Unsure how to manage your small business accounts? RDG, your local, friendly, chartered accountants are here to lend a helping hand.
Managing Accounts as a Small Business
In 2016, Statistics from the Department for Business, Energy and Industrial Strategy reported that there are around one million small businesses in UK. This is great news, wonder why so many people are taking the plunge and deciding to start on their own? Whilst we can speculate, no one can argue that setting up a business is a very exciting new chapter in life. It’s important for businesses to get it right from the get-go as this helps to set the tone for any business meaning that earnings can be a lot higher and success can become a constant.
Where to Start?
With so much to think about, we would say that the first place for small businesses to start with their accounts is with getting your financials in order. Ignoring this can be ever so detrimental to a business and can cause a number of issues. At the end of the day a business needs money to survive and the best way is through understanding bookkeeping and finance.
Areas to look into as a small business
Below are the key areas for small business accounts:
Bookkeeping
Bookkeeping takes up a lot of time and resource however, if done correctly you will soon find that your business is in a great position. This can be done either manually or using online modern accounting software.
Bookkeeping involves:
- Managing invoices
- Noting expenses
- Monitoring outgoings
- Paying employees
- Calculating your VAT
- Reconciling your bank
If this is too much to handle, there are companies or individuals who can take care of these aspects for you.
Debt Collection
Bad debt is an unavoidable issue for businesses, especially SMEs and start-ups. One of the main factors that contribute to businesses going bust in the first 5 years is often due to unpaid invoices – clients just not paying for their services. Even if a business doesn’t go bust, bad debt will have a big impact on cashflow and growth.
How to keep on top of bad debt:
- Make sure you have CLEAR terms of business with clients before you do any work
- Raise invoices promptly and include CLEAR payment terms
- Chase invoices quickly and efficiently i.e. accounting software like KashFlow gives users the ability to easily chase invoices and keep track of who has paid
- If you’re not comfortable chasing invoices use an external debt collection agency to do this for you
- Don’t let it snowball – chase unpaid invoices promptly and as close to the due date as possible. Don’t get into the habit of leaving it for months on end until you chase. If you do you’ll probably have to remind them of the work you did, what payment was agreed etc.
Clear Payment Terms
Having clear payment terms is essential if you want to be paid on time. Make it clear how much is owed and when payment is due, and also make them aware of any penalties due to late payment. This will help discourage any late payers! If relevant, ask for 50% deposit upfront before any work begins.
Handy tip – here’s a link to a list of commonly used invoice payment terms and their meanings.
Annual Accounts
How your business performs financially should be presented in a formal record on a yearly basis and in a prescribed format including (this will be different depending on whether you are limited or sole trader):
- Sales
- Costs
- Assets
- Extracting money from the business – paying yourself (salary vs dividend)
- Amounts owed.
When is the due date for submitting accounts?
This all depends on whether you are classed as a sole trader or a limited company. Technically speaking sole traders can choose their accounting year end, however taxable income is calculated to 5 April every year. We would recommend having an accounting year that runs from 1 April to 31 March. Sole traders then have until the following 31st January to complete relevant accounts.
Limited companies are a little different as they can choose their accounting year to suit themselves and their business. They still need to complete and file accounts every year with Companies House.
Corporation Tax
All limited companies in the UK are required to pay corporation tax and is charged at the current rate of 19% of the taxable profit up to the threshold of £3000,000.
Limited companies must also complete a corporation tax return, with tax due for payment to HMRC within nine months of the accounting period.
Self-assessment income tax
Not another form… I am afraid so! In order to calculate what personal income tax you owe you have to complete an online form for HMRC.
Once it has been completed, it must be filed and any tax paid no later than the 31 January following the previous tax year.
If you tax liability is over £1000 you may have to pay payments on account for the following year.
In addition to income tax, self-employed people may have to pay class 2 national insurance up to pension age. There is also another “hidden” tax called class 4 national insurance which is 9% payable on profit over a certain level.
HMRC have recently introduced your personal tax account and we strong recommend that you log on and set yours up with HMRC, where you can see a summary of your taxes and liabilities e.g. state pension forecast.
What are the income tax rates?
The current tax free personal allowance 2017/18 is £11, 500 and then anything above this will be taxed at 20% up to the higher rate tax threshold which is currently £45,000.
Does everyone have to register for VAT?
Businesses must register for VAT if their rolling 12 months turnover goes over the registration limited which is currently £85,000. Businesses below this threshold can still register, however, it is not a requirement.
How does VAT work in small business accounts?
Once registered, companies must then add 20% to sales invoice values which you will charge to your customers. Depending on what VAT scheme you are operating you may claim VAT back to offset against the VAT you’ve collected.
HMRC will require details for the VAT return of the net amount of the VAT you have collected with net sales and expenses information. Both VAT returns and payments are usually due on a quarterly basis, but other schemes are available.
PAYE
If you have staff, income tax and national insurance needs to be calculated and then deducted from their gross wages and salaries, which is then paid to HMRC.
In most businesses this is paid monthly and deducted from your employee’s wages. Since the introduction of Real Time Information (RTI) submissions, you now have to keep accurate and up to date records.
Income tax and NI are only deducted when earnings reach a certain limit and so some lower paid workers may not have any liability.
Employers don’t get out of paying national insurance as this is charged at a slightly higher rate which is currently 13.8%, however, you may qualify for employment allowance which will help alleviate this expense.
Useful resources
Everything you need to know about tax planning
50 ways to save money in your business
What now?
Owning a business is very exciting and can present some amazing opportunities. However, running a business comes with time-consuming but unavoidable admin jobs.
The tasks above can also be confusing, especially if you are not used to them. However, they need to be completed and correct, as this will keep you safe and compliant. No one wants to receive a penalty from the tax man…
There are two options, either do it for yourself or outsource to professionals. Outsourcing comes at a cost but can save you precious time and if you use specialists, with their experience they will know how you can make the most profit but stay legal!
Concentrate at what your good at and don’t be afraid to outsource to professionals as that can often save time, money and costly mistakes.
Talk to us about your small business accounts…
Want to discuss small business accounting? We are all ears! Even if you just want a chat or some general advice. We offer free and non-obligation consultations, we’ll even supply the coffee. You just bring the biscuits!
Case studies…
Proof is in the pudding. Our client, Fine Line Decorators, is a small business and we handle his accounts. See what he has to say about our service: CLICK HERE
