Tax and business basics, whatever the size of your enterprise.

Management

This section looks at key financial elements for business owners and managers.

Accounting package selection

What should you consider when making your selection of an accounting package? At Certax, we can help you to choose and implement an accounting package.

Selecting the right accounting package can be difficult, particularly as there are so many options on the market. Price and functionality vary so widely as to make objective comparisons very difficult without spending a number of days on the selection process. The explosion of internet (cloud-based) accounting solutions has complicated the selection process as there are now many more different options.

We have set out below some areas you should consider when making your selection:

Determining Your Requirements

The first decision to be made is the level of complexity required from a new system.

At the most basic level a cash-book, to handle receipts and payments, may suffice. On a larger scale a more sophisticated ledger-based system to produce quotes, VAT returns, and monthly accounts would be more appropriate.

Alternatively, a highly sophisticated system which, as well as doing all of the above, can also handle stock control and job costing and can also integrate with a website, may be required.

Online or in-house?

The next decision is whether you want to run the accounting functions in-house, or over the internet using a web-based provider. There are advantages and disadvantages either way. For example, just in terms of cost, an online solution will involve a recurring monthly/quarterly fee for the service, whereas an in-house solution may involve a one-off purchase price plus annual upgrade and support fees. A key consideration with an online solution is data security, and can the data be retrieved in the event the provider ‘disappears’ or goes into administration/receivership?

The growing business

Think about what your business might be doing, in say 12-24 months time:

  • will it be going through rapid growth or a change in direction, and need more up to date and more accurate financial information, such as profitability at department or cost centre level?
  • will transaction volumes be rising steeply?
  • will you want to be able to connect your products to your website and process orders and payments online?

Market sector

Your business may be in a specialist market sector where tailor made solutions already exist.

Talk to us as we have experience of your type of business. Also, contact your trade body/trade association or local Chamber of Commerce as they may already produce information to help you, and they may hold events and seminars on this issue.

Cost

Many software vendors now use a subscription based model as opposed to the more traditional one-off licence fee.

Subscription based pricing is usually based on a regular monthly or quarterly fee, which for cash flow purposes may suit some organisations.

However, cost should not be the deciding factor. If you are only willing to spend, say £10/month, the system will be unlikely to meet all of your needs. This in turn may place constraints on the way the business trades, and subsequently turn out to be a hindrance to expansion. It may also mean that more expenditure and upheaval is required should you need to upgrade to a more expensive system in the future.

Some systems are available in modules or in different bundles – make sure you know exactly what you need.

Your detailed business requirements

A list of your detailed business requirements would be useful when comparing packages. The following pointers should be considered in the context of your business:

General points

  • What is the base operating system of your computer network? There is less choice of accounting packages if using a non-Windows platform.
  • How many users will require concurrent access (now or in the future)?
  • What volume of transactions will you be processing and can the software handle this?
  • Can the system produce VAT returns and, if you are on a special VAT scheme, can it cope with this?
  • Can orders and payments be taken over the internet and downloaded to the accounting system?
  • Will the system let you import/export data to/from other packages such as spreadsheets?
  • Do you need to access the system off-site from a mobile device or remote PC link?

Your specialist processing requirements

Here is a sample list – you will need to add your own special requirements depending on the nature of your business:

  • retentions
  • deposits/subscriptions/donations
  • discounts – quantity discounts, value discounts and prompt/early-payment discounts
  • part-payments/part-receipts/part-delivery
  • foreign currency customers and suppliers and foreign currency fluctuations
  • processing adjustments such as bounced cheques, bad debt write-offs, refunds etc
  • direct debits/standing orders (receipts and payments) and multiple debit/credit card accounts
  • accruals and prepayments
  • loans, grants, mortgages, HP agreements and any special payment types and terms
  • component stocks and bill of materials
  • mixing of service and stock items on an invoice and as separate stock records
  • payments to suppliers electronically (via BACS)
  • label and mailshot capabilities for customers/suppliers
  • ability to create XML formatted transactions – (to facilitate electronic transmission to other systems)
  • debt factoring/financing (may require specific work rounds)
  • data import and data export requirements.

Your information and reporting requirements

You need to determine what kind of management and user information is required from the system.

