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Business tips Cash Finance Function Gym

5 common accounting mistakes that could hurt your gym business

5 common accounting mistakes that could hurt your gym business

Many gym and fitness centre owners – especially those just starting out – tend to handle their own accounting and bookkeeping. However, keeping track of the finance-side of the business– everything from income to expenses to tax compliance– can be overwhelming.

Mistakes can happen quite easily and can have costly consequences to your business, especially as the business grows. Below are five of the most common DIY accounting errors that you should avoid.

Unorganised Records

It takes excellent organisation skills to be able to do your bookkeeping and accounting right. You would need to keep a record of every transaction, keep receipts or digitise them for future reference, calculate taxes accurately, and more. If your records are not kept organised and updated, it is highly likely that you’ll miss something out, which could get you into trouble during the tax season.

To help with this using an accounting system such as Xero is really the way forward. You can access your records anywhere, you can connect it to your gym management software or upload CSV files to Xero, this will give you up-to-date information. Plus it means when you do seek support from an accountant/virtual finance department you will not be restricted by location.

No Accounting Schedule

As a business owner, there are surely a lot of other things that you need to attend to and accounting can easily be pushed to the bottom of your seemingly endless To-Do list. Yet, it is extremely important to set an accounting schedule to add your recent income and expenses into your records. If daily updating is not possible, at least dedicate some time once a week to do your accounting.

Unreconciled Accounts

Regularly check if your bank account reflects the same balance as you record your cash flow and other financial data into your books. If you find a gap, there is likely a mistake somewhere that you need to find or even a fraudulent transaction. Taking immediate action will help you prevent worse problems further down the line. Even if you use bank feeds into your accounting software, it is not guaranteed that transactions will not drop out or duplicate. So by checking your bank balance regularly against your accounting system you can feel comfort in knowing everything is being correctly captured.

Failing to Take Into Account Small Transactions

It can be easy to forget about minor transactions such as the office supplies that you picked up on your way to the office or the freebie that you sent a loyal customer. However, no matter how small you think the transaction is, it’s important to keep a record and get a receipt. In case of a tax audit, you will need to be able to present records of ALL business expenses, even these small ones. This is why I would recommend using a tool such as Hubdoc, Xero expenses or receipt bank, you can then quickly take a photo of the receipt, upload it and not have to worry about losing the receipt.

Not Backing Up Data and Using an Accounting Software

Imagine if the laptop where you store all your financial data was stolen, lost, or broken beyond repair and you don’t have a back up. You would need to redo everything from scratch, which could be a huge waste of time.

If you’re still using a spreadsheet or paper ledger to keep track of your business finances, you might want to consider upgrading into a cloud-based accounting software such as Xero. By migrating to the cloud, you will be able to easily back up your accounting data and even access them wherever and whenever you need to.

These cloud-based accounting systems also integrate well with your bank account and other powerful business apps. The results are streamlined processes, less manual work, enhanced efficiencies, and better overall business performance.

Spend Less Time on Your Books and More Time on Your Business

While being aware of these common accounting mistakes could help you avoid them, the most convenient and efficient approach to stay on top of your business finances is still to entrust your accounting to the experts. Our team of experienced accountants can integrate the most suitable cloud accounting software for your business and even train your in-house staff on its proper implementation.

Let us take charge of your books, while you focus on growing your business. Get in touch with us today.

 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

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Business tips Cash Finance Function Tax Uncategorized

More money for your business – tax savings during covid 19

More money for your business than you know

Even with a little glowing light at the end this unimaginably long tunnel, it does feel like for 2021, things just managed to get worse. But we’re not here to spread doom and gloom. We want to bring hope and open your eyes to options that until now you might not have considered for your business.

More options than you realise.

You’re probably feeling like you’ve exhausted all of the support, funding and loans available to you. However, as Accountants and Advisors we have a duty to ensure our clients leave no stone unturned in these remarkable conditions we find ourselves in. And there are ways, many ways.

As expected, we have seen the government extend initiatives, pumping more money into the pot. Money to give businesses and individuals the necessary support to try and survive. But government support and loans are not the only options for businesses right now.


Cashflow from Tax Advice & Reliefs

We highlighted it back in March but still tax advice seems to be getting missed out of the opportunities. 

Now is the time to consider tax reliefs and advice for your business

And there’s a lot to consider – see the image and summary below:


Tax is a very real cost to businesses. To fail to reduce it, is to miss out on money that should
be working for you, in your business. Having an awareness of the tax consequences of grants and loans when using them is vital. You don’t want to walk into unexpected tax charges. But with the right advice you can identify major cash injections.


