If you own a small business it’s easy to get caught up in doing bookkeeping yourself to try and save costs. However, when you have lot to do this can eat into your free time, and it’s probably not your favourite way to spend your weekends.

So how do you strike a balance and prepare your books correctly in order to reduce your accountancy bills, without it eating into your weekends?

Here some way to save time and money:

1. Talk to your accountant

Ask your accountant what you can do to lower your accountancy fees. The aim is not to take on more work at the expense of your weekends or family life. Most accountants do offer packages and it might be that you can get the year-end accounts and tax return work at half price. Or they could simply take over all your paperwork chores, produce regular management accounts and handle your VAT and payroll requirements. In return you get your end of year accounts done and filed for FREE. If the bulk of the work is completed and there are no additional complications or work at the year end, I see no reason why the accounts cannot be filed at no cost to you. 

• Get a format agreed

If you’re happy to do the books, then agree the format with your accountant. For example, should you to simply keep record of income and expenses on excel? Do they want you to use a particular software? Do they want you to reconcile the books by applying “Double Entry” bookkeeping? Unless you are a professional bookkeeper or a member of the Institute of Certified Bookkeepers, please do not attempt double entry bookkeeping. You may end up paying for the accountant to rectify errors. You may even end up with some tax issues.

• Use bookkeeping services

You can use a professional bookkeeper to prepare the books. Fees will be lower than an accountant’s. Shortlist a few and involve your accountant in the process if possible. You want to avoid a situation where you pay for the same work twice because the format and quality of the bookkeeping is not at a level to enable the accountant to produce the accounts at a cheaper rate. Or the bookkeeper and the accountants use different systems.

• Make records as simple and streamlined as you can

Whether you use an accountant, a bookkeeper or do it yourself, avoid complicated record keeping and streamline your transactions. Things you can do include having a dedicated business account, using the bank for most transactions, avoid using the business bank account for personal expenses, avoid multiple bank accounts or credit cards and have all your records in once place (preferably in a digital format).

• Use Receipt Capture System

There are some good apps including Auto Entry and Receipt Bank that allow you to capture these receipts on the go and send them directly to your accountant. You can even ask your suppliers to send their invoices to the app to free up your inbox a bit.

• Use Cloud Bookkeeping

FreeAgent, QuickBooks, Xero and the like, have transformed how bookkeeping is done. If you do it yourself use one of these platforms to save time and accountancy fees. Some accountancy firms may even cover the cost within their packaged services. Again, agree with your accountant where your bookkeeping duties would end.

• Use automation where you can

You can now authorise your bank to send bank transaction to a cloud bookkeeping platform. You can also set a rule to say that if a direct debit payment goes to, say Aviva, then this should be analysed as insurance. Imagine how much time and fees you can save by doing this.  However, don’t assume everything will be correct. It will need checking.

• Pick a good time to send in your records

Did you know you can ask for a lower accountancy fee if you prepare your books for your accountants at their quietest times? Accountants have peak times as many businesses have December & March year-ends, plus the Tax Return deadline in January. Avoid these times and ask your accountant if you’ll get a discount if you send in your books before the rush.

• EPOS integration

If you run a retail or restaurant business and you’re using a cloud bookkeeping platform, then why not go a step further and get an EPOS (Electronic Point of Sale) and inventory system that integrates with your chosen cloud platform and helps you keep track of stock? Platforms such us Vend, Izettle and others should be considered. A key area that often causes issues with the accounting process is the value of your stock. Where you or your accountant spends less time on this area, you can both save time and costs.

Conclusion

Make use of workshops from HMRC and the free videos from reputable accounting firms to enhance your knowledge. 

Always try to get the best deal from your accountants but also remember they can add value to your business so do your part well and get them to spend more time on business advice/tax planning.

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.  www.thetaxguys.co.uk

The general rule that says you can claim all expenses incurred wholly and exclusively for the purpose of your business looks as if it should be simple apply, but the reality is more complicated.

Let me share a sample of the surprising things your business cannot tax deduct.

Sponsorship

Sponsoring an event is an area that might surprise you. HMRC will disallow the cost if they can show that perhaps the sporting field you are sponsoring is a director’s, partner’s or proprietor’s regular hobby or if the party being sponsored is a relative of the business owner, or if there is no proposed or actual return on investment from the sponsorship.

So, the trick here is to ensure that the sponsorship deal is structured correctly and there is a clear commercial benefit for your business.