A sample list might include:

  • financial reports – trial balance, profit and loss, balance sheet, cash flow and turnover reports
  • key ratios and other business metrics
  • actual vs budget reports
  • work in progress and profit/loss on job or contract
  • profit/loss by department, or by cost centre or other levels of analysis
  • customer/supplier balances and aged debtors/aged creditors
  • statements and invoices

Other points

  • How does the system cope if you need to amend a transaction?
  • Is there a full audit trail (including details of modified transactions)?
  • Does the system produce the information in an acceptable form both to you and us (as your accountant) in order to complete all statutory and regulatory financial year-end and fiscal year-end tasks?
  • Does the system enable statutory online filing (VAT returns and EC Sales List returns for example)
  • Are there adequate security routines to prevent unauthorised access?

Training

Training for your new system and new procedures is vital for the staff that will be using the system on a day-to-day basis. Do not rely on users being able to learn the system as they go along.

We may be able to provide training for you or help you find appropriate training.

The Final Choice

  • Narrow the selection down to the package(s) that matches your needs most closely.
  • Discuss the options with the potential user(s) of the system.
  • Get an evaluation or trial copy if possible (some software vendors offer a free 30-day trial for example), and if possible go and see the system in action at a business similar to yours.

Having performed an objective review up until now, the final choice may be more subjective. It will probably be the look and feel of the system you like most which is finally selected.

Implementation

Whilst the beginning of the financial year is the most logical time to start using the new system, this may not be a particularly convenient time for the accounts staff.

You may wish to discuss the timing with us, as we can help in drawing up a list of opening transactions and the opening trial balance at the appropriate time.

You may wish to discuss the timing with us, as we can help in drawing up a list of opening transactions and the opening trial balance at the appropriate time.

Other issues to think about at this stage are:

  • customer/supplier/nominal and cost centre/stock/job costing codes
  • designing/ordering pre-printed stationery (invoices for example)
  • creating records and posting opening transactions (if you already have a system in place it may be possible to import some or all of this data)
  • developing periodic processing, authorisation and verification routines
  • backup and restore procedures for the accounting data files
  • long-term retention of accounting data (minimum of 6 years).

Your specialist processing requirements

Here is a sample list – you will need to add your own special requirements depending on the nature of your business:

  • retentions
  • deposits/subscriptions/donations
  • discounts – quantity discounts, value discounts and prompt/early-payment discounts
  • part-payments/part-receipts/part-delivery
  • foreign currency customers and suppliers and foreign currency fluctuations
  • processing adjustments such as bounced cheques, bad debt write-offs, refunds etc
  • direct debits/standing orders (receipts and payments) and multiple debit/credit card accounts
  • accruals and prepayments
  • loans, grants, mortgages, HP agreements and any special payment types and terms
  • component stocks and bill of materials
  • mixing of service and stock items on an invoice and as separate stock records
  • payments to suppliers electronically (via BACS)
  • label and mailshot capabilities for customers/suppliers
  • ability to create XML formatted transactions – (to facilitate electronic transmission to other systems)
  • debt factoring/financing (may require specific work rounds)
  • data import and data export requirements.

Your information and reporting requirements

You need to determine what kind of management and user information is required from the system.

A sample list might include:

  • financial reports – trial balance, profit and loss, balance sheet, cash flow and turnover reports
  • key ratios and other business metrics
  • actual vs budget reports
  • work in progress and profit/loss on job or contract
  • profit/loss by department, or by cost centre or other levels of analysis
  • customer/supplier balances and aged debtors/aged creditors
  • statements and invoices

Other points

  • How does the system cope if you need to amend a transaction?
  • Is there a full audit trail (including details of modified transactions)?
  • Does the system produce the information in an acceptable form both to you and us (as your accountant) in order to complete all statutory and regulatory financial year-end and fiscal year-end tasks?
  • Does the system enable statutory online filing (VAT returns and EC Sales List returns for example)
  • Are there adequate security routines to prevent unauthorised access?

Keeping an eye on your cashflow

Certax can help businesses with cashflow management and projection. Here are some of the basic principles…

Cash is the lifeblood of a business, but with so much emphasis usually put on profitability, it can be easy to overlook this fact. Of course, the bottom line is important, but poor cash flow management can drive a growing and/or profitable company out of business.

The risk is especially great for expanding companies. For example, if billing is delayed at the same time as stock is accumulated to fulfil increased orders, you can find yourself short of the cash needed to pay suppliers and employees.

The benefits of projection

Cash flow projections are critical, especially in times of need, but you don’t have to wait for a crisis to benefit from good cash flow planning. A properly developed cash flow projection can help a business foresee and prepare for potential shortages. Cash flow management can also help you:

  • Maintain adequate cash reserves to pay bills, expand the business and invest in facilities and product development
  • Reduce interest costs through managed borrowing
  • Receive discounts through bulk purchasing
  • Improve relations with the bank manager

Businesses that prepare cash flow projections often learn something about their systems, the dynamics of their business, and the process often has other positive outcomes. For example, you might discover that you need to pay more attention to certain customers, or that you can defer payments to suppliers more beneficially.

