Freelancers Sometimes Make More Sense than Employees

When you are supplying a service or a product, that's what you need to concentrate on if you are to make any money. But running a business involves all sorts of other jobs that have to be covered and can keep you away from your core activity. That's why you need to employ other people to deal with all these intricacies, allowing you to get out there and make a profit.

When Cash is Hard to Come By

But what if you have a very young business where funding is stretched, or the recession has hit you so hard you've had to let people go? You simply can't afford to take on permanent employees.

That's where freelancers come in. You accept or negotiate their charges up front and employ them for as little or as long as you can afford. They know that you will review their performance before you call them back, so they will do their best for you.

Use of Freelancers is Soaring

Recent research has shown a phenomenal rise in the use of freelancers by small businesses. The rise in the year to July 2011, compared to the previous 12 months, was reported to be 68%. And around one in 20 workers in the UK works as a freelance. Many of them have specialist skills and experience that can be a real benefit to your business, and would command an extremely high salary if you were to take them onto your payroll.

Benefits of Using Freelancers

When you use freelancers, you pay for the time they work for you, not for their holidays or when they are off sick. And remember, you are under no obligation to offer more work than you can pay for. Just make sure this is all agreed in writing before they start work.

Whether you want admin help or assistance with a marketing campaign, you'll find experienced freelancers who won't need training except for a quick induction. They will be accustomed to finding out what they need to know about each business they work for, and they won't take up too much of your time. And they can often bring a fresh perspective to the tasks involved, so you can benefit from ideas you may not have thought of yourself.

This is particularly helpful when you've outsourced your bookkeeping if you are concerned about credit control or meeting regulatory deadlines. It's always worth considering a freelancer who doesn't have to go on the payroll.

Sole Trader or Limited Company?

Many micro businesses start life as a sole trader. In the first year at least, if the profit is likely to be less than the owner's personal tax allowance, this is the sensible thing to do. If you anticipate significantly higher earnings, or if your start-up really takes off, you should consider setting up a limited company to maximise your personal profit and reduce your personal risk.

What are the Risk Factors?

As a sole trader all the debts of your business are your own. If things go wrong, you risk losing any or all of your personal assets. If you own a limited company, the debts belong to the business, not yourself personally, unless you have signed any personal guarantees. You are not in danger of losing your home in the worst case scenario.

What are the Tax Factors?

As a sole trader all the profits of your business are your personal income and you are taxed on them accordingly. You will also need to pay Class 2 National Insurance (NI), currently set at £2.50 a week, and Class 4 NI on profits over the current threshold of £7,225.00.

If you set up a limited company, you could add members of your family or others as directors if you wish, or you could be a sole director. You do have to register as an employer and submit the relevant employee returns.

On profits of up to £300,000, the company pays corporation tax of 20%. It pays salaries to directors and dividends to shareholders. You will pay no tax or NI on a salary of £589.00 a month, which is an allowable expense against profit. If this is your only income and your personal tax allowance is the normal £7,475.00, as long as there is enough profit in the business, you could also pay yourself a dividend of up to £38,934.00 without incurring any income tax.

Get Professional Advice

On the face of it, as soon as a business becomes reasonably profitable, it would be wise to set up a limited company. Under some circumstances, it might even be wise to sell your sole trader business to the new company.

But things are rarely as simple as this. Most people have other income to factor into the equation, even if it's just bank interest on their savings. You should always seek advice before setting up a private company. Discuss it with your outsourced bookkeepers, and if it still seems feasible, talk to your accountant.

Small Businesses: Get help with Problem Solving

When you have a business problem to solve, what do you do? Do you mull it over for as long as you can and then make a decision because there's no time left, even though you're not really sure about it? Do you ever discover when it's too late, and you are briefing your staff that someone actually had a better solution, but they hadn't known it was needed?

Problems come in many forms. It could be how to deal with a customer's complaint. Perhaps it represents a significant opportunity, if only you knew the best way to respond to an invitation to tender or invest. Or is it that a competitor has the edge on a product, and you must find ways to develop something even better?

