Our latest #GWTP Twitter chat guest was the very knowledgeable Jon Norton of Barefoot Accounting.
Jon gave so much sound advice about running our business accounts in the Twitter chat and it’s all below, in his own words.
Q1. What are good habits to get into when it comes to running our accounts #LikeAPro?
The main thing is to see your accounts as an integral part of your business. A way to monitor how your business is doing rather than an annual compliance exercise. Take an interest in them and understand them. They’re too important not to!
Get into a rhythm of regularly reviewing how your business is performing. It’s easy to let this slide, but it’s key to spot any problems earlier rather than later. It also prevents last minute stresses to try and hit deadlines.
Many people get caught short when it comes to paying the tax bill. Put aside funds into a separate bank account to build up a reserve to cover your tax. Don’t touch it – it’s not really your money anyway!
Remember to pay yourself! Then keep your expenses inline with what cash is left over (after putting some aside for tax). Profit First is a great book by Mike Michalowicz and it goes into detail about this. It’s certainly worth a read!
Keep track of who owes you money and what invoices are overdue. Often it’s resolved by a phone call. However, you need to protect yourself from those who can’t or won’t pay. Stick an overdue invoice list on the wall. Getting paid is that important!
Q2. What are the best systems to use?
Firstly, you need to understand what you’re looking at. Ask your accountant to walk you through them. Get some training – I believe Business Gateway offers free courses. You don’t need to be an expert, but it is worth getting to grips with the basics.
Context is important. Set targets to act as a guide to whether or not things are working out. It could be as simple as figuring out how much you want to pay yourself and working back from that.
Believe it or not, your accounts can tell a story! Try to relate numbers to what is happening in your business. How many sales did you make? How much work did you have on?
Keep it simple. It can be too easy to get lost in the detail, to confuse yourself and lose sight of the big picture. Just keeping track of sales, what you paid yourself, estimated tax and expenses is a great start.
Your accounts present data. Try and be objective about what they are telling you. Pretend it’s someone else’s business, would you invest? Think of steps you could take to improve things.
Q3. What are the best systems to use?
In short, the best system is the one you use. I’ve seen people have great control over their finances using paper based systems. Unfortunately, it’s not uncommon for people to pay for the latest cloud accounting solution and never use it after the first month.
Who can help you with the system? It’s worth asking your accountant for advice. If you don’t have an accountant, perhaps speak to one you think you may use in the future. This relationship is likely to get more important as digital submissions become the norm.
Think about what information you need to get out of the system, any integrations and how easy it is to get up and running. Also, consider what your business might need in the future, it’s best to avoid changing systems later if you can.
Once you have something that looks good, give it a go! You can often get free trials, and it’s the only way to really tell if it will work for you. Once you’ve found something, commit to it. Get it set up right and learn how to use it properly.
Q4. How can people select the right accountant for their growing business?
Most important is someone who’s a good fit for you and your business. Will you be happy sharing the inner workings of your business with them? Will you be comfortable with them asking questions about your accounts? Will they explain things in a way that makes sense to you?
Another consideration is their credentials. Accountancy is not a regulated profession so almost anyone could set up shop as an accountant. Here’s a video where I go into more detail.
Think about what support you’d like and bear in mind you don’t have to use an accountant anyway. Consider if they will be able to support you as your business grows, providing more in depth services as you require them.
If you’re thinking of switching accountants, perhaps speak to your current accountant. It might be that you’ve outgrown the package you’re on rather than the accountant. It makes sense that this will need to be upgraded as your business grows.
Take a look at how the accountant does business. Do they support the systems you are using or will you have to change? Do you need to visit their office or do they do web calls? It’s important to work in a way that suits you.
Q5. Why can profitable businesses fail?
There is a big difference between profit and cash. The profit appears on your financial reports, cash is shown on your bank statement! If a business doesn’t have cash readily available, it can’t make any payments. This is where is all goes wrong.
This could be due to unpaid invoices – they show as a sale, but the cash hasn’t been received, or purchases which are shown as an asset but not an expense. Here’s a blog that explains a bit more about this.
There’s a rhyme that is quite apt: Turnover is Vanity. Profit is Sanity. Cash is King.
The key is to keep on top of your finances so you can spot any warning signs and do something before it’s too late. Sounds a bit dramatic, but it may well come down to monitoring a couple of metrics.
It’s also important to understand what your financial reports are telling you. There isn’t a single report that tells you everything. You need to use them together to get a good picture of your business.
Q6. What expenses should we include?
When people ask this, they often mean, “What expenses are tax deductible?” However, there is another side to this. What do you need to know to manage your business? This might not be the same as what the tax man might permit.
You need to be aware of every expenditure. Meeting clients in cafes is considered Business Entertainment (not allowable). It’s good to track this cost and it’s probably cheaper than the tax allowable alternative of hiring a meeting room!
Regarding the tax position, HMRC set guidelines as to what can be included and it’s up to the business to decide how to interpret them. Unfortunately, HMRC might not agree with this interpretation. In some cases this ends up in court.
The general rule is that they must be, “Wholly and Exclusively” for business. If something is used both privately and for business, you may be able to claim for the business proportion if it can be clearly identified. There are standard rates for some expenses.
Often the profit in the accounts is not the same as the taxable profit. Here’s a video where I talk a bit more about this.
Q7. What can you tell us about the government’s Making Tax Digital scheme?
The idea is that rather than filing annual returns, financial information is digitally uploaded to HMRC. It is to be rolled out from next April and will eventually affect all businesses (including sole-traders).
Those businesses over the VAT threshold (£85k) will need to make Making Tax Digital (MTD) submissions from April 2019. All other VAT registered businesses will have to join the scheme from April 2020. From April 2021 onwards, other businesses will be added to the scheme.
You (or your accountant) will need to make these submissions via compatible software. HMRC is not providing this. There are quite a few software companies that are successfully making trial submissions and I’ve even heard that there’s an Excel plugin being developed.
HMRC is looking for a seamless flow of information from your bookkeeping/accounting software to their systems. You won’t be allowed to manually type the figures into something to make the upload. (Copy and pasting won’t be allowed either!)
The main challenge for some businesses will be making submissions quarterly in “real time”, rather than the annual submissions we’re all used to. There’s more information on all of this in this blog.
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