Managing your business
In our first article, we discussed everything you need to know about setting up a business, covering your business plan, structuring your business, employing staff and VAT.
Now your business is off the ground and established, it is time to take a look at what the everyday challenges and obligations are from a finance perspective – to ensure that your business remains healthy and successful. This article outlines what these challenges are and is a useful reference guide to ensure you have all bases covered.
Obligations and compliance
Running your own business requires several unavoidable administrative, bookkeeping, tax and accounting duties. These tasks may be onerous, but they are critical to making sure your business is compliant with HMRC, Companies House and other governing bodies. The fruits of these labours also provide you with valuable information that you can use to operate your business more successfully.
Bookkeeping is the day-to-day administration of accurately documenting and recording financial transactions. It includes generating and sending out sales invoices, chasing receipts, recording expenses, paying bills and employees, and monitoring bank and cash accounts.
If you run a limited company, you must produce and file accounts with Companies House within nine months of the end of your accounting period. There are, however, special rules if it is your first accounting period. This is a formal record of your yearly financial performance that must be presented in a stipulated way. There are automatic penalties imposed by Companies House if the accounts are not filed on time. The level of the penalty depends on how late the accounts reach Companies House, but they start at £150. Late filing of documents could also adversely affect your company’s credit rating.
Although sole traders do not have to file accounts, they should prepare a balance sheet and a profit and loss account each year as these will be required to calculate profits for tax purposes and to keep track of the financial position of the business.
All UK limited companies are required to pay corporation tax on any profit they generate. The current rate of corporation tax is 19 percent. To meet their obligations, companies must complete a corporation tax return every year and pay the calculated liability within nine months and one day of the end of the accounting period. There are automatic penalties if returns are not filed on time and interest will be incurred on the overdue payment of any liability.
Self-assessment income tax
Sole traders and partnerships pay tax on their business profits via the self-assessment income tax system. Returns must be filed by 31 January following the end of the tax year. The self-assessment system can require payments on account to be made towards the year’s tax liability. These are paid in equal instalments based on the previous year’s liability. As an example, for the tax year 2020/2021, payments would be made on:
First payment of account – 31 January 2021
Second payment of account – 31 July 2021
If your overall tax liability for 2020/2021 is higher than the year before, then a balancing payment would be due on 31 January 2022. If tax liabilities are decreasing, then you could be entitled to a refund if you have already paid both payments on account.
If you are a director of a limited company and receiving dividend income, you will also need to register for self-assessment and complete a tax return every year as these payments are not taxed at source.
Preparing tax returns and calculating liabilities as soon as possible after the end of the tax year will mean that you have the information to plan and ensure that you do not overpay or underestimate your future tax payments.
We covered VAT registration in our starting a business article, but it is not as straightforward as registering and then submitting. Even if you seek the help of a suitable bookkeeper or accountant, you will need to be aware of the basics to ensure that you are compliant with the current legislation and are protecting your business.
Your VAT liability is generally calculated by adding up the VAT that your business has charged on its product or service (output VAT), and deducting the VAT that it has paid on its supplies and services (input VAT). However, there are different rates of VAT associated with services/products and circumstances when input VAT cannot be claimed.
There are different methods available for the preparation of VAT returns. They include:
- Flat rate VAT scheme
- Cash accounting VAT scheme
- Annual accounting VAT scheme
- Standard VAT accounting
Some of these schemes must be applied for and there are threshold limits for both entering and exiting the schemes. It is important that you remember thresholds as your business changes – to ensure that you are only using schemes that your business is still eligible for.
Apart from the VAT annual accounting scheme, the deadline for submitting monthly or quarterly VAT returns is one month and seven days after the end of the accounting period. Unless a Direct Debit is in place, payment must be made electronically by the same date, so consider the methods of payment available to you and any daily limits set on your bank account – to ensure that all payments reach HMRC in time.
HMRC will record a default if the return or full payment are not received in time. When in default, a business will be placed in a surcharge period for 12 months. Further defaults in this period will extend the surcharge period and the business may have to pay a surcharge, ranging from 2 to 15% of the VAT liability, depending on the number of defaults there have been.