 

Cashflow checklist

20 signs that your business could be facing cashflow problems

To help you focus on your cashflow and profitability we have prepared this checklist. Simply answer ‘yes’ or ‘no’ to say whether each statement is true for your business. If you have more ‘no’ answers than you are comfortable with, you may be facing cashflow problems. Call us to discuss an action plan.

Print

 YesNo
When we receive a job, we know we can complete it and be paid on our terms  
We send a bill as soon as we complete a job  
Invoicing documents are accurate, complete and clear  
Our credit procedures alert us to problem customers so that we can follow up on outstanding accounts  
We monitor and enforce our credit terms and obtain deposits from ‘doubtful’ payers  
We finance capital expenditure in the most cost-effective manner  
Our pricing reflects time spent on jobs and covers associated risks  
Employees understand the importance of the business’s cashflow  
We complete work efficiently  
We catch mistakes before they reach customers  
Mistakes cause us to improve processes  
We keep a close eye on budgets throughout the year  
We determine the viability of outsourcing work  
Adequate controls are in place to control employee overtime  
We are effective in negotiating materials and supplies contracts  
We forecast cashflow monthly and base our financial arrangements on our projections  
Our bank is our partner and understands our business and its financial needs  
We always see that work is done by the least expensive, capable employee  
We link staff pay to productivity and company profits  
Our standard operating procedures are written down and everyone follows them  
 

If you would like advice on cashflow management and cashflow projections, contact Certax.

Buy, HP or lease?

Wondering whether to buy, hire purchase or lease an asset? Certax can help businesses to make the right decision.

The decision to buy, hire purchase or lease an asset will generally depend on the financing available to your business.

There are different treatments for tax and accounting purposes, depending on the type of finance contract entered into, and these will need to be considered together with the VAT treatment.

Buy

This section covers outright purchase for cash or by bank loan, etc.

Accounting treatment

The asset is capitalised in the balance sheet and an annual charge for depreciation is deducted as an expense in the profit and loss account, which in turn reduces the value of the asset in the balance sheet.

The annual depreciation charge is calculated in accordance with accounting standards, based on the useful economic life of the asset and the residual value.

Tax treatment

Depreciation is not allowed for tax purposes, but capital allowances may be available.

The maximum amount of the annual investment allowance (AIA), attracting 100% relief, was reduced permanently to £200,000 from 1 January 2016 (down from £500,000). Transitional rules will apply.

Qualifying expenditure in plant and machinery (not cars) up to the maximum AIA amount attracts 100% relief. Annual expenditure over that amount enters either the 8% pool or the 18% pool, attracting a writing down allowance (WDA) at the appropriate rate.

Any business that invests in energy-saving or environmentally beneficial equipment is entitled to claim a 100% first year allowance (FYA). New cars with CO2 emissions of up to 75 g/km also qualify for a 100% FYA. Cars with CO2 emissions of more than 75 g/km and up to 130 g/km are allocated to the main pool and attract 18% WDA. Cars with CO2 emissions exceeding 130 g/km enter the special rate pool and attract WDA at only 8%.

There is a 100% capital allowance for the purchase of new, unused (not second-hand) vans, which cannot produce CO2 emissions under any circumstances when driven (eg “electric vans”).

VAT

Unless the asset is a car, the VAT shown on the supplier’s invoice will generally be recoverable by the purchaser, if he or she is registered. Buying at the beginning of a VAT period will normally entail a wait of three months or more to recover the tax. VAT on cars is recoverable only in very rare circumstances.

Hire purchase (also known as Lease purchase)

An HP agreement usually includes an option to purchase at the end of an initial period. Payment of this nominal fee transfers title of the asset and brings the legal agreement to an end.

Accounting treatment

The asset is treated as if it had been purchased. It is, therefore, capitalised in the balance sheet and depreciation is provided on an annual basis.

The obligation to pay future instalments is recorded as a liability in the balance sheet.

The payments are apportioned between a finance charge and a reduction of the outstanding liability.

The total finance charge should be allocated to accounting periods during the HP term and is shown as an expense in the profit and loss account.

Tax treatment

Capital allowances are available for assets which are in use at the end of the accounting period. See “Buy” section above for details.

