FreeAgent

  • Guest post: Spring clean your business books

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    Now the winter weather is on the way out, it’s a great time to start thinking about how you could potentially tidy up your bookkeeping and make your business more efficient.

    So why not get on with some spring cleaning? Here are some top tips from FreeAgent’s Chief Accountant Emily Coltman FCA, to help you brighten up your books and get your business set for fresh new growth in the months ahead.

    Chase up your old debts

    It can be a major headache for a small business when customers don’t pay on time – but what’s even worse is when they don’t pay at all! So if that’s something that happens in your business, it’s a good idea to check regularly to see who owes you money.

    Check your list of unpaid invoices. Accountants call this list your “aged debtors report”. Is there anyone there who hasn’t paid you yet but should have done?  If so, contact those customers immediately, by phone or by email, and check whether payment is on its way.

    If your customer is refusing to pay, you may have to consider your options and either chase them up through a small claims court or just cut your ties with them completely. But if there’s a problem and they can’t afford to pay you just yet, you may want to arrange some kind of alternative payment plan with them. Either way, you won’t know unless you check your aged debtors report and make that call.

    Review your non-paying customers

    [su_pullquote align=”right”]Remember, it’s your business and you shouldn’t have to deal with anyone if you don’t want to – so don’t be afraid to weed out the non-payers if necessary.[/su_pullquote]If you have customers who regularly pay you late – or don’t pay at all – it may be a good idea to re-evaluate your relationship with them. Provided that your business can afford to do so,  you may even want to sever ties with them altogether. After all, if you’re not getting paid for the work you’ve done that’s all wasted time that may have been better spent working for someone else.

    Even if there is a good and genuine reason for being paid late, ask yourself if you are happy to keep on working with these clients or if their outstanding invoices might cause your business pain in the future. Remember, it’s your business and you shouldn’t have to deal with anyone if you don’t want to – so don’t be afraid to weed out the non-payers if necessary.

    It can also be dangerous to let your business rely on one, or only a few, customers, because then if you lose one customer you lose a large proportion of your sales – if not all your sales.

    See how profitable your projects really are

    Schedule some time to review all of your different projects in turn to see how they’re performing. Calculate how much profit you’ve made on each project, and then divide that by the sales figure for each project to get its profit margin.  This will show you how much profit you’ve made for every pound of sales.

    Now do the same calculation for your business as a whole. If a particular project’s profit margin is lower than that for the total business it may be an indication that you’re being too nice to that customer and you may need to put your prices up. On the other hand, if your project’s profit margin is higher than that for the whole business, you may want to try doing more work for that customer or use the same basis for a new client.

    Remember, it’s a good idea to make sure your growth is targeted and profitable; and working with good clients on profitable projects is key to this.

    Review your costs

    Set some time aside to go through the major costs in your business and see whether you’re paying more this year than you did last year – and, if you are, try to identify why this is the case. For example, you may find your suppliers have put their prices up and if so, you may want to consider increasing your own prices to compensate for this.

    Alternatively, could you save money without compromising your brand? Remember it’s not a great idea to try and save as much as you can by cutting costs to the bare minimum (for example by printing your business cards at home on cheaper paper, or teaching yourself to code and build a website rather than hiring an expert to do it), so make sure your cost savings are sensible and not harmful to your business in the long run.

    Tackle the little, niggly errors

    Most businesses will have a little odd anomaly lurking somewhere in their books. Perhaps it’s an overpayment from a client that’s never been written off, or a tiny, unexplained bank transaction which nobody remembers. The problem is that these may cause you pain in the future because your accounts will be incorrect and your accountant will have to take extra time to sort it out when they prepare your final accounts.

    Take the time now to clear the little errors out of your books and you’ll ensure your financial information is accurate – which means you won’t have to pay extra to get your accounts fixed by a professional at the last minute.

    But remember if you’re unsure of anything though, do ask your accountant for help. A quick call to them for advice could save you a lot of time and hassle.