If you’re a business owner reading this, valuable tax savings could help counteract some of the damage you and your business are feeling right now. There are essential and popular advisory opportunities that can get money back in a relatively short timeframe with HMRC.


And tax savings don’t need to be paid back. No debt hanging over your head. Just money back
into your business. Take R&D Tax Relief as an example, you could claim up to 33%
of the costs incurred on activities that are considered eligible. This money
can be used for absolutely anything.

Don’t leave any stone unturned

Work with us, or your Accountants and Advisers, and do not leave any stone unturned. Don’t miss out on any opportunity for money back into your business when you’ve come this far.

Take a look at the image and summary, see if anything flags up for you. If they do, let’s talk.

We can help get you through this. 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

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Business tips Finance Function Gym

Why is our tax service different and how does this benefit you?

Why our tax service is different and how does it benefit you?

There are 3 ways that we deliver over tax service to you as a client. 

The 1st is vitally important, its tax compliance, its how we help you account for the tax
that is due and therefore we help you fulfil your compliance obligations and
give you peace of mind. It’s box ticked, brilliant, that’s really important and
a key part of the service we offer to you.

However, what we really like to do as an accountancy firm is to focus on two additional areas, that in the market place don’t tend to get delivered in a consistent way to clients. What we are about as a business is delivering services in a consistent
and optimized way to clients.

So the way that we do that with tax services, is that as well as offering tax compliance we also deliver tax advice and tax consultancy to you.

Tax advice is delivered to you in a singular area of tax where we will charge you a fee
and you will usually benefit to a greater degree from the work that is delivered
via tax savings that will dwarf the fee that is charged in that area.

We are usually able to spot that piece of tax advice really in 1 of 3 ways.

ONE: you come to us and tell us you are doing something, sometimes if we leave it to
that point, it can be too late for us to do anything, because maybe you have already done it, or taken it too far and we cannot do some planning that can help you better your position.

Two: sometimes the nature of the area is that we can do a surface level spot. In other words, if you are a new start up fitness center and incurring large equipment costs and you walk into my office, I would say to you, you should look at getting VAT registered. It is a surface level spot.

The reality with tax advice though is that there are over 1000 tax reliefs, incentives, allowances and planning opportunities, that can apply to any client and we cannot leave delivery of these services to just surface level spots. 

So instead of waiting for you to come to us, we need proactively get on the front foot
with you and consult with you on the areas that could apply to you, as you move through your evolution as a business. And the way we do that is with tax consultancy, where we get under the skin of your business and really understand what the tax reliefs, allowances, incentives and planning opportunities are that at this point in your evolution specifically apply to you.

 

So (a) you are fully aware of what those areas and (b) we give you the full opportunity at implementing those areas with us. At every different point we will come to you and suggest to you an appropriate level of service and that level of service will be contingent on what you need. It will always comprise of the different tax areas; always tax compliance, often tax advice that we can initially identify you will need and we provide a level of tax consultancy that you need proportionate to where your business is up to.

If you think of your business as an iceberg, tax compliance is the tip, tax advice is the bit above the water (surface level) and tax consultancy is the majority of your business below the water. How we help you the most is by tailoring the package we offer to you with these three things in mind.

 

So how do we deliver to you as a client the different tax
consultancy levels I will go through this in the next article. (To be released shortly).

Until then take a look at the 32 ways you can extract value from you business: https://debbiebaileymoney.co.uk//32-ways-to-maximise-extracting-value-from-your-business/

Here is an example of how the tax consultancy service could benefit you: https://debbiebaileymoney.co.uk//prime-example-of-maximising-extracting-value/

 

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

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Business tips Cash Finance Function

Collect your debtors faster

Collect your debtors faster

Did you know that you still have to pay tax on your debtors, even if you haven’t yet collected them? 

This is because you pay tax on your sales figures, whether you’ve collected the cash or not. 

So, how do you collect your debtors faster? 

  1. Agree your payment terms at the time of sale. 

  1. Ensure your customer signs your Terms of Trade before you start the job. 

  1. Include a guarantee in your payment terms. 

  1. Invoice as quickly as you can. 

  1. Ask for a deposit prior to starting the job. 

  1. Change your payment terms to within 7 days of invoice or on delivery. 

  1. Send statements with only two columns – current and OVERDUE. 

  1. Follow up the day after the due date. 

  1. Have someone other than the owner be responsible for collection of debtors (owners are usually too soft!). 

  1. Document any changes to your standard payment terms in writing. 

  1. Use a debt collector sooner rather than later – the longer you leave it, the harder it is to collect. 

  1. Don’t provide credit to customers who’ve been late payers in the past, and don’t offer more credit to customers with outstanding payments. 