Getting a Handle on the Problem

You may have to make the decisions for your own business, but that doesn't mean you have to make them in isolation. The first thing you have to do when a problem arises is make sure you have a clear definition of it and what caused it. You need to clarify it in your own mind before you can communicate it to anyone else you might decide to involve. Sometimes a problem might be raised by someone else on your team, and if you haven't already recognised it yourself, this aspect is really crucial. No problem can be effectively solved unless it is fully understood.

Who Can Help?

For something really serious, if you can afford it, you might want to call in a consultant who specialises in your sector and market, as well as in problem solving. Or you might prefer to look closer to home. Arranging a group brainstorming session can be less time consuming for you than talking to people individually. You'll only have to explain the problem once and make sure people understand its parameters.

When you come to evaluate the ideas you'll be really surprised at some of the things that come up. Make it plain that you value everything that has been suggested, even though they can't all be used at that time. If you get everyone to award points to the ideas after they've been discussed, you might come away with a clear winner.

All kinds of people could be involved, from senior managers to the office gopher. You could even invite your outsourced bookkeepers to take part and offer some independent wisdom. Don't struggle on alone. Even just talking through a problem for ten minutes can help you see the light.

Reprieve for Cheques

So after all the head scratching about how to replace payments by cheque, we're not going to lose them after all. They had been due to be phased out completely by 2018, but no-one has been able to come up with a viable alternative, so the decision has been reversed.

Reasons for Phasing Out Cheques

The original proposals to stop them had been made because the number of payments by cheque has been dropping significantly since the early 1990s, culminating in a reduction by nearly half over the last five years. The widespread use of other methods of payment such as direct debits, BACS or CHAPs, or plastic cards in person or on the phone or internet has also saved the expense and hassle of preparing, signing and sending cheques by post.

Reasons for Not Phasing Them out

However, last month the Payments Council announced that the planned closing of cheque clearing has been cancelled. This was agreed, their announcement said, after they had consulted with over 600 stakeholder groups. Also, its members had been unable to come up with the paper based solution to using cheques, which would be essential to some sectors of the community including some small businesses. And we probably all know how much opposition there has been from members of the public and the MPs representing them, as well as charities which often receive donations by cheque.

Cheques are More Risky Now

While 2018 is still a way off, and many small businesses have not yet started to put other payment options in place, some retailers have already stopped accepting cheques. Will they have to do a U-turn? The problem is that cheques no longer have a guarantee, letting the banks off the hook if they are fraudulent.

Anyone who exchanges goods or services for a cheque from someone they don't know and trust is asking for trouble. So people who want to continue using them are still likely to find it difficult to get them accepted now that the cheque guarantee card can no longer be used.

There may not be much risk in continuing to accept cheques from long-term and trusted customers, or those you have for which you have completed credit checks. It's a different matter though, if you are dealing with individuals on a one-off basis, and have no way of knowing if their cheques are genuine.

Your outsourced bookkeepers are well aware of the problems and know how their other clients are dealing with them. Why not ask them for advice if you are unsure of anything?

Can You Pay Your Bills on Time?

A major problem for small businesses is late payments. While individuals usually pay on time, the business to business sector really suffers here. Those who supply goods or services to major companies frequently experience long delays in getting paid. Some have to resort to factoring, which incurs more expense for them. It seems that many larger organisations follow their own terms for payment, completely ignoring the terms on invoices they receive.

Results of Late Payment Receipts

It's a vicious circle, because if you don't get paid by your customers, you have problems paying your own suppliers. You can charge interest for late payments but most small businesses are reluctant to do so in case the customer decides to go elsewhere and they lose future business.

Late payments can cause serious problems for small businesses. Some may not even be able to pay their staff if their cash flow projections are nullified by not receiving expected income.

Sometimes accepting what appears to be lucrative business can make a small business vulnerable. For example, a provider of cross border deliveries from the UK to Europe has significant expenses in performing the service. The cost of fuel, ferry crossings and overnight stays can be crippling if the company has to wait 90 days or more for payment.

Your Legal Rights

Legislation to encourage prompt payment now includes an entitlement to reasonable compensation for debt recovery costs. The calculation of interest entitlement was simplified in 2002. It is now based on a reference rate, which is currently the Bank of England base rate as at 30^th June, plus 8%. This means that the maximum that can be charged from the present to December 31^st 2011 is 8.5% of the debt per year, so you just have to multiply that figure by the number of days the payment is late and then divide by 365. The bank's base rate at December 31st will become the new reference rate for the next six months.

