So, you’ve taken the plunge and started your own business. You have a plan, bank account, insurance and HMRC registration. You may even have your first office and employees.
But there’s something you absolutely need to sort out before you can sit back and enjoy your burgeoning business – your accounts and tax. It can be daunting to people not used to managing wages, tax and business accounts, but the more you can understand up front, the easier it’ll be when it comes to managing cashflow and everything that comes with it.
It’s always worth getting solid advice on tax and accounting, and at Turner Little we’re more than happy to help you through those first crucial steps. You can contact us here, but in the meantime, check out our tips for keeping on top of tax and business accounts.
1. Understand tax returns
Many people get intimidated just thinking about doing a tax return, and it’s true that they can be confusing. However, if you put it off, it will be harder in the long run. You must file your return for a certain deadline to avoid paying fines, so begin by getting the date in your diary.
If you’re a sole trader then there are some different deadlines to consider. For example, if you have some earnings that are taxed with PAYE and you want your tax collected by HMRC from your wages and pension, then the deadline is slightly earlier. Sole traders can complete their tax return online themselves or file a paper version (although HMRC would much rather it’s online). If this is too much, and you’re not quite sure how to do it, it could be worth a reasonable fee to have a professional handle it for you.
For those of you that aren’t sole traders, then tax returns become more complicated. You will have to consider VAT, NI contributions, income tax, PAYE and corporation tax. While you could use some third-party software, it is expensive and it’s much easier to engage a professional firm such as Turner Little to do this for you.
2. Learn to understand your cashflow
In simple terms, cashflow is a process of monitoring and analysing how and when cash comes into your business, as well as how it is spent. Working out your net cash flow is vital when you’re measuring the health of your company. If your business constantly spends more than you take in, then there is a cashflow problem.
When your small business is brand new, or in the first 12 months, then you must avoid extended periods of time with a cash shortage. Even if you’re expecting money to come in some time in the future, you can’t rely on it to help to pay the inevitable immediate costs.
3. Learn to manage your cashflow
To successfully control your cashflow, begin with your business plan. Look carefully at the areas that have cost you money, particularly when it comes to large outlays like VAT and payroll.
Work out when you’ll need to pay out these large amounts of money and plan it in to your diary. Calculate projections for the next 12 months, the next quarter and the next week (particularly important to do short term predictions at the start of your business). This will help you stave off any problems before they arise. Avoid the temptation to expand too rapidly as this can mess up your cashflow.
4. Minimise bad debt
Bad debt and late payments are, of course, linked to cashflow. If your customers don’t pay, then you could be in trouble. In a similar way, bad debt can cause financial hardship. No matter how much your business is in demand you need cash to make it work.
For small businesses, late payment can be an early death knell as it can even be difficult to get credit accounts. Right from the start, you need to be clear with customers about payment and credit terms. Make your invoices clear and follow up missed payments. If you sit back and wait, the chances are you won’t get paid.
Bad debt is when payments can’t be recovered and being proactive with your cashflow can help to prevent this happening.
5. Hire an accountant
As your new business grows, putting the time into making sure your accounts and tax are in order is likely to become more difficult. The cost of hiring an accountant is obviously something you need to consider, but the bigger picture is more important. If you need advice or guidance on a suitable firm, Turner Little can help.
6. Understand tax codes
If you’re a sole trader then you don’t need to worry about tax codes as they are part of the Pay As You Earn (PAYE) tax system. However, it’s still worth knowing the basics.
Tax codes are used by HMRC to inform businesses how much tax they deduct from their employees’ wages through PAYE. Self-employed sole traders pay tax through Self- Assessment instead of PAYE. However, if you’re a sole trader but have some income from other sources (like a pension), then you will have been given a tax code. It’s vital that you make sure you’re on the correct tax code so that you avoid over paying and potentially causing problems for your cashflow.