Don’t procrastinate on your debtors. Establish clear payment terms and ensure you stick to them. 

“It’s the squeaky wheel that gets the oil.” – Anon 

Need help developing your Debtor Management Policy? We can help… get in touch! 

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

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Business tips

Understanding your strengths and identifying your weaknesses

Understanding your strengths and identifying your weaknesses

The more you understand about your business, your market and your competitors, the better prepared you are for the business journey that lies ahead – and this is where a simple SWOT analysis can be an invaluable tool in your strategic armoury. 

But what exactly is a SWOT analysis? 

Building a detailed picture of your business 

SWOT stands for Strengths, Weaknesses, Opportunities and Threats – and this kind of analysis helps you to get a more detailed understanding of your business and market. 

By breaking things down into four key quadrants, you can review each area and begin to build up your business intelligence profile. 

Let’s take a look at each of the quadrants: 

  1. Strengths – in this section, you list the areas where the business is particularly strong and has a positive presence. In essence, these are the business attributes that would make a potential customer choose you over a competitor, or that single out the quality of your products/services. Elements to review may include your service levels, brand profile, level of expertise, price point, product features features, or location etc. 

  1. Weaknesses – this section is where you list the weaker areas of the business. You need to be impartial and objective here and think about where improvements are needed and where your competitors may do things better. Things to consider include company size, the quality of your management team and workforce, the penetration of your marketing, value you’re adding for customers, or even the amount of funding you have available to grow and expand the business. 

  1. Opportunities – these are the areas where the business has a chance to grasp an opportunity and enhance sales, growth, revenue or overall profits etc. Think about elements of your product/service delivery that could be done better, customers that are currently not being served by your competitor, or new advances in technology. Perhaps you can turn a weakness into an opportunity? For example, being the smaller ‘underdog’ in the market might be a positive marketing message! 

  1. Threats – look at the things which could have an adverse impact on the business over time. This could be the growth of a key competitor, a failing labour market, a fall in the exchange rate that impacts on your exports or the cost of overseas supply, or even a lack of access to the funding required for you to grow and attain your business goals. By recognising these threats, you can proactively plan to avoid the negative impacts. 

Finally, stand back and look at the bigger picture that your SWOT analysis is showing you. Are there relationships between the strengths/weaknesses and potential opportunities. Are there things you can do to reduce the threats? 

By getting proactive, you enhance your strengths and boost those all-important opportunities! 

Talk to us about getting the specific business advice you need. 

If you want to have the best understanding of your business and market, a SWOT analysis is an excellent starting point. We can help you pinpoint the strengths, weaknesses, opportunities and threats – and drive the next stage in your evolution.

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

https://www.linkedin.com/in/southbourneaccountancy/ 

https://www.facebook.com/debbie.hancockSA 

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Business tips Insuranace

What is Key Person Insurance?

WHAT IS KEY PERSON INSURANCE? 

Key Person Insurance is a form of commercial insurance which protects businesses against the financial loss it would suffer if a person considered a vital cog in their business died or was diagnosed with a critical illness.  

 

It is to ensure business continuity and succession planning, something overlooked by many business owners, particularly when the company is small. It pays out a lump sum upon the staff member’s death or in the event of a terminal diagnosis (if critical illness is included). 


It makes sure that if you lose a key figure in your business, that it has the smallest possible impact on the day to day running and success of the company.  

 

WHO IS A KEY PERSON? 

Key people are individuals whose skills, knowledge, experience or leadership are vital to a business’ continued financial success; they have a direct impact on the business’s profits. Often there is not just one key person but several. The important thing is to consider whether the business could continue if that person died and how much it would cost to replace them. 

Examples of a key person include, but are not limited to: 

  • Business Owner 

  • Sales Director 

  • IT Specialist 

  • Managing Director 

  • Specialise skill or expertise 

  • Head of Product Development 

 

BENEFITS OF KEY BUSINESS INSURANCE: 

Key Person Cover can help protect against the following business risks: 

 

Profits protected 

While your employee is receiving treatment for their illness or you are waiting to complete the recruitment process to replace a member of staff who has passed away, key person insurance will ensure you do not feel the effects of a potential drop-in profits and sales. 