The finance charge in the accounts is normally allowed against tax.

VAT

VAT charged by the finance company will be payable with the initial instalment. There will be a delay of up to four months in recovering this from HM Revenue & Customs (HMRC). In the case of a car, most businesses will be unable to recover any of the VAT.

Finance leases

A finance lease typically has a primary period for a fixed period at full cost, followed by a secondary period, usually of an indefinite length, at a very low cost.

Short Leases

Accounting treatment

For certain finance leases of up to seven years, the accounting treatment follows the strict legal position. The ownership remains with the lessor, and the rental payments are shown as expenses in the lessee’s profit and loss account.

Tax Treatment

The lessor (as owner) is entitled to the capital allowances, and the rental payments are generally allowable in calculating in the lessee’s profit. Where the asset is a car with CO2 emissions exceeding 130g/km, there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes.

Longer-term Leases

Accounting treatment

For longer term leases, the asset is capitalised in the balance sheet and depreciation is provided on an annual basis. The obligation to pay future rentals is recorded as a liability in the balance sheet. The rents payable are apportioned between a finance charge and a reduction of the outstanding liability. The total finance charge is allocated to accounting periods during the primary lease term and is shown as an expense in the profit and loss account.

Tax treatment

The tax treatment is aligned with the accounting treatment, and the lessee may claim capital allowances.

VAT on finance leases

VAT charged by the finance company will be payable with the initial instalment and each subsequent rental. There will be a delay of up to four months in recovering this from HMRC. In the case of a car, most businesses will be able to recover 50% of the VAT.

Operating leases

An operating lease is where an asset is rented for a period, not necessarily fixed, and returned to the owner at the end of the period. Contract hire is a typical form of operating lease.

Accounting treatment

The asset is not capitalised; the rental payments are charged on an acceptable basis over the lease term to the profit and loss account.

Tax treatment

The accounting treatment is an acceptable treatment for tax purposes, where the accounting standard has been applied. No adjustments to profits, therefore, need be made.

Where the asset is a car with CO2 emissions exceeding 130 g/km, there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes.

Capital allowances are not available.

VAT

Each rental or instalment will have VAT added so that the VAT cost is spread throughout the period of the agreement.

Where the asset is a car, only 50% of the VAT on the leasing charges can be reclaimed. If identified separately, the VAT on any maintenance element of the contract can be reclaimed in full.

The disposal proceeds of leased cars will be VAT inclusive.

Summary

 BuyHPShort Finance LeaseLong Finance LeaseOperating Lease
Accounting treatmentAsset DepreciationAsset/liability Depreciation InterestRental expense as you goAsset/liability Depreciation InterestRental expense as you go
Tax treatment
(deductions normally allowed)
Capital allowances InterestCapital allowance InterestRentalCapital allowances InterestRental
VAT
(normal treatment)
Up frontUp frontOn each instalmentOn each instalmentOn each instalment

Do call us if you would like any further help or advice in this area.

If you would like help with deciding whether to buy, hire purchase or lease an asset, the team at Certax can assist you.

The value of outsourcing

The team at Certax can help businesses when it comes to making decisions about outsourcing core functions. Here are some of the issues to consider…

Most business owner-managers find that they spend only a small percentage of their time on important strategic planning. A great deal of their effort is spent on the day-to-day running of the business – the ‘housekeeping’ side of things.

But do you really need to do all this work yourself, when it is possible to get someone else to do it for you? The chances are that significant parts of the car you drive are not made by the manufacturer whose name appears on the badge, nor even assembled in their factories. Some motor manufacturers now outsource not only parts but complete assemblies – steering, transmissions, engines, interior assemblies.

So, if outsourcing can work for major international manufacturing industry, what can it do for your business? Fundamentally, it can remove from senior management the need for close involvement with the details of running a business – freeing the business owners to concentrate on those aspects of running a business which truly warrant expenditure of senior management time and effort.

Areas you might consider outsourcing include:

Payroll

Payroll is the most common task that companies outsource. Services include weekly/monthly/quarterly payroll and normally attending to the completion of the (many) Government returns.

Under RTI, employers must submit their PAYE information to HMRC on or before the day of payment.

Human resources

It is possible to outsource your human resources requirements. There are specialist companies that offer a full range of services, including insurance, training, recruitment, policies and procedural advice and help with complying with the myriad of Government employment laws and regulations.

Marketing

Independent marketing firms have all the necessary expertise and materials. You can outsource your entire marketing requirements, thus saving you the problems of creating your own internal infrastructure.

