How Fitness and Running A Business Are Related

I’ve recently increased my efforts to lose weight. Having a holiday coming up has certainly helped with the motivation. I’ve been saying for months I need to lose weight but the urgency wasn’t there. Now, with a month to go, probably far too late, I’m starting to do something about it.

The first thing I did was to start taking measurements. The gym I go to has a machine that scans your body and then provides readings for weight, muscle mass, fat mass, etc. Great! All interesting stuff but my main focus was on the weight loss.

I proceeded to go for morning runs (3 or 4 a week), visit the gym to do some strength training, had the odd swim and tried to eat better. I also reduced my alcohol intake.

2 weeks later, jumped on the body scanner…. I’d put on weight!!

What a load of expletives! Why bother with all that effort?

Well…. The important thing here is that, yes, I had put on weight, but because the body scanner took more measurements of different things, such as fat and muscle mass, I was able to see that I had lost fat and put muscle on. I had put on more muscle mass than the fat mass lost, which is why my weight had increased.

Now… this put me in a much better mood. I’ll be ripped in no time!! Just got to keep going. Persevere!

Why is this all relevant?

Business Goal

The key take aways here are that:

  1. I thought I knew what my goal was but it turned out I didn’t. I thought it was to lose weight, but instead it was to get into shape. Lose fat, gain muscle.
  2. You don’t know how close to, or far away from, your goal you are unless you measure your progress.
  3. I was only able to see progress by measuring several different KPIs. One alone didn’t give me the true picture.
  4. I didn’t know what the useful KPIs were until the machine showed me.

From a business perspective, it’s much the same.

  • The business goal for many of my clients is to earn more money. This is great. However, will they ever achieve it or will they just always want more? Perhaps a better goal would be to earn £X, so that you have enough to cover all outgoings, pay for 3 really nice holidays each year and have money left over to buy what you want, when you want. If you can put a value on that, it makes it far more real and meaningful.
  • Many business owners don’t measure their progress. Even if they know their goal, which they often don’t, they don’t know how they are performing in relation to that business goal. Regular management accounts will keep you on track, allowing you to see how you are performing each month, in real time.
  • Don’t just measure one thing. For example, you might be tempted to measure your net profit (bottom line). More profit means more success, right? What if earning that profit meant that you were working more hours than there were in the day. The hours you were working meant you couldn’t ever take a holiday even if you were earning the money. Perhaps you could also measure the number of hours you are working each month too, and work on reducing it.
  • Your accountant will have worked with many businesses and should provide a great insight into what KPIs you should keep track of to ensure you are on track to hitting your goals. There are so many things you could track. Not just financial but, like the above example, could be hours worked, number of days you took the kids to school, had dinner with the family, etc.

To summarise then, if you want to grow your business, you need to set yourself meaningful a business goal. You need to monitor your progress towards achieving those goals, you need to understand what you should be monitoring and you need an amazing accountant in your corner, helping you every step of the way.

Can Kilby Fox help?

Absolutely!

If you’d like to understand how we can help you grow your business and achieve your goals, please get in touch.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best. He has been doing this for over 16 years.

Making Tax Digital for Income Tax (MTD ITSA) – The Next Stage

Making Tax Digital has already affected many business owners. Those who are VAT Registered should already be reporting their VAT Returns under the regime.

The next phase in HMRC’s plan to digitalise the UK tax system is to bring Making Tax Digital to the self employed and those with income from property.

When does it come in?

This comes into effect on 6th April 2024, so not too far away.

Does Making Tax Digital impact me?

It will impact self-employed businesses and property owners with turnover / gross rental income in excess of £10,000 a year.

So, what does this all mean?

Under MTD ITSA, information will need to be submitted quarterly to HMRC. The first quarterly submission will be for the 3 months ended 5th July 2024 and will be due by 5th August 2024.

Once all 4 quarterly submissions have been made, an end of period statement will then need to be submitted, bringing in any of the ‘end of year adjustments’ that your accountant might help you out with.

Then, after all of that, you still need to submit a self-assessment tax return declaring your trading profits, as well as any other income that you might have (salary, dividends, property, other investments, etc).

So, there will be 5 additional submissions to make, on top of the self-assessment tax return that you should currently be submitting.

