It’s easy for small and medium sized businesses to get hung up on making a profit, but cash flow is even more important than profit, and the two are quite different things. A business can make a profit but still have poor cash flow, and vice versa. Businesses do not necessarily fail because they don’t make a profit, but more often just because they run out of cash.
What is Cash Flow?
So what is the difference? While profit is the amount of money left when expenses are deducted from invoiced sales, cash flow is about the actual monies received and monies paid out, and whether there is always enough in the pot to be able to pay bills today, next week and beyond.
So making sure the business has enough money to pay for all its expenses as they fall due is vital to staying in business. It’s simply not enough to be turning a profit – there needs to be enough cash, or access to borrowed cash, in the business to consistently sustain it. This requires careful planning and monitoring of cash flow.
You not only need to know what’s in the bank account right now, but what cash will be received when and what expenses are due for payment in the future. A crystal ball might be useful here.
Why is Cash Flow Important?
What about any unexpected costs that may arise? Say a customer does not pay an invoice on time? Can the business cope without the cash that would have been received had the customer paid his invoice on time?
Cash held in the bank account is extremely useful but whilst it’s sitting there the cash is not working very hard. This is why many businesses invest their cash into stock or work in progress rather than leaving cash in the bank account.
So what happens when the bills need paying and there is insufficient cash in the business’s bank account? A common fall back is the good old fashioned overdraft provided the bank. Overdrafts are designed to assist with immediate and short term cash needs and overdrafts are invaluable to most businesses. All but very large businesses tend to only run one banking relationship at a time and therefore that relationship between the business and the bank is very important to both parties.
So what happens when cash needs exceed the business’s agreed overdraft facility? Like all relationships you will only know how strong the relationship is when the relationship is tested. Some businesses prefer not to test their relationship with the bank. So why rely solely on the bank for finance? Some might say it’s like putting all your eggs in one basket.
Who Should You Turn To For Asset Finance?
From time to time businesses acquire machinery, IT or vehicles and the question is: How best to pay for them? In our opinion using bank funding is short sighted.
Should a business decide to use its valuable but limited bank facilities, be they overdraft, bank loan, or asset finance via the bank owned finance company, there is a significant risk that should the business later ask the bank for further help it will either say, “No, sorry we can’t help”, or ask for further security in the form of personal guarantees or charges over your home or business as a condition of any lending. Remember that every bank has a ceiling on the level of overall lending it feels comfortable to lend to your business at any time, so why clog it up with assets which could easily be financed elsewhere?
So it pays to think not only about the cost of any finance, but also who could best be the provider.
Most bank overdrafts and bank loans can be “called in” at very short notice, whereas a finance company which has provided Hire Purchase or Leasing contracts cannot do that. This means your valuable banking relationship remains intact and hopefully ample lending head room remains with the bank for that rainy day.
By using Hire Purchase or Leasing provided by an independent finance company such as Arkle, the business knows the interest rate charged is unlikely to increase during the term of the finance agreement, and the repayments will be fixed. This means your business can better predict its cash flow for the term of the finance which could be up to 7 years. Using Hire Purchase or Leasing is a great budgeting and cash flow protection which helps preserve that special relationship with your bank, for more critical matters.
Being able to forecast your cash flow more accurately means you can make important decisions about the future of businesses, and good cash flow management can prove be the difference between success and failure.If you need any help in understanding your cashflow then please call the team on 0116 2697222 or email us on email@example.com
When you decide to start a new business there is a lot to think about. We work with you to really understand your plans for your business and help you to make sure that you have everything in place before you get started.
We want to help you find the most effective way to run your business with tax efficiency at the forefront of our minds.
To give you an understanding of the ways we can help you, take a look below.
There are a number of obstacles every entrepreneur has to deal with when setting up their business. The best way to deal with these obstacles is to have strategies in place to work through whatever situations arise.
What is Cash Flow Forecast?
A cash flow forecast is used by businesses around the world and is considered to be an imperative business tool. The purpose of a cash flow forecast is to identify the amount of cash that is expected to come in (receipts) as well as go out (payments) from your business. Cash flow forecasts are extremely useful for future planning as they assist you in calculating the expenses and revenue of your business, as well as whether you can aim for expansion at the current time. The formula to calculate cash flow is simple:
Net Cash Position = Receipts – Payments
Cash flow forecasts are mainly used for the purpose of accurately calculating the expenses and the probable income by the end of a selected time period. Cash flow forecasts greatly help business owners make sensible decisions in terms of assets and capital, especially liquid assets.
Learn How to Prepare a Cash Flow Forecast Chart
Once you have all the necessary details and have outlined the goals you want your company to achieve, it will not be difficult to create a cash flow forecast. Here are 3 steps to help you prepare a cash flow forecast chart:
Cash inflows are based on the money you expect to collect during a given time period. This can include anything from interest earnings to repayment of debts. Simply speaking, any money coming in the form of cash is considered an inflow.