Penalties are also charged if VAT is not reported correctly. These can be:
- 100% of any tax understated or over-claimed if you send a return that contains a careless or deliberate inaccuracy
- 30% of an assessment if HMRC sends you one that is too low and you do not tell them it is wrong within 30 days
Employing staff or subcontractors
As your business grows, you will inevitably need additional support, and this could be employing more staff or using the services of subcontractors. But what is the difference and what are the consequences of getting the employment status wrong?
A subcontractor is someone who is self-employed and carries out work for you. Typically, they will be contracted in for their specialist knowledge or skills for a defined period of time, to work on a specified project.
There are three key factors that can help differentiate employees and subcontractors:
- Control – subcontractors will have the ability to control the hours and times that they work.
- Mutuality of obligation – a subcontractor will typically be contracted to provide a fixed amount of work for which they would then provide an invoice. They would not expect further work to be offered at the end of the contract and they would be under no obligation to accept further work.
- The right to provide a substitute – a subcontractor would be able to provide their own employee or hire someone else to undertake the work.
In addition, getting the distinction right between the status of employees and self-employed individuals is important due to the impact that it has on:
- Any tax and national insurance obligations you may have to comply with.
- The employment law rights that will apply, such as unfair dismissal, redundancy payments, holiday, sick leave, maternity or parental leave, minimum wage and pension contributions.
If an employee is wrongly classified as a subcontractor, they could make a claim against you for not providing the correct employment rights. You could also be liable for the tax and national insurance payments which would have been associated with an employee contract.
Managing cash flow
This is the biggest challenge for any business. If your business constantly spends more than it receives, you will encounter negative cash flow problems and this is the reason that most businesses fail.
A lot of business owners purely concentrate on the profit and loss statement. Profits and cash flow are completely separate things and if you fall into the trap of just looking at the profit and loss statement, you could be missing key information and warnings for your cash flow status.
Examples of cash flow management problems
- Providing credit to customers is a common way for businesses to run into cash flow problems. When the sales invoice is raised, this income will show in your profit and loss statement. However, invoicing is normally done on terms of 30 or 60 days, and this will not have a positive effect on your cash flow until the cash is received from the customer. It is not unusual for customers to delay payment, which can leave a business with a cash flow crisis.
There are actions you can take to make sure your customers are paying you promptly. Take a look at our Top Tips – getting your sales invoices paid on time.
- If you are a seasonal business that carries out most of its trade at peak times such as Christmas or the summer, you will require careful planning and cash flow management to ensure that you maximise your cash flow during peak times: to ensure that reserves are maintained and you do not experience cash flow problems during the low seasons. This problem is common for certain types of businesses, such as those in farming, construction and retail.
- Having high overhead expenditure will not only eat into your net profit, it will also impact negatively on your cash flow. Some overheads (such as rent, rates and salaries) are fixed, while other variable expenses (such as utilities, advertising and entertaining) need to be reviewed regularly and kept under control.
- Excessive stock levels in a manufacturing or retail business can result in too much stock being sat in warehouses or on shelves, tying up valuable cash resources. Monitoring stock levels and movement is important. You will need to have adequate levels of fast-moving items to ensure that you can meet demand and a fine-tuned level of any slower moving items.
As a business owner, you will need to analyse your cash flow on a regular basis and perform some cash flow forecasting. This will ensure that you can take the necessary steps to combat any cash flow problems before they adversely affect the business.
Expanding your business
If your business is expanding, you may need injections of cash during the planned growth period. Businesses that undergo rapid expansion can run into cash flow problems quite quickly. Business expansion tends to involve higher costs, such as increased rent for additional space, higher wage costs as new employees are taken on, and greater marketing and advertising costs. There may also be increased capital investment for new equipment or facilities, or an initial need to tie cash up in increased levels of stock to meet new levels of demand.
All of this needs to be considered and planned carefully to ensure that any additional cash requirements are available to the business at the right time. Funding could come through financing or investment, but whatever form you are considering, it is essential to have an up-to-date business plan in place. Any potential investors or financial institutions will need this to see the requirement for funding and the ability of the business to service any repayments.
Register here to join our Webinar, the second in a 4 part series, covering all you need to know about growing your business. Claire Barringer will be joined by Alan Ramsden and David Assor from GWM and who will be taking questions from the panel.
Please get in touch if you are looking at developing how you manage the financial aspects of running your business.
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