If you have a business which turns over more than £10,000 a year, and also have rental properties that generate more than £10,000 in gross rental income, you will need to make separate submissions for each.

In that case, there would be 8 quarterly submissions, 2 end of period statements and these will then both go onto your self-assessment tax return.

How do I make these submissions?

Many business owners already use software to record their income and expenditure, however there are lots who do not. The new regime means that businesses will now need to utilise software, in some form, in order to make these quarterly submissions.

You can submit these quarterly returns yourself, or ask your accountant for help.

How much extra will this cost me?

The extra cost will depend on the complexity of your affairs, and how much of the work you intend to do yourself.

HMRC has given an undertaking that free MTD software will be made available to businesses with the most straight forward affairs. However there will likely be a small monthly fee for most of the software available.

If you have no intention of maintaining your accounting records yourself, using software, then you will need to pay a bookkeeper. If you do wish to do it yourself, you may need to pay for training and ongoing support.

Then there are the submissions themselves. 4 quarterly submissions and an end of period statement, as well as your self-assessment tax return. The cost of these will likely depend on the amount of transactions that need to be reviewed before a submission can be made, to ensure it is correct.

I suggest you speak to your accountant to understand these extra costs sooner rather than later, so that you can begin to plan.

Can Kilby Fox help?

Absolutely!

If you’d like to better understand if and how Making Tax Digital for Income Tax will impact you, get in touch.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best. He has been doing this for over 16 years.

How To Make The School Holidays Less Stressful On The Bank Balance.

The School Holidays can be a very expensive time for families.

As a father of 3 young children, I know how difficult it can be to keep children entertained when they’re not at school.

Now, I’m certainly not the Number 1 Dad in the World (no matter what my Father’s Day mug tells me!), however I do have experience in helping businesses increase their profits and extract cash from their businesses as tax efficiently as possible, and these skills do transfer over to our personal lives.

So, in this blog, I wanted to share a few tips on how to make the School Holidays less stressful on the bank balance.

  1. Understand where your money is currently going

The first step for improving anything is to first understand where you are now. You can do this using a spreadsheet, or software if you’re feeling fancy. List out all of your bank transactions for the past 6 months or so. Then, categorise each into columns. So, you might have a column for shopping, entertainment packages, takeaways, eating and drinking out, fuel, car payments, Children’s Birthday presents, etc, etc.

2. What can you immediately cut out?

Do you really need 3 takeaways a week? Could you replace these with cheaper planned meals that you enjoy. (The old ‘Fake Away’).

Can you reduce your shopping bill by planning your meals so you only buy what you need?

Do you need Netflix, Prime, Now TV, Disney, as well as the full Sky Package including sports? Particularly with Sky Sports, is there enough on over the summer holiday that warrants the cost? I did this exercise recently and saved over £30 per month by cancelling a subscription that I took out to watch a single film, assuming I’d use it regularly. That film probably cost me over £100 in total!

3. Plan ahead

Ok, so now you’ve stripped out what you don’t need, project the new income and expenditure forward to see what your bank balance would look like in 1, 2, 6, 12 months’ time.

I know this blog is aimed specifically at the school holidays, but let yourself get excited by how much extra money you’d have in 12 months’ time. What could you do with that spare cash if you follow through with this? This visualisation will help to keep you on track.

 The school holidays are expensive so here are a few tips on how to make the School Holidays less stressful on the bank balance.

4. Plan the days and weeks

This is where I need to channel my inner Gem (my wife). She is our in-house organiser and is an expert in keeping our children entertained with low-cost activities.

Try to have a plan for each week. Use a calendar so you can clearly see what you’ve got planned and where you need to think of things to do.

Come up with a list of things you can do that are low cost but are enjoyable and take up a decent chunk of the day. Write these down so you can refer to them. You shouldn’t need to spend a lot of money to keep children entertained.

Long walks to new or favourite places, country parks, etc are great ways to have a day out with minimal costs. My girls like going to garden centres, specifically if they have fish, so we can have a trip out to a garden centre, making sure we try out all of the swinging garden chairs, and then have a coffee (soft drink for them). If you’re like a good friend of mine, you might even challenge your children to put their heads into the water fountains…

Meet up with friends at parks. Hopefully the kids will sort themselves out while you can have some adult conversation.

