Boost your Profits - instantly

February 24th, 2010

Business owners are always looking for ways to increase their profits, or to keep more of what they earn. 

There are two common ways that a business uses to try and generate more profit, which are:

• Increasing their sales volume
• Cutting costs

But there is a third and much more successful way

Consider a small retail business which turns over a modest £100,000 a year, with a gross profit margin of 40% (The gross profit margin is calculated as sales less cost of goods bought divided by sales) and other expenses of £20,000.  The profit statement for his business would read:

Sales                                        £100,000
Cost of goods bought                    £60,000
Expenses                                    £20,000
Profit                                           £20,000

If we follow our two most common profit improvement strategies mentioned above and change the figures by 10%, we’d get:

• An increase in sales of 10% would generate additional profits of £4,000
• A decrease in costs of 10% would generate an increase in profits of £2,000

Our two favourite strategies would add some bottom line benefit but involve a lot of hard work.  After all, how hard is it to increase your sales by 10%, or cut your costs by the same.

As a third option, why not consider putting your prices up by 10%?

Just by putting your existing prices up by 10%, you could generate an additional £10,000 in profits.  That’s 5 times the benefit of cutting costs and 2 ½ times the benefit of selling 10% more

I can hear the voices of dissent already saying “yes, all very well and good, but my customers would leave if I put the price up”.  Ok, so maybe a proportion will, you’ll always have a price sensitive section of your customer base.  BUT, if you increase prices by 10%, you can afford to lose 20% of your volume before you are back in the same profit position as you are today.

So, that’s 20% less work for the same money that you are earning now! That effectively frees up a whole day a week to do something else.  Of course, you could use that day to bring in more business and be even better off!

The extra twist

What’s quite frightening is that during a recession, many businesses are looking at cutting selling prices, rather than putting them up.  Did you realise that (using the example above) if you cut prices by 10%, you’d have to sell 33% more to make the same money as you do now.  That’s a massive extra volume!

So how can you put prices up and stop customers leaving?…..differentiate, be different in your market place and price almost becomes an irrelevance

What are your experiences of changing your prices in the last couple of years?

Post to Twitter

Tags: , , , ,
Posted in General Business, Profit Improvement | 4 Comments »

6 Ways to quickly improve your cashflow

December 29th, 2009

Over the last twelve months, I have been asked one question more than any other;
“how do I improve my cashflow?”

Lack of cash is the number one killer of small businesses and the statement “turnover is vanity, profit is sanity, but cash is reality,” has never been more true than it is today.  That’s because in a tough economy, customers will pay you more slowly and suppliers will want you to pay them more quickly.

The following 6 step plan contains some ideas and strategies that we have helped our clients put in place, which have seen them achieve massively improved cash flow.  By using these ideas, you will be able to manage the tough times and when the good times return, you’ll have all the checks and controls in place to be one step ahead.  Our clients have found this invaluable, and I believe you will too.

1. Know your customer

It’s very easy to do some work for a new customer, only to find out that they can’t afford to pay you or have been bad payers to many other suppliers in the past.  Of course, most people only find out that a customer is a bad payer when it’s much too late.

To help prevent that happening to you, make sure you credit check your customers before offering credit terms to them.  There are many online agents that will do this for you, for a small fee.  Experian and Equifax are probably the best two known agencies in the UK, but in the B2B market, you could also use agencies such as Creditsafe or Busibody (which is actually part of Experian).

Similarly, you need to review your existing customer base.  Does it contain those “won’t pay/ can’t pay” customers?  If it does, get rid of them now!  They have this amazing ability to drain your time and effort, and you know that it will be so much hard work to get them to pay even a small amount of the bill.  Instead, spend your time and energy on the better customers, who are delighted to get extra help and will gladly pay for it.

2.  Review your terms of business

I’ll bet that for the majority of businesses, their terms of business haven’t changed since the day they started.  To go even further, I’ll bet that the way they set out their terms is identical to everyone else in their industry, and it’s the way they were taught before going it alone.

Typically, this approach will be:
Do all the work.
Hand it over to the customer.
Then just wait to get paid….and wait…..and wait.  What a nightmare!

Instead of carrying all the risk and cost throughout the project, ask for a proportion of the fee upfront, or at the very least, on project work, ask for payments at clearly defined milestones in the project.  Then, make it clear to the customer that you won’t continue to the next stage, until the previous bill is settled.  At the very worst, if you use this approach, you’ll only be one “stage” down should the customer default, rather than lose the whole project revenue.