The cash outflows on your chart are your expenses, such as loan repayments, taxes, supplier payments, and credit card payments. Cash outflows also include regular and irregular payments as well as seasonal payments, such as rent, repair and maintenance and the inventory you purchase. In other words, any cash you are going to be spending is included.
3.Figuring Out Your Cash Flow Position
You simply have to add all the cash inflows and then subtract the total of the cash outflows to determine your business’ cash flow position for a given time period.
Cash flow is one of the most important tools for a business as it helps to account for the cash that is going to be coming in and leaving your business. It can help you plan for the future.
For many businesses, an accountant is a lot more than just a service provider. An accountant is often considered a trusted advisor, particularly a tax advisor. Tax is an important matter for any business, but it is also often a complex and intricate process. Operating in the most tax-efficient way and making sure that all allowances are claimed can have a huge, positive impact on a business’ outgoings. Making sure that everything is properly declared and tax is not underpaid can also save a lot of trouble later on. Making use of your accountant’s expertise as a tax advisor is a valuable asset in making sure your business runs efficiently. Seeking help from a professional, expert tax advisor will have a positive impact on your finances and ensure that all necessary tax processes are followed properly. Many small business owners feel that acting as a tax advisor is one of the most compelling reasons for using a professional accountant in the first place.
Limited Company Formation
If you are forming a new business, you will have to decide which legal structure to adopt. The two main options are sole trader or limited company. Limited companies provide better personal protection from business liability and, in some cases, can be more tax-efficient. You may also wish to form a limited company after functioning as a sole trader for some time if business growth has made it the more tax-efficient option. Setting up a limited company is a multi-stage process and significantly more complicated than registering as a sole trader. If you have trouble with this process or are concerned about making sure you carry it out properly, your accountant should be able to help you.
Accountancy firms can usually offer a very wide range of financial services, including serving as a payroll bureau. Payroll is a complicated process with a lot of necessary legislation to follow, and at the heart of it is both the business’ wellbeing and staff interests. In most cases, handling it in-house rather than outsourcing to a payroll bureau requires either hiring a specialist or spending a lot of man hours on having it handled and carefully checked by a non-specialist. Outsourcing it to your accountant’s payroll bureau service will not only free up this time and effort, but also make sure that the entire process is handled properly and is fully-compliant. As a result, trusting a payroll bureau is both cost effective and extremely useful for the majority of businesses that employ staff.
For help with any of these matter of for anything else, please do not hesitate to contact us on 0116 2697222 or firstname.lastname@example.org
Saving money is at the forefront of many entrepreneurs’ minds. As a result, many of us put off hiring an accountant in the hope of saving a few pennies. However, the added knowledge and expertise an accountant provides can be invaluable when it comes to strengthening your finances.
If you’re wondering whether or not your business needs an accountant, check out these seven tell-tale signs that it is time to call in a professional.
1. You’re a start-up
Start-ups are eager to save money – of course. But the very beginning of your business is a crucial stage. Should you set up as a sole trader, or a limited company? What’s the best way to register with HMRC for your tax needs? How does self-assessment work?
If these questions concern you, then the advice of an accountant can help put your mind at ease, while helping you choose the right business entity which will save you money in the long run.
2. Bookkeeping is a nightmare
Bookkeeping is an absolute necessity for every business. However, many entrepreneurs find themselves without enough time to dedicate to it – and no one wants to be scrambling for receipts when January rolls around. Hiring an accountant removes that pressure from your shoulders, allowing you to focus on running your business while a professional keeps track of your revenues and expenses.
3. Taxes are a headache
Filing a tax return can be a long and laborious process. Even after getting through it, how do you know if you’ve claimed the right benefits and exemptions? What about ‘payment on account’ for sole traders – are you ready? What business expenses can you claim? Can you include your office in your tax form? An accountant can offer you some easy assistance.
4. Your business is expanding
Just as a new business can benefit greatly from an accountant, so too can growing businesses. Accounts might have seemed relatively easy in the beginning, but as your business expands, so too do your accounts become more complicated.
This can feel like a lot of hassle at a time when you should be focusing on your business’ growth. With the assistance of a professional accountant, you can rest assured that your finances are in good hands.
5. You need advice regarding expenses
Business expenses can become extremely complicated when they appear to bleed into personal expenses. As your business expenses are tax deductible, it’s important to know what you are allowed to claim on your tax form. An accountant can save you a lot of money here, while helping you to differentiate between the two kinds of expenses.
6. HMRC is conducting an audit
If you’re getting audited and you don’t have an accountant, now is definitely the time to get one. An audit can be an anxiety-inducing experience, and having a trained professional on your side is a necessity when it comes to much-needed financial advice. If you’re unsure about your accounts and HMRC have decided a visit is necessary, speak to an accountant to see how they can help you set things straight.
7. You find money is tight
It may sound counter-intuitive but if you find your business is taking too much from the coffers, then your money is better spent on an accountant who can help you save. Whether you’re slightly over-budget or haemorrhaging money, a professional accountant can go through your books and offer seasoned advice. If you find that you seem to owe far too much tax each year, an accountant can help you find tax loopholes and benefits so you don’t end up paying more than you should.