Spread the more costly days, if there are any, out over the holiday. Spread them out so there is always something to look forward to. Plan the cost and put that into your new spreadsheet forecast. Make sure you can afford to do each activity. If not, find something else to do. Don’t over stretch.

5. Make sure you take time for you.

Plan in down time. Its tiring to constantly be doing stuff. Sometimes you need a break, so make sure you plan those days in too. Have indoor activities in your back pocket for if (when) your children get restless. Again, make a list of these activities – crafting, drawing – anything that you can set up and leave them to get on with it.

As I said, I’m no expert on being a parent, but hopefully the first few tips will help to create some extra cash to help over the School Holidays. If you take anything from the last couple of tips, amazing!

If you’d like to explore how I help my clients to generate more profits, and take more money out of their businesses, as tax efficiently as possible, get in touch.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best. He has been doing this for over 16 years.

Do you need an accountant when starting a new business?

Starting and running your own business can be a lonely place.

Most of the time, you go from being an employee, where you are amazing at what you do, but you haven’t been involved in the strategy and decision making of the business.

So, you set up on your own because you can earn more money doing the work on your own, and then you realise that you’re all alone – perhaps working out of a home office – with no one to bounce ideas off or help you with important decisions.

These decisions only get more difficult as you grow. When should I take on my first member of staff? What if there’s not enough work to keep them busy? How do I deal with holiday, sick leave, etc? I need a new van; how should I fund it? I’m not making as much money as I’d hoped – what can I do to improve it? I don’t know how much money I’m making on each job – is there a way I can manage them better? I’m not getting many leads, what should I do to get more?

The list goes on and on.

I’m here to tell you that you don’t need to make these decisions alone.

You need an accountant!

Why you need an accountant to launch your new business…

The team at Kilby Fox have decades of experience (easily over 100 years combined) in helping and advising business owners on these very issues.

But a great accountant can add so much more. You don’t know what you don’t know, right? So your accountant should be able to dig a bit deeper than the end results and help you to make decisions to improve those numbers from the get go.

Going from employee to business owner is a big step that involves some big decisions.  Here is why you will need an accountant from day one.

I meet monthly with some of my clients where we discuss things such as the following:

What are your 1 year, 2 year and 5-year goals?  Aimed at turnover, profit, staff numbers, personal take-home cash

Where are we now? Where do we need to get to in the short term (Review the monthly management accounts)

New clients

Lost clients

Average client fee / pricing

Lead generation / conversion

Upselling opportunities

Marketing strategies

Staffing

Systems

Upcoming developments / opportunities in your field / industry

There is obviously a lot there and, depending on how long we meet for, depends on which areas we focus on.

The point is, there is always someone to bounce ideas off, give advice, hold you accountable, etc. You don’t have to do it all alone.

If you can relate to feeling alone, and having to make all of the tough decisions, leading to overwhelm, feel free to reach out.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best. He has been doing this for over 16 years.

Do You Pay Your Accountant Enough?

Is your accountant undercharging you?

I come across loads of business owners who are super proud that:

‘My accountant only charges me X!’,
‘I don’t pay my accountant, I just do a bit of work for him here and there and we offset.’
‘We have our monthly meeting over lunch, which I pay for, so my accountant doesn’t charge me for that!’ 🤦🏼‍♂️

I know you think you’re getting a good deal. But I’d like to challenge whether it is actually a good thing.

Before I became a Partner at Kilby Fox, I was a manager at a larger firm. One of the newer partners kept lowballing to get clients through the door, presumably under pressure to grow their client base.

What this meant though was that the staff working on those jobs ended up hating those clients. They’d never met the actual business owners but working on those jobs meant massive time pressures, having to rush the work because the fee couldn’t handle the time required to complete. Then, inevitably, they’d get it in the ear for going over budget.

Another post worth a read: Why you should absolutely like your accountant! (not in a weird way)

Do you think the people working on those jobs ever gave it their best? It wasn’t their fault. The fee (and the environment) made it impossible.

As a manager, do you think I prioritised that work over the higher paying clients? Of course not. If you’re spending good money on your accountant, you should expect the best service. So the opposite should run true also. You’re going to get put at the bottom of the pile.

So if you know you’re paying your accountant too little, don’t expect to be a high priority for them. Don’t expect them to be overly diligent, trying to identify every tax saving possible, don’t expect them to include tax planning within that fee.