Monthly payment plans can also help ease those cash flow worries, if you work with clients on a regular basis.  The majority of our clients at Accountancy Extra, pay us for our services by monthly standing order.  The customer has the benefit of knowing how much they need to budget each month, similarly to budgeting for a utility bill and we don’t need to regularly chase outstanding debt.  A win, win scenario!

Alternatively, if you can’t apply milestone or monthly payments to your customers, what about offering them early settlement discounts?  The thought of getting a small percentage off the bill for paying early will be attractive to some customers who want to keep their costs down.  Conversely, you should consider adding statutory interest to invoices that are paid late – and state it clearly in your terms of business that that is what you are doing.

3.  Manage stock levels carefully

Money invested on stock sat on shelves is dead money!  Ok, you need to keep stock in for when  a customer calls or visits, but do you really need maximum quantities of all your lines?

Avoiding overstocking and having all that cash tied up, (whilst ensuring you have enough to meet customer demand), isn’t easy.  However, by using a recognised stock ordering technique, you can easily achieve a happy balance.  Consider using Just in Time (JIT), Economic Order Quantity (EOQ) or batch control methods to minimise the costs of holding stock.

4.  Relentless and pro active credit control

It’s a typical scene: You complete some work and raise an invoice to the customer, stating that your payment terms are 30 days from issue.  After 30 days, you haven’t received payment, but you delay chasing for another few days, just to be sure that the cheque is not in the postal system somewhere.  When the cheque hasn’t arrived after those few days, you call the customer and typically get one of two responses, either “we didn’t receive it” or “ there’s a problem with the invoice”.

At that point, you reissue the invoice and wait a further 30 days…..sound familiar?

Instead, three days after issuing the invoice, call the customer and ask if they’ve received it and are there any problems.  These questions require yes or no answers.  On the assumption that both are answered in your favour, then you can finally ask “so we can expect payment on XYZ date?”.

Remind them, perhaps via e mail, 5 days before the invoice is due and then start chasing immediately after it’s due.  At this point, you’ve just removed the most commonly used excuses for not paying, so at least you’ll get to the root of the problem and not just be the victim of “dallying” tactics.  Remind them that you are adding statutory interest to the invoice.

A lot of our business customers were unsure about how to approach credit control.  To help with this, we put together a helpsheet of various letter templates, telephone scripts.  Feel free to download it and use it in your business.  You may wish to adjust some of the timings stated on the helpsheet to fit in more with your business and it’s credit terms.

5.  Make it easy for them to pay

Or looking at it another way, make it hard for them not to pay!  Why not consider extending your range of payment options.  Facilities to take credit card payments can be added to websites inexpensively or you may wish to include your bank details on invoices to allow electronic payment transfers to be used.

6.  Keep your cash flow forecast up to date

Whether you need to manage it daily, weekly or monthly (depending upon your billing cycle), do make sure that you keep your cashflow forecast bang up to date.  Keep the forecast on a simple spreadsheet, listing expected cash in and then all the outgoings that you’ll need to make over the next 12 months.

Be realistic, customers will always try and pay later than you anticipate, so don’t build unrealistic time-scales in.  By extending the forecast over 12 months, you can quickly identify any problem months and prepare a plan of how you’ll tackle any predicted shortfalls.

Overview

I hope you found these cash flow tips useful.  If you did, please share them with your friends and contacts.  If you have any questions, drop me a line here or call me on 01422 365981.

Post to Twitter

Tags: , , ,
Posted in cash management | No Comments »

VAT rate change 1st January 2010 - What it means for you

December 18th, 2009

On 1 January 2010, the standard rate of VAT reverts to 17.5 per cent after a period of 13 months at 15 per cent.

Goods that are supplied or taken away before the 1st January can still be charged at 15%, even if they are paid for after that date..

Some businesses will still be trading at midnight on 31 December 2009 and HMRC has acknowledged it would be unfair to expect them to stop what they are doing on a busy New Year’s Eve and change their systems to cope with an extra 2.5 per cent VAT.  They will be allowed to continue applying the 15 per cent rate until their trading session ends that night, or until 6am, whichever is the earlier. The types of business affected are: pubs, clubs, restaurants and similar retail shops and telecommunications providers.

Exempt and partly exempt businesses (especially Charities) should consider taking advantage of early deliveries of goods, because, by so doing, they will minimise irrecoverable input tax.