Information systems

Purchasing and maintaining information systems, hiring and evaluating IT staff and training users can all be very difficult. By outsourcing your information systems function, you can obtain the latest technology and suitably skilled personnel.

Delivery

Depending on your products and situation, there are numerous options for outsourcing delivery. Common couriers might be able to provide a major portion of your delivery function. Larger businesses might prefer to contract a major delivery firm rather than maintain their own fleet. Either way, you can hire the expertise to keep delivery problems and decisions off your desk.

The common feature of all these functions is that none of them is fundamental to your core business, and that all of them can be bought in at a competitive price. Thus leaving you to focus on the real issues: providing the best possible service to your clients, growing your business and expanding your product lines.

If you would like to discuss outsourcing with Certax, contact us today.

Expansion – is your business ready?

At Certax we have a wealth of experience in helping business owners to take their business forward. Here we outline some of the key areas to consider when looking to develop and expand your business.

Recent research shows that micro businesses have grown in number by 40% since 2000, but less than a quarter of these businesses have managed to grow in size. However, around 80% of SME owner managers would reportedly like to expand their business, so this low growth rate cannot be blamed on a lack of ambition.

There are many situations where a business would benefit from expansion. Whether it is because of increased demand for a service or product, adapting to your customers’ changing needs, or branching out into a new area, it is important to weigh up both the advantages and disadvantages of growing your business.

Should I grow my business?

Research is key in making an informed decision as to whether your business should expand. Study the demand for your product, your potential market place, your competitors and your customer base as well as the impact expansion may have on your internal processes.  It is important to explore every eventuality before making a decision.

You should only consider expanding if your business is healthy. If it is not profitable, expanding may cause bigger problems which have the potential to be disastrous. Assess your current business performance thoroughly, to ensure that you have a solid base that can take the inevitable pressure and upheaval that expansion will present.

Think about why you would like to expand, and whether doing so would result in cost advantages for your business. Expansion often means using more resources and employing more staff. Would the increased business make sufficient profits to comfortably bear the weight of these extra costs?

Funding and expansion

Then there is the issue of financing your expansion. Funding remains a challenging area for small businesses, but there are other options you could consider instead of the traditional bank loan. Invoice factoring, overdraft facilities or leasing equipment could provide you with more funds and reduce the amount you need for expansion. You could also consider investment finance, which would mean that an investor would share some of your business risk, although if you are unwilling to relinquish some ownership of the business, or are a sole trader or partnership, this option will not be suitable. If you do decide to apply for a business loan, remember to make sure your business plan is water tight before presenting your application to the bank.

Growing a business is challenging and it is important to consider the risks associated with expansion. There is potential for financial loss and you will have to navigate through unfamiliar territory and face numerous other issues along the way. It is therefore important to make sure you feel capable of taking on such obstacles. If all of these issues have been duly considered, the benefits of business expansion can be numerous and extremely rewarding.

Making it manageable

Managing a business expansion, like any other business project, will mean you need to plan extensively in order to make sure the task in hand does not become overwhelming. Of course, you will not be able to plan for every eventuality, but the more planning you do, the more likely it is that your expansion will run smoothly.

Some tips to help:

Consider expanding in stages, according to demand.
Staged expansion means that you will have to keep a close eye on how much demand there is for your increased business and will therefore not expand beyond your obtainable market.
Set yourself goals and deadlines.
Meeting your goals will help to build and sustain momentum, as well as giving you a sense of achievement and maintaining the enthusiasm of all those involved in the process.
Look at your marketing plan.
Because your business is changing, you will need to change your marketing plan so that it promotes your expanded business, attracts new customers and retains current ones.
Set up your systems first.
Organising efficient systems beforehand means that you will be able to cope when business levels start to increase.
Delegate.
Remember that you will not be able to do everything yourself. Involve your staff and ensure that you make the best use of their particular skill sets.
Manage your customers’ expectations.
If you think that the growth of your business may affect your current customers, it would be a good idea to let them know. Remember to keep customers aware of any changes to their service and highlight any improvements that have been made. Making them aware of why their service may be interrupted will minimise frustrations and help to prevent any potential loss of business.

Remember: growing a business can be stressful! Make sure you take care of yourself – if you are not on top form, your business won’t be either.

We can help you with all aspects of business planning. Please contact us for further advice and assistance.

If you are seeking to expand your business, please contact Certax for further information and advice.

 

How we can help

We are here to help you with any of the steps involved in choosing and implementing an accounting package. Please contact us at Certax for further advice.