 

Recruitment Cost covered 

Recruitment can be a time-consuming and costly exercise, there are costs associated with finding the right persona and with training a new employee. Key Person Insurance covers these costs in the event of your business losing a key member of staff to sickness or death. No business wants to be spending in excess to replace their staff as this could have a negative impact on their bottom line.  

A report by Oxford University, concluded that the cost of replacing an ordinary employee is more than £30,000. This amount covers the recruitment and training expenses, lost time, and output while searching for a replacement.  

 

Reduce Stress 

Losing a key person can be a distressing time, especially when illness and death is the cause. The absence of this key person can put a lot of strain on the remaining team, as they attempt to pick up the extra workload. By making sure you have key person insurance for your company means that in a worst-case scenario your staff will be in a better position to cope. 

 

DO I NEED KEY PERSON INSURANCE? 

If you’re a small business owner and don’t yet have any kind of business protection insurance in place, talking to an independent financial advisor might help you understand where your vulnerabilities are, and how best to protect yourself, your profits and the members of your team. 

 

The loss of a key person to your business can have a serious impact on your business’s finances as sales and profits begin to decrease and the workload increases for your remaining staff. 

 

The Key Person Insurance is designed to pay out a large lump sum of to help your business recover. The money can be used to help replace profit loss or finding and hiring a replacement. With many small and medium-sized companies dependent on a few specialist individuals, Key Person Insurance is designed to help protect your business. 

Many key person policies also combine life insurance with critical illness cover, therefore, the business would be covered if the insured person was unable to work for a prolonged period due to illness or injury, subject to the terms and conditions of the policy purchased. 

 

HOW MUCH SHOULD A KEY PERSON BE INSURED FOR? 

When deciding how much you need to insure them for, consider the annual turnover of the business and how far that person’s loss would affect it. 

 

Also, think about the scenario that might follow. Would you wind the company down, or carry on without them? If the latter, then how long would it take the business to recover? 

 

Finally, consider the premiums you’ll need to pay and how much you can afford. As a general rule, though, insure the key person for a slightly higher amount than you think they’re worth to the business, rather than the other way around. 

It’s also important to remember that this is not the same as a personal life insurance policy and is not designed to benefit the person’s family or personal dependents. 

 

When the business is trying to recover from the loss of a director, owner, or key employee, key person insurance is essential for keeping the company afloat in difficult times. 

 

WHAT BUSINESSES BENEFIT MOST FROM KEY PERSON LIFE INSURANCE? 

 

Large businesses will usually have the cash balances and contingency plans to deal with the departure of even their most influential leaders. Unfortunately, small businesses do not usually have this and therefore key person insurance is more important. It’s mostly these businesses that could not survive the death of a founder whose vision and determination have carried the business through both profitable periods and lean years. Consequently, a look at key person life insurance makes sense for any company in the small business segment. 

 

Thinking of the worst circumstances in a family or small business can be unsettling, but failing to prepare for an unexpected death can be devastating. While key person life insurance benefits could never replace the lifeblood of your business, those funds could help keep a business they worked hard for, to rebuild and flourish.  

 

WHAT NEXT? 

Have you insured key persons in your business? If not, what stops you from securing this vital cover? Southbourne Accountancy works with Independent Financial Advisors who will happily discuss your businesses circumstances and how this type of insurance could help. Please do get in contact with me if you would like to discuss further.  

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/

2. Download our free guide on “7 mistakes to fix, to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/

3. Download our free Coronavirus support guide: https://debbiebaileymoney.co.uk//coronavirussupport/

4. Connect with me on social media:

https://www.linkedin.com/in/southbourneaccountancy/

https://www.facebook.com/debbie.hancockSA

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Business tips Finance Function

Understanding your profit and loss statement

Understanding your profit and loss statement

Your profit and loss statement (P&L) helps you understand your business performance and profitability over time. It’s sometimes called an Income statement and its main purpose is to list income and expenditure. 

Whereas a balance sheet is a snapshot in time, the P&L shows transactions over a specific period of time. This can be a month, quarter, financial year or any other period, and it can be a stand-alone report or a comparative period report. 

Together with the balance sheet, these two reports provide a comprehensive understanding of the financial position and performance of a business. 

The profit and loss statement has two main sections: income and expenses. 