Business owners should be aware that where a supply of services spans the change, i.e. it starts before 1 January 2010 but does not finish until on or after that date, the supplier may choose split his invoice to show amounts due at the two rates. As that treatment is optional, recipients of such services, whose input tax is not fully recoverable, should encourage their suppliers to take up the option.

You  should remember that the VAT fraction for determining the VAT amount from a VAT-inclusive figure reverts to 7/47, from 3/23.

Changes to the flat rate scheme

The percentages were revised downwards on 1 December 2008 when the standard rate was reduced to 15 per cent. However, the changes from 1 January 2010 will not only reflect the reversion to the 17.5 per cent standard rate, but also take into account business patterns across the various sectors over the last year.

Post to Twitter

Tags: , , ,
Posted in VAT | No Comments »

Tax and the Christmas party

November 17th, 2009

Christmas is drawing in on us at an ever increasing pace and at this time of year we, as business people, think about how to reward our teams for a hard years work.  A great way to do this is to throw a Christmas “bash” free of charge to attendees.

Employers can spend up to £150 a head annually on staff events, without HMRCE treating it as a taxable perk.

However, there are a few things that you need to be aware of and, if they aren’t followed, could cost you or your staff dearly.

  1. The allowance is £150 - on the nose. Go just £1 over this and the entire event becomes taxable, not just the excess.  The taxable benefit becomes £151, which means that tax and national insurance must be added on top.  This would make the event very expensive, either for the employer or the employee.
  2. You can spend the £150 on virtually anything you like, but make sure you keep the taxi fares and hotel accommodation within the £150
  3. The £150 also includes VAT, so be aware of including VAT in your budget
  4. The event must be open to all employees, not just a select few (although not all have to attend).  You can also extend the invitation to partners/ spouses and they too can benefit from the £150 allowance
  5. You don’t have to limit yourself to just one function a year.  You may decide to have two events a year at a cost of £75 each.  Be aware though, if the second event costs £76, then the whole £76 becomes a taxable benefit.
  6. Only annual events qualify, so going to the pub on a Friday teatime is out.  HMRCE have been known to pursue tax on an event which, despite it being within the limits, was to celebrate the companys 40th birthday.  Whilst this is an extreme interpretation of the rules, you need to weigh up the risk against the benefit

The HMRCE approach is to aggregate the cost of the event and divide it by the number of attendees, so there’s no need to worry that John in Marketing ordered the fillet steak!  Do make sure, however, that you keep accurate records of the costs of the event, and whatever you do - Don’t forget to close the free bar in time!

Post to Twitter

Tags: , ,
Posted in Corporation Tax, General Business, Tax | No Comments »

HMRC New Penalty Regime

October 6th, 2009

HMRC have recently introduced a new penalty regime that applies to tax returns that under declare the amount of tax payable.  It applies to all tax return documents filed on or after 1st April 2009.  The penalties all centre around the care applied when producing and submitting the return.  In this article, we’ll look at why a penalty might be charged, the amounts of the penalty and what you can do to avoid getting charged.

Why might you get charged a HMRC penalty

The penalty regime is focused on both the accuracy of submitted information and the care that was taken in preparing the information.  HMRC state that there are four differant types of inacuracy:

  • An inacuracy made, despite the taxpayer taking reasonable care (in which case there will be no penalty)
  • A careless inacuracy
  • A deliberate, but not concealed error
  • A deliberate and concealed error

Penalties for inacuracies will impact across VAT, CIS, Income tax, Corporation Tax, Capital Gains Tax, PAYE and National insurance.

The penalty regime is designed to address the behaviours that led to the inacuracy.  As a result, the penalties for deliberate and concealed errors are substantially higher.

How much will you be charged

The penalties determined will depend upon how the error occured in the first place.  The regime has been put in place to encourage “correct compliance”.  An inacurate document must satisfy two conditions before the penalty can be charged:

  1. It must have led to an underpayment of tax, or a false reclaim of tax, and
  2. It must have been careless, deliberate or deliberate and concealed

If those two conditions are met, then a penalty can be applied.

The maximum levels of penalty range from 30% of the understatement of tax for a careless error, right through to 100% of tax due for a deliberate and concealed error.  A deliberate, but not concealed error, will lead to a maximum penalty of 70% of the tax due.

How to avoid being charged a penalty

The most obvious way of avoiding a penalty is not to make any mistakes on your tax returns!

However, occassionally mistakes do occur, so how can you reduce your penalties should you find yourself in thsi situation?

