowing your rights as a tax payer can help you decide if any of their questions are not appropriate, so that they could be challenged. Your outsourced bookkeepers may have experience of HMRC enquiries with other clients, and may be able to advise you. Or they may suggest you consult a tax accountant or legal tax expert.

Cash Flow Consistency

Does your business revenue have peaks and troughs? Are you familiar with the self-employed dilemma of feast or famine? Is the demand you experience seasonal? If so, one of your problems may be a lack of consistency in your cash flow.

Don’t Leave it till the Last Minute

To deal with it you need to be spot on with your forecasting. Unless you know what is likely to happen, you cannot make plans to get around it. One of the most common revenue patterns shows highs in November and December, with lows in January and February. This is, of course, because of all the frantic preparations for Christmas and the other holidays at the time. The run up to the holidays can also be very expensive for businesses that traditionally want to show their appreciation of staff and customers at this time.

That is why, for many years, we’ve had the January sales in the UK, as retailers try to boost sales at an expected slow time. It could also be a time for you to offer extra incentives to customers to continue to do business with you when they would rather not be spending. Anything can be better than nothing, so rather than have a dearth of income, could you reduce your margins or find a way to give more added value for a limited period. Depending on your cash flow, generating income may be more important at such a time than achieving high profit margins.

Plan Ahead

If you get in the habit of forecasting your cash flow over coming months, you could choose to spend more in advance of your needs, or set aside and ring-fence cash amounts for specific purposes. Now is the time to be thinking about what you will be needing in six months’ time. Book that office party for December in August and pay a hefty deposit up front, so that you won’t have to find as much money when you are feeling the pinch.

Deal with the debtors

Your bookkeepers will never cease to tell you how important it is to collect your dues from debtors. Not having a good credit control system can wreak havoc with your cash flow at the best of times. When you are coping with a seasonal drop in revenue, it becomes even more crucial. You must try everything you can to get your clients and customers to pay up. When they are clearly in financial difficulties, sometimes suggesting staged payments can help.

Regular discussions with your outsourced bookkeepers will yield other possibilities for dealing with debtors and help you keep on top of the problem. They can also help you with budgeting and forecasting, so you don’t have to do it all yourself.

Official Recognition for Entrepreneurs

November 19^th 2014 is the date of the Great British Entrepreneur Awards ceremony. From now until August 8^th you can enter for one of the awards. All entries are welcome: last year one of those shortlisted was a 9 year old girl. It costs nothing to enter one or more of the various categories, which will all have winners, and the judges will also decide on an overall winner to be named the Great British Entrepreneur of the Year.

Support in High Places

This will be the second year of the awards which are sponsored by some major businesses, including Dell and NatWest. Our outsourced bookkeepers have noted that Sarah Shields, Dell UK’s General Manager and Executive Director for Consumer and Small and Medium Enterprises said, “…Events such as the Great British Entrepreneur Awards are hugely important to us as they not only provide an opportunity for us to show our support for British innovation, they allow us to hear directly from entrepreneurs about their current challenges and what else we can do to help.” Peter Ibbetson, Chairman of Business Banking, NatWest and RBS, said that the awards offer “a great opportunity to inspire future entrepreneurs by hearing the stories of people who’ve made a success of their ideas and built thriving businesses.”

The awards also enjoy government support. The Skills and Enterprise Minister Matthew Hancock said: “…The Great British Entrepreneur Awards are an opportunity to recognise the dedication and successes of those with an entrepreneurial spirit and I hope they will inspire more people to put their business ideas into practice.”

The 30 or so judges come from a wide range of backgrounds. Peter Ibbetson (mentioned above) is among them, as are author Rachel Bridge, author of five books about entrepreneurs; Krill Savin, Managing Director for UK and Ireland, Kaspersky Lab; and Jenny Tooth, Chief Executive, UK Business Angels Association.

Benefits of Entering

Why not confer with your bookkeepers about what categories you should enter? If you are shortlisted, it will be announced on September 18th. Getting involved could bring positive PR and more awareness of your business even though the awards focus on individual entrepreneurs rather than on their businesses. The awards have been featured in articles in newspapers such as The Times, The Telegraph and the Huffington Post, reaching an audience of 19 million people. Associated events also bring networking opportunities: at the 2013 awards ceremony, 3,283 business cards were exchanged.

So don’t be shy. You can only be mentioned alongside the Great British Entrepreneur Awards if you enter, and think how great it would be if you were a winner.

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.