And most of all, if your accountant doesn’t know how to price their services profitably, in a way that enables them to give you the best service possible, don’t expect them to be able to help you grow your business.

Think about it.

Now, if you identify with the above, and are ready to take your business to the next level, I’m right here! 🙋🏼‍♂️

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

Tidy desk, tidy mind – how can a cleaner help you grow your business.

I posted on LinkedIn a while back a picture of my office desk a few days after I’d tidied it and how it had helped me improve my focus and therefore productivity over those few days.

This is because my mind wasn’t constantly being interrupted by bits of paper that I knew I needed to deal with. I had my one task that I was working on in front of me and that got 100% of my focus and attention. The rest of the paperwork was then filed away in a system that helped me prioritise the next most important task for that day.

I can only work on one thing at a time, if I want to do it well.

The post got lots of engagement, particularly from people who felt inspired to tidy their own desk, and so I thought I’d write a blog exploring it further.

The old adage of ‘tidy desk, tidy mind’, definitely resonates with me, although I don’t live by it all the time.


For example, if I take a week off, I always come back to a pile of stuff on my desk. I’ll deal with the important stuff but will then push the rest to one side, telling myself I’ll deal with it later. More often than not, other stuff will get added to the pile and ‘dealing’ with it all seems a much larger task than I have time for, so I leave it. And it gets worse from there until it gets too much and I then, finally, do something about it.

Tidy desk, tidy office

I always feel far more focused and productive when my desk is tidy. Then I’m left thinking, those months when my desk was a mess, how much more work could I have got done had my desk been tidy. Could I have earned more money just by having a tidy desk.

Do you get it at home when you’re trying to relax but your mind can’t switch off from the large cobweb in the corner, the wonky picture frame or the DIY job you know needs doing? I don’t experience any of that because I’m a bit rubbish and don’t notice those kinds of things, but I’m told many people do.

So, if you can be more focused and profitable at work, and enjoy your personal time more, simply by having a cleaner to clear the clutter, or someone to sort your paperwork for you, or clear your email inbox, doesn’t it make sense to do it?

We have a cleaner for the office, but I don’t have a cleaner at home. However, writing this blog, I think I’m coming around to the idea.

Luckily, I know someone who can help.

Business productivity is an area of focus in our ‘Board Meeting’ service, which is ideal for people who run their own businesses alone and would like an expert to help them set goals and targets, hold them accountable, review their goals against current performance and to generally bounce ideas off.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

What does my Balance Sheet tell me?

Your balance sheet is a Report that will be in your annual accounts. This is likely the only time it will be presented to you as there is generally a lot less emphasis on it from a day-today business running perspective.

In a nut shell, your Balance Sheet will tell you what your business owns and what it owes, at any point in time. Where as your Profit and Loss Account tells a story, your Balance Sheet is only ever a snap shot of a specific moment in time.

I will go into more detail, below, around what each section of your balance sheet tells you, and how you can use this report on a regular basis to help you improve your business.

Fixed Assets (sometimes called non-current assets)

This will be home to the larger assets that your business owns. Plant and machinery, computer equipment, vehicles, property, etc. will all be found here.

These assets will be depreciated year on year (whether you are aware of this or not) to reflect their current values. This level of depreciation should be discussed with you to ensure you are happy it is fair, but more often than not, your accountant will use pretty standard rates of deprecation, based on their experience.

So, the number on your balance sheet for Fixed Assets should represent the current value of the assets your business owns, not what you originally paid for them.

Oftentimes, business owners get confused when they buy a new item of plant and machinery as they immediately believe it will reduce their profit. The new asset does not impact the P&L at all, as it goes to the balance sheet. However, various tax reliefs are generally available to ensure your tax liability is reduced accordingly.

What does my Balance Sheet tell me?

Current Assets

Current assets contain the value of your stock, your cash in bank and in hand, and your debtors (amounts owed to you).

They are called ‘current’ assets because they can (in theory) quickly be turned into cash (if they are not cash already).

Most business owners will have a keen eye on their bank balance to make sure it is going in the right direction and to make sure they can pay their staff and suppliers.

However, it is also important for business owns to keep track of their stock and debtor levels.