Quality of disclosure

Reductions of penalties can be made, dependant upon the quality of the disclosure following the discovery of the error:

  1. You can tell HMRC of the error, explaining how the error arose and making full disclosure of the inacuracies
  2. You can help HMRC in quantifying the under assessment
  3. You respond positively to requests for information and documents from HMRC

(These responses are taken from HMRC website)

The final way to avoid receiving penalties in the first place is to use your accountant to undertake as much of the work as possible in the first place.  Yes, it may cost you a few pounds more than you are currently paying, but could be well worth it in the long run to avoid being caught up in the penalty regime process.

Post to Twitter

Tags: , , , , ,
Posted in Tax | No Comments »

Do you have a valid VAT invoice?

October 3rd, 2009

In my last post about reclaiming VAT on expenses incurred by an employee, I talked about getting a supplier to make out an invoice directly to the company.  But what should be included on a VAT invoice, and what will happen if any of the items that should be included, aren’t?

Valid VAT invoices

For an invoice to be valid in the taxman’s eyes, all of the following  must be present on the invoice:

  1. The invoice must contain a unique identifying invoice numberautomated-invoice-processing2
  2. The date of supply of goods/ services should be displayed
  3. The date of the invoice (the tax point)
  4. The name and address of the purchaser
  5. The type of supply (e.g sale of goods, lease, rental, commission etc)
  6. A description of the goods or services supplied
  7. For each description, a quantity of goods or extent of services supplied
  8. The total amount payable excluding VAT
  9. The rate and amount of any discounts offered
  10. The rates of VAT applied
  11. The amount of tax chargeable at each VAT rate
  12. The total amount of VAT chargeable

If any of the above is missing from an invoice, it is not a valid invoice for tax purposes and there is no legal entitlement to reclaim VAT on it.  It has been known for input VAT claims to be refused because of minor ommissions.

VAT invoice Tip

I would recommend using the list above as a checklist for supplier invoices.  Make sure you carry out spot checks on invoices you receive to ensure they meet all the criteria for being valid and that you don’t miss out on potential VAT reclaims.

Post to Twitter

Tags: , , , , , , ,
Posted in Tax, VAT | No Comments »

Don’t fall foul of the VAT reclaim trap

October 3rd, 2009

There are occassions where the director of a business will need to pay for business expenditure out of his or her own pocket.  For example, you could be away on a trip and see a shiny new must have piece of equipment at a knock down price.  You don’t have your company card with you, but do have enough cash in your personal account, so you buy it and then claim it back on expenses from the company.  The problem is that the receipt is likely to be in your name, rather than the company’s, so how will the VAT inspector react on a VAT inspection?

The VAT reclaim rules in black and white

The law states that if a business wishes to reclaim VAT on purchases, several conditions must first be met, otherwise the VAT inspector could refuse your claim.  The two basic rules are:

  • The VAT must have been incurred by the person reclaiming it
  • The person making the reclaim must hold a valid VAT invoice for the supply

Exceptions to the rules

There are a couple of exceptions to these rules which all relate to small value purchases incurred in the course of business (i.e. less than £25 per transaction), such as:

  • Coin operated machinery
  • Car Parking
  • Toll charges
  • Telephone calls
  • subsistence claims

In these cases, the original receipt should be passed to the company by the employee/ director, but VAT can be reclaimed.

However, that doesn’t help with our original problem of the director buying a significant piece of equipment for the business on his personal card.

How to avoid the VAT trap

When you are buying goods in this way, you are really just acting as a conduit for your company, who are the real buyer, so you have met the first condition.

To meet the second it would be wise to ask the seller to make the invoice out to the company, even though you are paying the bill.  To avoid any concerns the seller may have, show him a business card to prove you are an employee of the company.

Post to Twitter

Tags: , , , ,
Posted in Tax, VAT | No Comments »

Special schemes to account for VAT

September 3rd, 2009

vat_thumbThere are a number of special VAT accounting schemes, which may have benefits for your business.  Three of the most popular are explained below:

Annual Accounting for VAT

If your business turnover is less than £1.35m, you may apply to HMRCE not to fill in quarterly VAT returns, but instead to complete one return a year.

Under this scheme, you must pay a monthly direct debit equal to an estimate of the years VAT liability (usually calculated by reference to the previous 12 months).  Any additional liability is then paid as a lump sum at the end of the year.

Under this scheme, businesses must remain self disciplined and ensure they keep a close eye on any VAT liability accruing throughout the year.  The last thing you need is a large balance to pay that you weren’t expecting.

The schemes main advantage is that there is certainty over the monthly VAT payment so you can correctly budget for it within your cashflow.