All P&Ls are based on a very simple formula 

Sales – costs = profit (or loss)  

One of the most common reasons small businesses start producing profit and loss statements is to show banks and investors how profitable their business is. 

Depending on the complexity of the business and reporting requirements you will generally see the below: 

  1. Income or Revenue 

  1. Income primarily includes main business activities such as sale of goods or services. Other income such as interest received, capital gains or income from secondary business activities is also reported. 

  1. Expenses 

  1. Expenses are usually divided into two sections: direct costs, or cost of goods sold, and expenses. Cost of goods are those that are directly linked to the provision of services or sale of goods. For example, if you buy weights from a wholesaler and sell them at a marked-up value, the cost of the weights is a direct cost, not an overhead expense. 

  1. Other types of direct costs might be importing and freight costs, contractor costs or certain equipment. Some direct costs are fixed, that is, they are the same from month to month, or they could be a fixed percentage of sales; others vary in value but are still related to the income producing activities. 

  1. Overhead expenses are all the other expenses required to run the business, regardless of the level of income: for example, rent, utilities, bank fees, accountant fees, professional development costs, vehicle costs and staff costs. Many of these costs form the basis of working out your break-even point, or how much it costs just to open the doors for business. 

  1. There are some expenses which may be reported as a direct cost in one business but an indirect cost in another type of business, for example, merchant fees or contractor costs. 

The Bottom Line 

Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line’. Often business owners are just interested in looking at the bottom line, but a true financial picture requires an understanding of several reports and an ability to see the big picture that the reports are illustrating. 

The P&L is a vital tool to analyse for trends over time. 

  1. What does your P&L tell you about relationships and ratios between sales and expenses, seasonal changes and annual trends? 
  2. Have all your direct costs been allocated correctly? 
  3. Have you recouped all billable expenses from customers? 

Percentages you can use to help distill the information in your income statement  

A profit margin shows you the relationship between how much you spend, and how much you make, so you get an overview of your company’s financial performance. Lenders and investors look at your profit margins to see how profitable your company is, and decide whether to give you money. 

The three most important profit margins are: The gross profit margin, the operating profit margin, and the net profit margin. I will cover these in a later blog.  

Financial statements help you understand the big picture for your business. With deeper understanding of your business operations and performance you can make informed decisions about your business finances. 

Are you confident in reading your profit and loss statement? Would you like to know more about the relationship between costs and revenue to make better business decisions? Book a session today to examine your financial reports with an experienced business advisor. 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/

3. Download our free Coronavirus support guide: https://debbiebaileymoney.co.uk//coronavirussupport/

4. Connect with me on social media:

https://www.linkedin.com/in/southbourneaccountancy/

https://www.facebook.com/debbie.hancockSA

Categories
Business tips Cash Finance Function

Understanding Statement of Cash flow

Understanding statement of cash flow

Revenue is vanity, profits are sanity, but cash is king – or so the saying goes. That’s because cash is what customers pay in, and what shareholders get as a dividend.  So, you must want to know more about the impact of your business activities on your cash flow?  

Understanding Your Statement of Cash Flows 

The cash flow statement shows how your business has generated and used cash (and cash equivalents) within a specific time period. 

For each of the reporting categories, receipts and payments are listed (money in and money out), and this is reported as a net increase or decrease in cash held for that category. 

The net change in all categories is added to the amount of cash at the start of the reporting period to arrive at the current cash at the end of the reporting period. 

It is another important financial statement to understand alongside with the Profit and Loss statement and the Balance sheet. These three reports provide a good understanding of the financial position of your business. 

How Does it Work? 

The cash flow statement integrates the information provided by the profit and loss statement and the balance sheet into a current cash position. The cash flow statement is reported on a cash basis, while your other financial statements are usually reported on an accrual basis. Accruals basis being when the income was earned or expense incurred, not when the cash entered or left your business. 

Report Categories 

The statement of cash flows is organised into three sections: 

  1. Operating cash flows– Day to day operations of the business. All business income, expenses, assets and liabilities (except for those assets and liabilities reported in investing and financing activities). 

  1. Investing cash flows – the purchase and sale of long-term investments, property, plant and equipment as well as deposits paid to suppliers or received from customers and dividends received. 

  1. Financing cash flows – for example, issuing and repurchase of shares and bonds and payment of company dividends if applicable. Loans are also included in financing activities. 

Why is it Useful? 

The statement of cash flows gives you a valuable measure of cash flow in and out of the business over a given period. It shows the ability of the business to pay its bills and fund its operating activities. This gives you a picture of overall performance. 