A business that is holding too much stock runs the risk of that stock losing its value due to obsolescence (think large amounts of tech stock which gets superseded with newer models regularly coming out), or the stock going out of date (depending on the type of stock – food and drink, for example).

Stock management becomes more important as your business grows and you should consider investing in robust stock management software to help you stay on top of this. Decent stock systems can have reorder levels automated so they automatically order more of something when the total on hand falls below a certain amount.

Cash is the lifeblood of any business. Having slow paying customers can destroy a business. Make sure you monitor your debtors regularly to make sure your invoices are being paid on time. If not, it may be time to get someone in to help you with credit control, chasing invoices as they fall due for payment.

It is also important to ensure your invoices are as easy as possible for you customers to make the payment. There are numerous payment options out there that integrate with your accounting software to add a ‘Pay Now’ button to your electric invoice.

What does my Balance Sheet tell me?

Current liabilities

Similarly, to current assets, current liabilities are described as current because they will result in a fairly quick cash outflow.

Unpaid supplier invoices will be found here, along with VAT, PAYE, Corporation Tax, etc. You should also find your Director’s Loan Account balance here (if everything is as it should be). See my blog – ‘What is a Directors Loan Account?’ for more information on this.

It is important to monitor who you owe money to. That last thing your business needs is a ‘Stop’ on a supplier account because their recent invoices haven’t been paid. This could cause delays to your production which would then affect your income levels.

You should also try to make use of supplier credit terms. If a supplier has 30-day terms, rather than paying them immediately, think about using the 30 days and holding onto the cash for a bit longer, in case something super urgent comes up. You never know what’s around the corner.

Long term liabilities (non-current liabilities)

Here you will usually find business loans which may have a repayment term in excess of 1 year.

Where your business has a loan, it is important to split out what is due within 1 year from what is due in more than 1 year. This is because users of your accounts (such as banks) may look at your ‘net current assets’ to make sure that your current assets are in excess of your current liabilities. This gives them confidence that your business has enough ‘liquid’ assets to cover the shorter-term liabilities. So, your business doesn’t run out of cash and have to close.

So, make sure your accounts don’t have the whole loan dumped in current assets, if it is not all repayable within a year, as it makes it look like your business cannot afford to cover its short term debts.

Equity (Shareholders funds)

This is the final section of the Balance Sheet.

Here you will find the company’s share capital, and the Retained Earnings (accumulated profits less accumulated losses). You may also find Share Premium here and other reserves, but these are less common.

The main thing to look at here is the Retained Earnings. Dividends can only be paid out of ‘Distributable Reserves’ which should equal this figure. If the Retained Earnings are negative, your company cannot pay you a dividend.

Sometimes a company might make a profit in a financial year and the director wants to pay a dividend. Unfortunately, if your business made losses in the previous years, you may need to generate more profit, to wipe out those losses, before you can then think about dividends.

Now that you know what your Balance Sheet is telling you, you can begin to make better decisions to grow your business and gain control of your cash. If you would like regular management reports based on up-to-date information, please get in touch.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

Form P11D – Reporting Benefits in Kind

The forms P11D which report details of benefits and some expenses provided to employees and directors for the year ended 5 April 2022, are due for submission to HMRC by 6 July 2022. The process of gathering the necessary information can take some time, so it is important that this process is not left to the last minute.

Employees pay tax on benefits provided as shown on the P11D, generally via a PAYE coding notice adjustment or through the self assessment system. Some employers ‘payroll’ benefits and in this case the benefits do not need to be reported on forms P11D but employers should advise employees of the amount of benefits payrolled.

In addition, regardless of whether the benefits are being reported via P11D or payrolled the employer has to pay Class 1A National Insurance Contributions at 13.8% on the provision of most benefits. The calculation of this liability is detailed on the P11D(b) form. The deadline for payment of the Class 1A NIC is 19th July 2022 (or 22nd for cleared electronic payment).

HMRC has produced an expenses and benefits toolkit. The toolkit consists of a checklist which may be used by advisers or employers to check they are completing the forms correctly.

You may find the following link helpful: HMRC guidance

If you would like any help with the completion of the forms or the calculation of the associated Class 1A NIC please get in touch.

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

Understanding what your Profit and Loss Account is telling you

I have many clients whom I send monthly Profit and Loss reports to. When I send these, I accompany it with some narrative around what this means in terms of business tax and a suggestion of what should be put to one side for that particular month.