Surprisingly, there is quite a lot. As long as you are resident in the UK for tax purposes you will probably qualify for the following tax reliefs and allowances for the 2017-18 tax year:
Apart from these basic allowances, there are a number of income types and gains that are exempt from income tax and capital gains tax. Currently, they include:
Tax-free capital gains:
Also, when you inherit an asset, any inheritance tax is usually paid by the estate. So you will get the use of the asset tax free, but you may have to pay capital gains tax if you subsequently sell it.
A limited company is a separate entity in law, and all income earned belongs to the company rather than its directors. There are certain ways in which you can extract money as a company director, one of which is taking a salary under the Pay As You Earn Scheme (PAYE).
A combination of this and drawing dividends when the company has distributable profits available, is usually the most tax-efficient way to pay yourself. The best ratio of salary to dividends usually depends on your personal tax situation, and that of your company.
Becoming a company employee
It is not a well-known fact, but directors can be employees of their own company as well as holding office as director. For the purposes of clarity, you should have a written contract of employment that lays out your roles, responsibilities and duties as an employee, as well as the level of remuneration you can expect to earn as a director.
You can take a salary in the same way as other employees, and benefit from the statutory entitlements enjoyed by members of staff. This can be particularly important should the company experience financial decline, as you may be able to claim redundancy payments and other entitlements.
Money withdrawn by way of salary through PAYE attracts tax and national insurance, as well as the usual employer costs that are borne by the company.
Combine a small salary with dividend payments
As long as you are a shareholder as well as a director, you can also pay yourself by taking dividends, but a combination of these two methods is generally considered the most tax-effective.
Many directors take a small salary plus dividend payments periodically throughout the year, according to the profit levels of the company. The most tax-efficient ratio between the two methods of payment will depend on various aspects specific to your circumstances, including your personal tax allowance.
Other factors include the rate of corporation tax your company pays, which is currently 20% on profit before dividends.
It is important to remember that dividends can only be paid if they are supported by sufficient distributable profit (after tax). This means if you take a dividend and the company cannot afford it, the dividend will be regarded as unlawful should the company enter insolvency.
You will be held personally liable for the money, and potentially open to accusations of misconduct as a director. So before a dividend payment is sanctioned, it is important to first verify your company’s financial position.
One of the reasons why dividends are more tax-efficient is that you do not have to pay National Insurance, as with a ‘regular’ salary under PAYE. Furthermore, you have a tax-free annual dividend allowance of £2,000.
The danger of an overdrawn director’s loan account
If you are used to paying yourself as a sole trader, you will already know that a salary extracted by way of ‘drawings’ is taxed within the self-assessment system. Some directors new to office, or who have previously operated as a sole trader, assume that this is the correct system to use within a limited company.
The problem is that you are liable for considerably more tax if you pay yourself in this way. In the books of a limited company, all money withdrawn that is not a director’s salary, dividend, or a benefit, is recorded in the directors’ loan account and on the company’s balance sheet.
The risk of holding an overdrawn director’s loan account again lies in the potential for insolvency, in which case you will have to repay the money to the company. It would be wise to discuss your remuneration as a director with an accountant, who will be able to calculate the most tax-efficient combination of salary and dividends.
The new tax year which began last month and brought with it a series of useful tax-free allowances that you may not currently be aware of, including the Government’s new trading and property allowances.
Under the new trading allowance, anyone is able to earn up to £1,000 a year from a personal hobby or start-up business before income must be declared to HM Revenue & Customs (HMRC) via a self-assessment tax return.
This exemption applies to people who sell goods via online marketplaces such as eBay and also those who provide ‘casual services’ such as gardening or babysitting.
New self-employed microbusinesses can also take advantage of the new rules, but will be expected to pay income tax on their full profits once the £1,000 threshold has been exceeded.
Furthermore, under what is known as ‘rent-a-room’ relief, homeowners are now entitled to earn up to £7,500 a year from letting out furnished accommodation in their home. However, those who rent out rooms via short-term letting websites such as Airbnb could face a shock in coming months, as the Government is reportedly considering changing the rules so that such lettings are not entitled to the tax break.
Homeowners can also benefit from the new property allowance – which enables people to earn up to £1,000 tax-free by renting out the likes of driveways, parking spaces and loft storage to other people.
The property allowance also applies to Airbnb lettings, but an HMRC spokesperson has warned: “If someone is using the rent-a-room relief to let their home, they will only be able to use the new property and trading allowances for a separate source of income”.
They added: “They can use rent-a-room relief for letting out a furnished room and the new property allowance for renting out their driveway for a parking space. Or, they can use rent-a-room relief for letting out a room and the new trading allowance for doing some handyman work”.
Put simply, in order to take advantage of trading allowance, property allowance and rent-a-room relief in a single tax year, people will need to have three separate money-generating ventures.