What to do About it

If you are concerned about this affecting your business, you need to review your credit control practices. Outsourced bookkeepers can help with this if you don't have the time or the staff to cover it. If you don't want to charge the statutory interest you're entitled to, you could offer a discount for prompt payment, which might be a cheaper option than factoring or waiting for those late payers. Your outsourced bookkeepers might come up with other ideas too. Don't forget to make full use of their experience and expertise.

After the August Riot Mayhem

Most businesses in the areas of the recent rioting have been affected in some way. Even those serving the public on the fringes lost revenue either because people stayed away thinking it too risky to come there, or because management decided to close much earlier than usual and get their staff out of the area before nightfall.

Of those small businesses that were damaged by rioters, sadly many will not survive. But there is some help out there for those determined to struggle on.

Claiming for Damage and Loss

The Riot Damages Act of 1886 is still in force, which means that businesses can claim for damage to goods and premises or loss of stock by looting. Unfortunately, the form to be used to make claims is an antique, but you do have six weeks to submit it. As long as the police agree that a riot was taking place in your area at the time, your claim should be honoured, though it could take some time for the cash to arrive. You might also benefit from a suspension of council tax and business rates for a while.

Claiming on Insurance Policies

Support is available from the Forum of Private Business if you aren't sure whether your insurance will cover you. Whether or not you are a member, its underwriters will assess your cover and give you free advice if you call them on 0845 130 1722.

HMRC Helpline

HM Revenue and Customs has set up a telephone helpline for people and businesses affected by the riots. If you are going to have trouble meeting your tax commitments or you have lost your tax records in the mayhem, call it on 0845 3661207 any day between 8 am and 8 pm. The department has pledged to be sympathetic with difficulties, not to impose surcharges and to review whether penalties should be imposed.

Entrepreneurs Help Each Other

Various other types of support have been offered by businesses keen to help. Social media sites are full of such offers, for example:

· @riotcleanup is a new twitter account where people can offer assistance and publicise cleaning up events

· Workspace Group, a London commercial property company, is offering temporary storage and work stations for those in need

· Stockline Ltd can help with high quality refurbishment where needed for damaged property

· Lockaid has country wide branches that can help with general security, including boarding up or repairing windows.

It's good to see the business community pulling together like this. If you are among the lucky ones that haven't been adversely affected, perhaps there is something you could offer.

What's Most Important – Profit or Cash?

It's always good to know you are making a healthy profit. Regular positive profit and loss reports can give you confidence that your business is developing well. But profitable companies have been known to have cash flow problems and even to go under because of them.

If you are a regular reader of these pages, you'll have seen plenty of articles here about cash flow before. As experienced bookkeepers, we know just how important it is to keep on top of your cash, and we can't stress this often enough.

A Hypothetical Cash Flow Problem

Suppose you received a new large order for multiples of a product and had to take on extra staff and buy in extra materials to fulfil it. All your efforts go into getting it right and producing what is wanted on time. If you are a service company, rather than sourcing more materials, you might have to pull in people from other jobs to form the perfect team for the new client.

You lose focus on your regular customers, the rest of your order book, and on what's happening to your cash. Suddenly you hear from your bank that you've reached the limit of your overdraft. How long will it be before you can expect to be paid for the new work on which you have been spending most of your resources? How are you going to pay your staff and your suppliers?

The hypothetical example above shows how easily, and quickly, it could be to fall by the wayside if you don't look after your cash. It doesn't matter how much profit you've made on paper if you don't have the cash to go forward.

Keep Your Eye on the Bigger Picture

Make time for regular meetings with your bookkeeping staff or outsourced service providers. The latter can help you to look at the implications of the reports they produce for you. Do you need to be chasing up debtors or cutting costs in other areas?

They could also demonstrate trends such as dwindling repeat orders from long term customers. Then you can look at your customer service, see if there have been any problems and try to put them right. Or you can look for shifts in the market where you need to adjust your strategy. Perhaps there are new products out there that are outshining yours, either because of genuine improvements or clever marketing tactics. Your business will need to respond and remain dynamic to continue to make a profit and develop.