    Emily Coltman FCA is Chief Accountant to FreeAgent, who provide a multi award-winning online accounting system specifically designed for small businesses and freelancers.

  • Keeping your business in the black and out of the red (Guest Post)

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    Getting paid by your customers or clients is one of the most important things that a business needs in order to flourish. But simply sending out your invoices isn’t enough – you need to remember that a sale isn’t a sale until the money’s in your bank account!

    Emily Coltman FCA, Chief Accountant to online accounting service provider FreeAgent, gives her five top tips on how to collect payment from your customers and clients, and ensure your books stay in the black – not the red.

    Make payment and collection easy

    Think about the different ways your customers could pay you, and which would be the most straightforward for them.

    It’s also worth considering whether there’s any risk to you that the payment might not be processed successfully.  For example, direct debits may be returned if the customer’s bank balance is too low.

    If you want to provide an easy method for your customers to pay you, it may be a good idea to use a service such as PayPal that lets you take card payments without a merchant bank account.  Using PayPal means that your customers don’t have to give their credit card details to you directly, and you won’t incur the fees and additional admin of a merchant bank account.  However, it’s important to also do your sums and check PayPal’s fees too, because they charge you when you receive money in from your customers.

    Finally, make sure you communicate clearly to your customers how they should pay you, including putting your bank account number and sort code on your invoices.

    When should you take payment?

    You need to make sure you achieve an acceptable balance of risk between yourself and your customer in this area.

    Asking for full payment upfront could put prospects off if they’re worried about losing their money if they’re not happy with your product or service.  Consider offering a money back guarantee to make them feel more comfortable.

    You could alternatively spread the risk by asking for part payment upfront and part on completion of the work, or delivery of the product.

    Asking for payment only once the work is done, or the product is delivered, puts a lot of the risk on to you.  If your customer delays payment, or refuses to pay altogether, but you’ve already delivered the service or the product, you could end up out of pocket.

    Communicate your payment terms clearly

    Make sure your customers and prospects know when they can expect to pay.

    Set your payment terms and make sure they’re clearly visible on your website, and reinforce the message by including payment terms on your invoices, too.

    You may also want to consider adding a more personal approach onto your invoices to better communicate them to your customers. For example, we had one FreeAgent user who customised his invoices with a picture of his children and a note saying that they wouldn’t get fed until the payment was received.

    While you might not want to go as far as this example, a personal message or style could still help ensure your clients remember your invoices and deal with them sooner – rather than leaving them lingering in their “to do” piles.

    Chase late payers

    A lot of small business owners make the mistake of not chasing money that they’re owed, because they’re worried about losing customers.

    Remember, you’re providing a product or service that your customer wants and needs.  Don’t be embarrassed to chase them for the money.

    If you’re worried that doing this yourself could damage your customer relationships, consider using a virtual PA service.

    Using an online accounting tool also allows you to send automatic reminders by e-mail to your customers, both before and after your invoices are due.

    No non-payers

    Especially if your customer’s business is a lot larger than yours, it’s sometimes tempting to take the line of least resistance and stop chasing them for payment – but keep selling to them, hoping that they will eventually pay up.

    In a word, don’t!  No business can survive for long without cash to pay its suppliers and its taxes, and remember you’ll want to draw some cash out yourself.

    So if your customers don’t pay you, and if they are still unresponsive even after you’ve chased them, you should consider not selling them anything else – because it’s not a sale if they don’t pay you!

    Emily Coltman FCA is Chief Accountant to FreeAgent, who provide an award-winning online accounting system designed to meet the needs of small businesses and freelancers.  Try it for free at http://www.freeagent.com

    (If you fancy giving FreeAgent a try, they have a 30 day free trial. Here’s a referral link. This post is not paid for, but the referral link does give me a small discount on my own FreeAgent account if you love and continue using it after the initial 30 days)

  • How to structure your new business

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    One of the questions I get on this site on a regular basis is ‘what’s the difference between a sole trader and a limited company’? Today, I have a guest post from Emily at FreeAgent, who has broken down the different business structures for you. 