I also incorporate some VAT liability planning, by looking at what the VAT Return looks like for the period to date, again, to try to prepare the business owner for the upcoming VAT payment due.

I also look at what the director has drawn out of the business, how that sits with our initial remuneration plan, and what that means from a personal tax perspective, and what impact that might have on their self-assessment liability.

However, I’m certain that there are many business owners who look at their accounts and don’t really know what they’re looking at or what they should be paying closer attention to.

So, the purpose of this blog is to help you get better at reading a Profit and Loss, so you know what to look out for to help you grow a successful business.

Turnover

This is probably the first thing that any business owner looks at. Turnover is your sales. What sales have you made this month? Has it been a good month?

This is the best metric for understanding your business growth. If your turnover is higher than it was previously, your business is probably growing.

Remember that this figure represents invoices raised. In many businesses, the cash inflow will follow at a later date. So, make sure that you understand that an increase in sales doesn’t necessarily equal more cash in the bank.

Depending on where your business is in its life cycle, you may want to keep an eye on your rolling 12-month turnover. Once this figure goes over £85,000, you may need to register for VAT and it is important that you plan for that and understand what it means to your profitability and cash flow.

Gross Profit

Your gross profit is the profit left after your ‘directly attributable’ costs. In your accounts, these costs would be called ‘Cost of Sales’. It basically tells you how much it directly costs you to earn each pound, and therefore what you have left. So, for example, if your business manufactures wooden tables, the direct costs would be the wood, glue, screws, etc. It should also include wages for production staff, as you need to pay these people if you want them to produce. Your gross profit would be what’s left after these costs.

Costs that are fixed (also called overheads) do not belong here as they are incurred regardless of the levels of production. Examples of these costs are wages for administrative staff, utilities, insurance, etc. These costs are shown later on in the Profit and Loss report.

You should monitor your Gross Profit % (Gross Profit divided by turnover) as reductions in this % could indicate your businesses costs are increasing at a greater rate than your sales. For example, this could show that you haven’t been forwarding material price increases onto your customers.

The easiest way to increase overall profitability is to focus on increasing your Gross Profit:

  • Are you able to increase your selling price?
  • Can you get better discounts on materials?
  • Can you improve your efficiencies to decrease your man hours?
Many business owners who look at their accounts don’t really know what they’re looking at or what they should be paying attention to. This blog will help you get better at reading a Profit and Loss, so you know what to look out for to help you grow a successful business.

Overheads

As mentioned above, there will be a large section in your accounts relating to overheads. These are costs that are (generally) fixed, regardless of the level of production in your business.

These costs would include rent, rates, utilities, insurance, repairs to property and machinery, accountancy, motor expenses, travelling and subsistence, software costs, etc.

As discussed in a previous blog – ‘Do you know when you’ll break even?’, understanding how much your business spends on these fixed costs will help you to determine how many sales you need to make (taking into account what Gross Profit is earned on each sale) to cover your fixed costs.

These costs should be reviewed regularly, comparing month on month, to identify any specific increases and to understand why the cost may have increased and what could be done to reduce them.

Business owners often find old software subscriptions they no longer use but which they are paying for month on month. They may decide, following a review, that they are paying for various marketing costs which aren’t making the impact they had hoped for. Perhaps they need to sit down and re-evaluate their marketing strategy.

I like to present my clients with a month-by-month Profit and Loss report, showing the last 12 months. This way, they can see these costs side by side. This makes it easier to see variances which we can investigate sooner, rather than waiting until the end of the year.

Net Profit

Net profit is the most important figure on your Profit and Loss. This is the profit left after all costs are taken into account.

It is the figure used as the basis for your tax calculations. It is also this figure that, if you are a Limited Company, determined the level of dividends you can declare.

They say that turnover is vanity, profit is sanity. I see many multi-million pound turnover companies who make less net profit than someone turning over a few hundred thousand.

Make sure your focus is on your profitability. If you take on a new contract, but your profit doesn’t increase in line with the additional turnover, you need to understand what extra costs have been incurred as a result. It could be for a good reason – the new contract has meant that you need to take on an extra member of your administrative team. You need to be aware of the reasons though. Does it make financial sense to take on that contract?

Don’t end up being a busy fool!

