Improving the Profitability of your Small Business
It does not matter what type of business you have, or how large or small the business is, good accounting practices are an imperative part of making every business successful and profitable. Most well-established companies will invest in the services of a reliable accountant and this is highly advised, but as a business owner you still need to have a good understanding of business accounting practices yourself, and you need to ensure that everything that can easily be kept in order with some simple processes is kept in order. This will help you understand your company better and so develop and grow the profitability of your small business.
Three Accounting Necessities for all Small Businesses
- Meeting Deadlines
First and foremost, the importance of meeting deadlines cannot be stressed enough. This relates to everything from the bills you need to pay to your tax returns. If your accounts are kept in order and you are shown to act promptly, it will reflect well on your business. Late payments can be detrimental to your credit rating, which will make it hard for you to borrow to expand, and late tax returns can result in a costly fine for your business. If you have a turnover in excess of a certain threshold, you will need to keep value-added-tax (VAT) returns on a quarterly basis. Don’t run the risk of forgetting to make a payment. Why not set up a direct debit from your business account instead? A non-compliance fine is not only very costly, but it can have a negative impact on your company’s image as well.
- Legal Compliance
Aside from meeting deadlines, you also need to make sure that you meet the legal requirements that are in place. There are many legislations that will impact your business, you and your company’s directors. This can be a major source of confusion for a lot of people, which is why it is advisable to take advantage of professional advice from an accountant so you can ensure everything is handled correctly. The last thing you want to do is end up being forced to pay a huge fine because you were not complying with legal requirements, which can often happen without business owners even realising they are at fault. You also need to make sure that you calculate everything from salaries to profits once tax has been deducted so that you can get a true reflection of the financial standing of the company.
- Keeping good records
Last but certainly not least, keeping good records is a business must. There are many reasons why this is the case. There is the legal requirement, as you are required to keep all of your tax returns and supporting documents up to date in case you are asked for an assessment from the tax authorities. Not only this, but you are never going to be able to move ahead if you don’t have an accurate and in-depth understanding of your business’s finances. This is the only way you can make effective reports and forecasts, and good business decisions that will help your business grow. It is a good idea to invest in simple accounting software, as this will make the whole process a lot easier for you. You will also be able to track payments a lot more effectively and ensure your business is running to the highest level of efficiency.
Book-keeping tips for small businesses
Many small businesses fail to comply with their legal responsibility when it comes to the relatively straightforward tack of book-keeping. As a small business owner it is up to you to ensure that your books are up to date and accurate, and you need to keep them this way by updating them regularly. Failure to do so can cause huge problems later from submitting accurate and timely tax returns, to handling a tax investigation, to growing and developing the business profitably.
Not only will you struggle to budget and forecast effectively, but you may find yourself facing hefty fines if you are investigated by the tax authorities and your books are not in order. This is the last thing anyone wants to deal with, so take a look at some of our top book-keeping tips that will help you stay in control.
- Maintain daily records – There is only one place to start, and this is with the fact that you must maintain daily records. This is imperative, otherwise you will find it extremely difficult to track your business’s financial condition, and you will be more likely to make mistakes and record inaccuracies if you are trying to catch up with the book-keeping days, weeks or even months later.
- Go paperless – You will find it much easier to keep control of your book keeping commitments if you invest in good quality accounting software such as Kashflow, in which everything will be managed from the one place, and you don’t have to worry about bills, receipts or invoices going missing. This will improve efficiency and accuracy by a significant amount.
- Get your compliance and tax obligations right – Failure to do so can end up costing your business thousands. You always need to ensure you fully comply with the law. This is why it is a good idea to hire a professional accountant, as they will be able to take care of this for you, leaving you free to run and grow your business.
- Make sure you are using the best accounting system for your business – There are numerous different accounting systems for you to choose from, and you need to ensure you select the right one for your needs. Most businesses tend to opt for accrual-based accounting or cash-based accounting. The former is when you count expenses and income when they happen, not when you pay or receive them. On the other hand, with cash-based accounting, you count expenses when you pay them and income when you receive it from your customer. Which you choose will entirely depend on type of business you run but if you are at all unsure then just ask us; we are always happy to help.
