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.

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.

Why you should absolutely like your accountant! (not in a weird way)

I regularly read comments on Social Media from people saying things like:

‘I don’t like my accountant’

‘My accountant makes me feel like a naughty school kid when I make a mistake’

‘Why in the world would I ever want to attend my accountant’s anniversary BBQ’

I find comments like this so frustrating (although not surprising – I know lots of accountants!)

The reason these comments frustrate me is that I strongly believe that business owners should have brilliant relationships with their accountants. They should feel happy; possibly even excited to pick up the phone to speak to their accountant.

And here’s why:

If your accountant invited you to their Annual BBQ, it is very likely that there will be other business owners there. Maybe some of these business owners could be potential customers of yours or useful contacts! Now, consider the scenario where you have a great relationship with your accountant. You might even call them your friend. You rock up to their BBQ and they stop their conversation so that they can introduce you to everyone. Maybe you even have a good time and get new business as a result.

Accountants are very well-connected people by nature. Many of them have clients in a wide variety of industries and professions. They are prime for making introductions if you tell them what kind of people you’re looking to connect with. It’s unlikely you’re going to be having these discussions with an accountant you don’t like. It’s more probable that conversations will be minimal and those that do happen are short.

When you need to know something, like ‘can I put (insert something absurd here) through my business?’, it’s so much easier to phone your accountant and get an immediate answer from your own personal expert, than trawling through the internet or asking Dave from the pub. For one, your accountant’s advice should be tailored to your business and your personal circumstance. The internet won’t know those. So, if you want to claim for your brand-new American style fridge freezer and 3-piece-suite for ‘the office’, the answer might be different if your accountant knows ‘the office’ is actually your dining room.

Your accountant should want to make time to help guide you through the complexities of your financial affairs. This often includes educating you on how to do things. This could be using your accounting software more effectively. Or explaining the tax consequences of the method you use to pay yourself. A business owner needs to be made to feel adequate, even if they don’t know something. That’s the point of hiring an expert! And it helps you to improve your control over your business finances.

So, the next time you see or hear someone say they don’t like their accountant. Tell them they desperately need a new one!

If you have any further questions, or would like to book a free
one-hour consultation with one of our partners, please get in touch.
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