Now you know what your Profit and Loss Account is telling you, you can make better decisions to grow your business. If you would like regular management reports based on up-to-date information, please get in touch.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

What is a Director’s Loan Account?

When I’m talking to my Limited Company Director / Shareholder clients about their accounts, I pretty much always mention their Director’s Loan Account. I might even abbreviate it to DLA because it sounds cooler and I can’t be bothered to say Director’s Loan Account as it’s a pain. I’m getting bored typing it – Director’s Loan Account….

However, particularly with newer business owners, I find myself needing to explain the concept of a DLA. So, I thought it would be useful to give a brief explanation in a blog.

What is a Directors Loan Account?

To put it simply, the DLA is an account within your accounting software – you’re using accounting software, right? – which tracks what monies are owed to, or by, the Company Director(s).

For example, if you’ve made a decent profit, you might (following some tax advice from your much loved accountant) declare a dividend, however you intend to draw it out over the coming months rather in one lump. The dividend will go to your DLA as an amount owed by the company to you, the Director. Then when you draw down on it each month, that balance is reduced until it’s been drawn in full.

Beware of the Overdrawn DLA!!!

An overdrawn DLA occurs when the Director / shareholder has drawn out more money than they are entitled to.

You may be thinking ‘how is that possible? Surely if the money is there to be taken, it’s the Directors / Shareholders to take?’

In most instances, that’s pretty much true. Generally speaking, a company that has money, has earned it through profit generation, which can be extracted as a dividend. However, there are instances where a company can have cash which was not generated by profit

Dividends can be paid to shareholders from its accumulated profits. If there are no profits, then a dividend cannot be paid out.

COVID has brought about a common situation where companies have not been generating profit, due to being closed or just having reduced income. However the company has been able to get its hands on cash through the Bounce Back Loan Scheme (read more about that here).

As this cash was not a result of profit generating activities, it’s not a ‘distributable reserve’ so can’t be paid out as a dividend.

However, many Directors have indeed been drawing this money out for their personal benefit.

The result, is that these drawings will get allocated to the Director’s Loan Account and will effectively be a loan that the Director needs to pay back to the company.

HMRC don’t like this as they see it as the Director having had money that hasn’t been taxed in any way.

HMRC’s solution is to tax the company on the outstanding loan balance at a rate of 32.5%, unless the ‘loan’ gets repaid to the company within 9 months of the year end.

So, if you take £10,000 out of your Company without it being taxed as a salary or a dividend, and it is not repaid within 9 months of the year end, HMRC will want £3,250 in tax.

This tax does get repaid once the £10,000 loan gets repaid to the company, however. But be aware, this repayment isn’t automatic, and you will need to let HMRC know when it has been repaid so they know to repay the tax.

Beware the lazy accountant / bookkeeper!!!

A common issue I have seen throughout my career is where expenses get allocated to a client’s Director’s Loan Account because the person doing the bookkeeping didn’t know what the cost related to, so assumed it was personal.

This tends to happen where invoices aren’t supplied, either physically, or using software such as Dext. The bookkeeper then thinks that, because you didn’t provide a receipt for a cost that went out of your business bank account, it mustn’t be for business, which isn’t always the case. The reality is that the invoice is likely sat in your Amazon account because you forgot to print it out, or upload it to Dext.

This lazy, or uneducated assumption effectively means that you, as Director, owe the company money because the company paid for something on your behalf which did not relate to the business.

How to manage your DLA

Make sure you are reviewing your DLA regularly for entries that do not belong there, and then discuss these with your bookkeeper to get them reallocated to the correct place.

Otherwise, you may be in for a shock when that £10,000 you paid into the business to get it started, is no longer showing as being owed to your in your accounts.

To try to avoid these issues, it is important to work with your accountant to understand what is in your Directors Loan Account, what money is available for you to draw out, and what that means in terms of tax, so that you can appropriately plan ahead.

Now that you know what a Directors Loan Account is and how it gets used within your business, why don’t you get in touch to discuss further.

Just call on 01604 662670 or email martincrooke@kilbyfox.co.uk

Martin Crooke, Director, Kilby Fox

Martin Crooke is a Partner at Kilby Fox Chartered Accountants in Northampton. Martin specialises in helping small business owners gain financial control of their lives so they can focus on what they do best.

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