Cash Accounting for VAT

If your turnover is less than £1.35m, you may choose to only pay VAT to HMRC once your customers have paid you, rather than when you raise invoices to your customers.  however, similarly, you can only claim VAT back on your purchases once you have settled the bill with your supplier.

The main advantage of this scheme is that you don’t have to fund the VAT to HMRC out of sales proceeds as you only pay it across once you have received the VAT cash in.

Flat rate accounting for VAT

This scheme can be applied to businesses with turnovers less than £150,000 (excluding VAT).

Those who join the scheme do not need to record the VAT on their expenses.  Instead, the business continues to charge its customers at the full VAT rate (currently 15%), and then pays a fixed percentage of the gross sales over to HMRC.

The fixed percentage is based on the industry that the business is involved in.

This scheme is particularly beneficial to businesses who have few VAT’able expenses or who are looking to simplify their VAT recording.

Of course, you shouldn’t enter into any of these schemes without full consideration of all the facts.  Why not give us a call to see if any of these schemes would be beneficial to your business

Post to Twitter

Tags: , , ,
Posted in VAT | No Comments »

Entering into a Partnership - Make sure you get it right

September 3rd, 2009

A partnership is created when two or more individuals come together to form a business.  Partnerships can be a great way to run a business and using one as a trading vehicle can result in some significant tax savings.

However, a partnership needs to be created properly and should not be entered into lightly.  If your partner should go bust then you could easily find that you are “jointly and severally” liable for each others debts….ouch!!  That being the case, you need to be very careful who you choose as your business partner.

What can go wrong and how to prevent it happening to you

Apart from going bust, he main issue with partnerships occurs when relations between partners start to break down. This could be because one partner thinks they do more within the business than the other but still takes an equal profit share, or it could be that life partners have entered into a business together and their life partnership breaks down.  Either way, each partner needs to be clear of their obligations.

The easiest way to achieve this is through the introduction of a written partnership agreement.  This document, which can be drawn up by a good corporate solicitor, will lay out the responsibilities and obligations of each partner, so, if the worst should happen, there is something to fall back on which explains the steps to be taken in such a case.

Don’t leave it to chance - make sure you are covered!

Post to Twitter

Tags: , ,
Posted in General Business | No Comments »

Protect Your Business against fraud

September 1st, 2009

Most of us are aware of the US scandals regarding the “missing Madoff Millions” earlier in 2009.  The scandal particularly underlines the danger of thinking you know someone and, in consequence, perhaps not being as careful as you should be.

Of course, fraud isn’t just confined to large companies.  It can occur in the smallest of businesses, even where there are only two partners running and working within the business.  The risks escalate as you appoint staff, and for these reasons it’s important that you have sufficient procedures and controls within your business to prevent fraud happening.

Often, small business owners don’t find out about fraud and theft, until it’s too late.  Very few businesses are able to fully recover from an internal theft.  Having a good set of internal controls means that you can focus on what you do best, building your business.  With that in mind, we’ve listed below a checklist that you can use within your own business to ensure that your controls are up to scratch and to minimise the chances of fraud taking place.

Your 10 step checklist to reducing fraud and theft in your business

  1. Set an appropriate ethical example for employees to follow.  Treat them with respect and fairness
  2. Ask your employees to identify ways in which someone could commit fraud at your company and ways to avoid it
  3. Develop a code of conduct that prohibits employees from committing acts of conflict of interest etc.  Ensure all employees and suppliers are aware of it.  Consider having key employees provide annual confirmation of their compliance and have a clear company policy on time and expense reporting.
  4. Adopt a “trust but verify” code.  If you only need one bookkeeper, conduct careful background checks before hiring.  Take note of employees who appear to live substantially beyond their means.
  5. Verify the credentials of all new vendors, before they are authorised to supply the company.  periodically review vendors to identify improperties.
  6. Make sure all disbursements and expenses are properly approved
  7. Protect yourself against cheque alterations by adopting electronic transfers for large payments, use direct debits for payroll and place a financial limit on cheques.
  8. Review original bank statements before your bookkeeper does.  Keep an eye out for unexpected overdrafts or balance shifts
  9. Make sure bank statements are correctly reconciled every month.  Ask that your accountant undertakes a periodic review of the bookkeepers work.
  10. If something seems odd - it probably is!!  You need to consider the possibility of fraud.
Post to Twitter

Tags: , , , , , ,
Posted in General Business, Risk Management | No Comments »

« Older Entries

Follow me on Twitter