    When you set up a new business you need to think about how you’re going to structure it, because this will affect its legal status, how much tax it pays and when. This applies no matter how small your business is.

    There are four different alternative business structures in the UK: sole trader, partnership, limited liability partnership (LLP for short) and limited company.

    Emily Coltman FCA, Chief Accountant to FreeAgent – who provide a multi-award winning online accounting system for freelancers and small businesses – explains how they each work:

    Sole trader

    This is the simplest kind of business structure.  It’s just you, your computer and your dog – there’s nobody else involved in running the business.

    You need to register with HMRC as a sole trader and this can be done by filling in a simple online form.  You have to do this by 5th October after the end of the tax year (which runs from 6th April to 5th April the following year).

    Once you’ve registered, you have to file a tax return every year, and if you file it online then you have until the following 31st January to do this.  But you don’t have to file accounts anywhere – so, because your tax return is not on the public record, your business’s figures are kept private.

    There’s no legal difference between a sole trader and his or her business.  As a sole trader, you are the business as far as the law is concerned.  So that means that if the business is sued, you are personally sued, and your own assets – for example, your home and your car – could be taken to pay the debts.

    Partnership

    A partnership is just like a sole trader except that there is more than one person running the business.

    This does mean that there’s no legal difference between the partners and the business, so if the business is sued, or one partner vanishes with the partnership’s money or other assets, the other partner or partners could lose their personal assets to pay the business’s debts.

    To set up a partnership, you will need to register the business with HMRC.  One partner would be the nominated partner responsible for filing tax returns to HMRC, and that person must register the partnership.  The other partner(s) must also register.  The deadlines for registering and for filing tax returns are the same as for sole traders, but not only must the partnership file a tax return, each partner must also file one – so there will be at least three tax returns to file each year.

    Make sure that you draw up a partnership agreement covering important issues like what happens if a partner leaves the business or dies, how much money each partner will put into the business and how much he/she can take out.

    Limited Liability Partnership (LLP)

    The “limited liability” part of this structure’s name comes from the fact that it’s a separate legal entity from the partners, with a legal identity in its own right.  This protects the partners’ own assets if the business is sued, unless they have been guilty of wrongdoing or given personal guarantees.

    What’s the catch? Loss of privacy. An LLP must file accounts every year with Companies House, and a document called an annual return which lists the partners (or “members” for an LLP).  These documents are on the public record, so anyone can buy a copy of them for a couple of pounds.

    For tax an LLP is treated the same as a partnership, so it must be registered with HMRC and each partner must register, and then there are tax returns to file each year.

    Limited company

    Running your business through a limited company can often result in a smaller tax and National Insurance bill than for the same business as a sole trader or partnership, which makes it a very popular business structure.

    The company is a separate legal entity from the people who run it (its directors) and those who own it (its shareholders). For small companies, the directors will often own all the shares, but even if there is only one director who owns all the shares, the company remains a separate legal entity from that person.

    This means that it has the same protection of limited liability for the owners’ assets as an LLP but – like an LLP – the quid pro quo is having to file accounts and an annual return at Companies House each year.

    Company directors are also subject to legal obligations, for example they must not let the company keep trading if it can’t pay its debts, and they must look after the business’s machinery and other assets.

    And, if a company’s costs outweigh its income in its early years, it’s not possible to put those losses against the directors’ other income and claim tax back.  The company will only be able to reduce its tax bill by means of the losses once it starts making a profit.  For all the other business structures, losses in early years can often be used to claim a tax refund against the owners’ other income.

    It’s important to weigh up the advantages and disadvantages of each business structure and decide which best suits your business and your circumstances.

    Emily Coltman FCA is Chief Accountant to FreeAgent, who provide a multi-award winning online accounting system to meet the needs of small businesses and freelancers. Try it for free at http://www.freeagent.com