Travel

Let’s assume that you operate as a self-employed doctor or sole trader rather than limited company. You have a home-based office. You travel to see different patients or clients on a regular basis. Your journey starts from your office (at home) and includes a few itinerant travels from one client to the other client. Can you claim the full travel expenses? Logic will tell us that yes. However, the rules deem the travel from your home office to patients / clients as ordinary commuting and therefore not tax deductible.

Client Entertainment

As part of your sales and marketing, you decide to take clients to a relaxed restaurant to discuss new business. The purpose is to negotiate and generate new business. The income will be taxed so the expenses should be ok to put through the business, right? Unfortunately, the rules specifically disallow these expenses to be claimed against tax. Part of the reason behind this is that you could have had the same conversation over a cup of tea in the office, plus there is an element of personal benefit in the entertainment.

Promotional Gifts

It’s true that nothing ever happens in business until a product or a service is promoted and sold. And when it’s sold at a profit, tax gets collected accordingly. However, if you promote your business by spending too much money on promotional gifts to customers and the gifts cost more than £50 per customer, you won’t be able to deduct these costs against your income. Even where the gift cost £50 or less, make sure it carries a conspicuous advert for your business.

Clothes for Work

Imagine you’re a barrister and you’ve purchase your gown to be worn in court. You don’t wear this gown in public. Can you go ahead and claim the cost of the gown against your tax? Not according to the famous tax case of Mallalieu v Drummond which established that “no deduction is available from trading profits for the costs of clothing which forms part of an ‘everyday’ wardrobe. This remains so even where the taxpayer can show that they only wear such clothing in the course of their profession.”

However, some protective and work clothing with logos and other business branding are claimable. If in doubt, speak with a tax accountant.

Staff Reward via Trust

Your staff are well engaged within your business and you want to reward them. You decide to make payment into a Trust to demonstrate that the money has been earmarked for them and waiting to be paid when they hit their targets.

As the money has been paid out of your bank account to the Trust, can you claim it as a legitimate business or staff expenses? Unfortunately, not. Because of a specific tax avoidance rule, this legitimate expense cannot be claimed. 

Parking Fines

Your business is delivering some items to a customer. The driver parks for a few minutes and get a parking ticket. Surely the reason for the fine is because of business activity so it should fall under the wholly and exclusive for the purpose of business rule? Not quite. Fines incurred for breaking the rules are disallowed.

Legal Expenses

Not all legal costs are tax deductible. For example, fees in connection with the purchase of a business premises or investing in shares are disallowed.

In addition, fees that have both personal and business elements may fail the wholly and exclusive test. And legal costs associated with breaking the law are also disallowed. For example, where you’ve got a parking fine and you decide to call your lawyer to defend the case and you lose, you won’t be able to claim the legal fees.

Wages to Spouse or Kids

A great way to keep more of your cash within the family is to employ your spouse and kids. And there is nothing wrong with this plan. However, where you pay family members over and above the market rate, where they don’t actually perform any task for the business or where you’ve structured this working arrangement incorrectly with no evidence or paperwork to back up your plan, HMRC will not allow their salaries to be put through the business. Do take care with this as it’s currently a hot spot for HMRC enquiries.

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.  www.thetaxguys.co.uk

Everyone entrepreneur should be vigilant when it comes to managing profitability. However, many are not as clued up as they need to be when it comes to understanding profit and what factors impact profit both negatively and positively.

Let’s discuss some of the ways you may be unintentionally reducing your profit and how to avoid mistakes in future.

Bank balance accounting

As a business owner, you’ve heard the phrase “Cash Is King” so many times that it starts to feel like more cash means more profit. You then start to gauge the profitability of your business based on the bank balance. This is a common mistake I see so often. Here are 7 reasons why you might be making a loss in your business despite the cash in your bank account:

• You have not paid your suppliers or other creditors
• You have received advance cash from your customers
• Payroll expenses have not been reflected in the accounts
• You haven’t made adjustments for all expenses
•  You have not taken any reasonable drawings or dividends
• The cash is from last year’s profits
• You are not paying yourself a reasonable salary

The above list is not exhaustive but covers the common areas where your cash will go. So, the next time your accountant presents you with accounts with less than expected profit figure, have a conversation and go through the above list together with other factors specific to your business.

Cost cutting in the wrong place

You realise the cash at bank is not yours and that you are not making profits. So panic sets in and you’re determined to cut costs to make profits. Here’s the thing though: Not all expenses will have a greater impact on your profits. A study by McKinsey and Co (global consulting firm) revealed that whilst a 1% reduction in fixed costs can have around 2% increase in profits, the same reduction in variable costs has a bigger 7% increase in profits. So instead of going for cost cutting at all cost (no pun intended here) conduct a cost benefit analysis and focus on variable or direct costs first.

