Accountancy

When starting your business you should choose your accountant wisely. The relationship you build with your accountant could help make your business a success as they will work with you and help assess the risk you are taking.

A high percentage of new businesses fail within their first year of existence and about half never make it past the first three years. This is mainly down to poor planning. We believe it is essential for all businesses, not just those in the start-up phase, to have a business plan.

The plan should cover all aspects of the business such as premises, marketing, staffing, equipment and – most important of all – financial planning, cash flow management and accounting systems.

The earlier you start to formulate the plan, the better as a well thought out plan will significantly enhance the probability of the business succeeding. The initial plan must however be flexible and must be regularly revised and updated. Consider how the business is performing and if there have been any changes in the business environment relative to your business. Have new opportunities come along do you have new competitors? Your accountant can provide relevant and focused advice and will have access to a variety of business planning tools.

A good accountant will want to remain with you throughout the life of your business, to help grow the business, maximise profits and secure maximum value from the business in retirement. These services are in addition to the traditional services of preparing accounts and tax returns, and advising on accounting systems and record keeping. The accountant, who should perhaps be better referred to as a ‘business coach’, can also assist with many other aspects of a business, including payroll matters, advising on the most tax efficient method of purchasing plant and equipment, and the insurances needed to protect those assets, the business, the business owner and his/her family.

Perhaps the most important of the services that an accountant can provide is a regular (at least quarterly) review of the performance of the business. This simple inexpensive regime will enable problems to be nipped in the bud, and it will also enhance the relationship with your bank manager, who is another ‘coach’ vital to the success of any business.

Sole Trader or Limited Company?

Before you start you will have to decide if you want to be a sole trader or operate as a limited company. An accountant can advise you as to the best course of action and the costs involved. Much depends on the type and scale of the business. They will also tell you what accounting records you need to keep. You need to know what accounting package is appropriate for the size and scale of your operation.

Keep all your bank statements, invoices, receipts and bills and file them properly. Under new tax legislation this is a legal requirement. Good filing soon pays for itself.

One of the problems budding entrepreneurs have to handle is just how much expertise and time they have to dedicate to administration and accounting. You might soon discover that you need to employ somebody to deal with these aspects of the business. They are available and could soon pay for themselves.

Business expenses: These can be claimed against income if, in the words of the Law they are: ‘wholly and exclusively for business purposes. Your accountant can advise you on what you can claim

If you are using a room at home for business you may be able to include household expenses such as light, heat, power, water, rates, sewage and insurance. Note: You must be able to shut the door on the office.

If you are just using space in your lounge then you are unlikely to be able to claim any allowances.

Car expenses: Things like servicing, repairs, petrol, insurance, motor tax and an annual allowance can be claimed. That allowance is based on a 25% reducing balance allowance against the value of the car. Then you, again, apportion the total between business and personal use. Take care here though as there is a cut-off limit for car allowance related to the value of the car. Commercial vehicles are not subject to this maximum restriction. Relief on interest charged for buying assets for the business is allowable in full at the moment.

There are capital allowances available to businesses. It is important that you make a list of plant, assets and equipment being brought into the business at the outset. Those, together with other capital items subsequently purchased, qualify for capital allowance relief.

You should also keep note of pre-trading expenses just in case these prove relevant.

You can also claim for relevant training costs as well as travel and entertainment costs against income in appropriate circumstances.

To effectively manage your business and carry it forward you need to have a strong grip on accountancy and administrative issues and to be able to carefully monitor progress. Make sure you understand your debt position and how the money is coming in. If you have time consider a training course or read up on the topic.

In an increasingly competitive environment you cannot afford to bumble along. “Cash is always King” so make sure you know where yours is, where it is going and where it is coming from. Payment for goods and services supplied must be collected at the earliest opportunity. Income should be invoiced as soon as work has been carried out. When a job will take longer than one or two weeks, prior arrangements should be made to send interim accounts.

When quoting for work, you should try to assess the risk of the customer not paying or paying late. Non-payment could lead you to incur costs to collect the money or it may never be collected. Late payment will affect your cash flow and could lead you to paying higher bank interest and charges. If you think this could be a risk you should increase the quote to compensate for the risk you are taking and also consider refusing the work.

Ideally you should prepare budgets for future income and expenses and forecast when the cash is going to come in and go out of the business. This will give you warning of possible cash flow problems.

If you don’t do this you should at least know how much income you usually need to generate each month to cover costs and profit. You should have a plan of work to generate this income for the next three months, which is continually updated to reflect new and lost sources of income.

Cash collection should be monitored almost daily. Customers who have not paid within agreed timescales should be spoken to and where necessary work ceased and debt collection actions taken. Traders are very busy, so it does not make sense to carry on working for a “bad-payer” when there are “good-payers” queuing up at the door.

Where work is carried out over the year on a regular basis, efforts should be made to collect cash monthly by standing order. Following these guidelines seems obvious but many don’t. Being on top of your business will help prevent non-payment of large amounts and potentially expensive legal disputes.