- Keep business and personal finances separate – This is a classic mistake made by many start-up and small business owners. They keep their business and personal finances in a single bank account – it can initially seem the easiest thing to do and reduces bank charges and costs by having a single account but this is truly a false economy. It is much easier for you to stay organised if you keep everything separate so only business expenses in your business bank account and only personal expenses in your personal account. Ask any business owner who failed to do this in the early days of their business and they will tell you that you will live to regret not keeping personal and business finances separate.
- Leave an audit trail – You should make sure you have a system in place that gives you the ability to easily and quickly retrace the financial activities of your business. This means keeping everything in chronological and numerical order and ensuring nothing is left out; not even small petty cash amounts or petrol receipts. If you are not leaving an effective audit trail behind, you will face difficulties later on down the line when you try and reconcile your accounts in order to submit company or personal tax returns.
- Use the services of a qualified accountant – Last but not least, one sure fire way to guarantee your books are straight is to use the services of a professional accountant. We are, of course, bound to say that but a good accountant will ensure that everything from bank statements to invoices to receipts are filed correctly so that you no longer need to worry about that aspect of your business. This frees up time and allows you to focus on the core of your business activities. Your business will never grow successfully if you are bogged down in dealing with regular financial affairs and cannot develop ideas and strategies for growth.
Top tips for dealing with late payments
It is well-known that many a small company with a good idea, product or service fails to thrive because of cashflow problems. When it comes to business survival, let alone growth and progression, there is no denying that prompt payment plays a significant role. However, it seems the problem of late payments is something that is only getting worse and worse. Research conducted by Sage revealed that 72 per cent of business owners had to wait 60 days or more for payment, while 57 per cent had to wait for 90 days or more. This is clearly a major issue, especially for manufacturing businesses who have significant upfront costs, in some cases months before they are finally paid. If you are struggling with late payments at your business you need to be proactive to help combat this potentially fatal issue.
One thing you can do is carry out credit checks on any potential customers before you agree to do business with them. By doing this, you will be able to discover whether they are in a position that means they are able and likely to pay you on time. There are various ways you can go about this. You could pay for a credit check. While this costs money, it may be the most advisable route to go down if you are agreeing to do a large amount of work at significant cost for the customer in question. Aside from this, you can check registered company records for any charges that are recorded, and you can ask for trade or bank references. By doing this, you will reduce the chances of working for a client that is likely to avoid paying you for months and months on end and risking the success of your own business.
In addition to this, you should review your terms and conditions to make sure that they are suited to the people and types of companies that you are doing business with. Many business owners compile their trading terms and conditions and then simply forget about them, yet this could be the reason you are getting paid late, or at least be a contributing factor. You should consider whether to have several different terms and conditions based on the type of customer you are doing business with. Sometimes it pays to have different payment terms to improve the chances of timely payments.
You should, of course, also make sure that you send your invoices out on time. If you take ages to send out an invoice, it does not indicate to the client that there is any urgency to get paid, and this will make your customer feel more inclined to take their time with paying the invoice. Aside from this, make sure you set the invoice out correctly and that everything is clear. The last thing you want to do is delay the process from your side. If a customer is continuously paying you late, don’t hesitate to find out the reason. You should also make sure you send regular reminders – and these reminders must be sent out in accordance with the terms and conditions you have. Another way to tackle the issue is to consider enforcing penalty charges or interest for any late payments, although many companies shy away from this practise as it does not endear you to clients that you want to build a good relationship with. But remember that all the time you are dealing with a poor paying client there could be other clients out there who would be more reliable payers.
There are a number of different ways you can try to tackle late payments but remember that your best weapon is a polite but firm relationship with your customer; let them know what your expectations are and re-inforce those with timely invoice reminders and reminders of your terms of business.