Not understanding margins

This is an important indicator to profitability, but it’s vastly ignored or misunderstood among most entrepreneurs. The next time you get your accounts, take the direct costs of sales or direct expenses out from the revenue. Then divide that number by the revenue. That is your gross profit margin. Let’s say your revenue is £1,000 and your materials or direct labour or direct expenses cost you £700. The difference of £300 divided by £1,000 revenue gives you a margin of 30%. This means that for every £1 of sale, you are making 30p in gross profit. This tells you how profitable you are at the gross margin level. You can also compare this 30% to the industry average to gauge where you are at. If this margin is so low, then you’re unlikely to be making net profit because there won’t be enough to cover your overheads.

Losing profit margin

Having ascertained your profit margins of 30%, a common and huge mistake I see is as follows. You go to see a new project. You take your costs. Let’s say 1,000. What do you do next? You apply 30% to the costs. You then quote £1,300 for the job. Sounds familiar? And it makes sense, right? Well not quite. If you take your £1,000 costs from the £1300 revenue (price) you get £300. Now divide that by £1,300. You now get 23%. You’ve just lost 7% profit margin without even blinking.

And this mistake will make its way down to the net profit figure causing you to be less profitable year after year.

Fearing prices increases

Having realised that you’ve been under quoting for jobs or that your costs have gone up, another classic mistake is to put off price increases for fear of losing customers. Yes, you will lose some customers but let’s do some maths. Let’s say you have 20 customers and your price is £1,300 per customer. (£26,000 revenue) If you put prices up by 10%, your new revenue will £28,600. If you lose 10% of your customers (2 customers x 1,300 = £2,600), your revenue will revert to £26,000 but with two fewer customers and less resources needed to service the remaining 18 customers. And depending on how you approach the price increase and how you communicate it, you might be pleasantly surprised that less than 10% of your customers will leave.   

Avoiding even small increases

McKinsey studies also revealed that increasing pricing has a bigger influence over your profits than reducing costs or increasing sales volumes.

But here is what most entrepreneurs do not consider doing: Assessing the power of a mere 1% increase in price, 1% increase in sales, 1% decrease in variable costs and 1% decrease in fixed costs.

Next time you sit down with your accountant, ask him or her to run these numbers and show you the impact it will have on your profits. Would you lose a lot of customers due to a mere 1% increase in price?

Miscalculating the effect of discounting

You’ve quoted a price for the job. The customer says, “what can you do about the price” Do you get a knee jerk reaction and offer a price discounts to win the work? Let’s return to the above example (on margins) where you were making 30% margin on sales of 1000. Let’s then assume you offer a 10% discount. Your revenue drops to £900 but you’ve kept your costs the same. Your margins drop to 22% (£900 less £700 divided by £900) The 10% discount now means a 26.6% drop in your margins (the original 30% less the current 22% dividend by the original 30%. This is just the beginning because it gets worse if we look at the impact this will have on the bottom line (net profit margin), assuming you keep all your overheads the same. Were you intending to have a 26.6% drop in your margins by offering a 10% discount?

The point here is to be aware of the profit effect of price discounts and use it to negotiate a better win-win deal for all.

Lack of familiarity with key figures

One of the biggest mistakes is not knowing the profit numbers that matter in your business. Your gross profit margin, profit per staff, profit per client or project, net profit margin, breakeven number, your monthly costs and your prices are all important numbers to track and focus on. If you currently speak to your accountant once a year only to be told how much tax to pay with no access to your key numbers, then it is unlikely you will be able to improve on your results.

The good news is that with so many online accounting apps on the market, (FreeAgent, QuickBooks and Xero), entrepreneurs should no longer be flying blind in their businesses.

A final tip

In his book Profit First, Mike Michalowicz makes the case for opening another bank account and transferring your profits before you make payments to anyone. So, if you’ve worked out that your net profit on every sale is 10%, then a safe way to see and secure those profits is to transfer it straight away to your “profit bank account”. That way you are forced to make do with the remaining 90%.

To summarise

Profit is as essential to business as oxygen is to human being. Your business cannot hold its breath for long without it! Make sure you understand how profit is generated and impacted in your particular business. You can do what is needed to make your business as profitable as possible. 

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award winning chartered accountant and tax adviser who advises entrepreneurs on business and profit improvement. Jonathan is the founder and CEO of The Tax Guys.

www.thetaxguys.co.uk