It also shows the relationships between assets, liabilities, equity and cash accounts. It shows changes and movements over time, whereas the balance sheet and profit and loss reports show account values at a single point in time. 

The statement of cash flows gives you vital information on your business. 

  1. How strong is your cash position? 
  2. What is the long-term outlook for your business? 
  3. What activities generate the most cash flow? 
  4. What is the relationship between your net income and your operating activities? 

A useful metric is free cash flow, this is simply operating cash flow minus capital expenditure such as building and equipment. 

Cash flow from operations – capital expenditures = free cash flow. 

It shows what’s left over from operating cash after expansion and upkeep costs. A positive balance implies the business has cash left over to give back to shareholders, pay off debts or invest in R&D or acquiring other companies. 

It can be useful to ascertain if a company’s free cash flow is, and has consistently been, greater than the dividend paid. That’s another figure you will be able to find on the cash flow statement, under financing cash flows. 

If your business is growing, you’re looking to expand your business, or you have a tremendous amount of investments, chances are that calculating your free cash flow can be beneficial. 

If you’d like to understand your financial statements, cash position and future outlook in more depth, arrange an advisory session today. We’ll help you identify and appreciate the strengths of your business. 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/

2. Download our free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/

3. Download our free Coronavirus support guide: https://debbiebaileymoney.co.uk//coronavirussupport/

4. Connect with me on social media:

https://www.linkedin.com/in/southbourneaccountancy/

https://www.facebook.com/debbie.hancockSA

Categories
Business tips Finance Function

How financial Ratios will tell you if your business has solid foundations (and how to read a balance sheet)

How financial ratios will help you build solid foundations for your business.

As a business owner you will own lots of assets, owe other businesses money and have shareholders. The balance sheet brings all these together in a financial snapshot showing the businesses financial position at a specific point in time. Together with the Profit and Loss Statement, and Statement of Cash-flow, these reports provide a complete understanding of the financial position and business performance.  

In the book “Business for Punks” by James Watts he describes being able to read a Balance Sheet and P&L as one of the five basic financial skills you need to master before starting your own enterprise.  

So, what is the balance sheet, what do the different parts means and how can financial ratios help you to measure your company’s performance? 

What’s involved? – The balance sheet has three sections: assets, liabilities and equity. (It tells you how much you owe others, and how much others owe you and what has have invested in the company). 

The equation is: 

Assets = liabilities + equity  

For example, if a business has borrowed £10,000 from the bank (a liability) and has had £10,000 invested by its shareholders (shareholder equity), then the business has £20,000 of cash at its disposal (an asset). 

What are Assets? 

Assets are items and resources that a company owns, anything that is valuable to the business. They have current and/or future value. 

Cash in the bank: Most business owners know this number! 

Accounts receivable: otherwise known as money owed to your business, this is for services/goods you have delivered but not yet been paid for.  

Inventory: stock you can sell 

Raw materials: stock the business uses to make items to sell. 

Land, buildings, equipment: big capital items that are not quickly turned into cash and are used to run the business.  

Intellectual property: intangible items which are hard to quantify including trademarks 

What are Liabilities? 

Liabilities are amounts owed, so anything that needs to leave the business. This could be to suppliers for goods or services already received or amounts received in advance from your customers for future services yet to be provided by the business. 

Bank overdraft: amounts owed by the business to the bank 

Interest payable: Interest on loans the business has secured 

Salaries for staff: national insurance, tax, PAYE 

Tax: HMRC always want their cut (corporation tax) 

Loans: Loans from external businesses/lenders (or internal if part of a group set-up) 

What is Equity? 

The money you’ve put into a business is equity. That includes initial investments you or other investors have made, and earnings you’ve retained in order to reinvest in the future of the business. 

Initial Capital: The funds invested into the business when it started 

Retained earnings: Income set aside for business purposes and reinvestment into the future 

Business owner’s drawing: Money taken out of equity to pay the shareholders.  

Shareholders’ equity: The book value of shares held by shareholders 

The Balance Sheet Equation 

The balance sheet must always balance!  

Asset value = liabilities + equity 

For example, if you buy a new piece of equipment at £5,000, you pay a £1,000 deposit and take out a £4,000 loan, the value of fixed assets increases by £5k, but the bank asset value decreases by the £1k deposit. The value of liabilities increases by £4k loan, thus leaving the balance sheet balanced on both sides of the equation. 

The balance sheet equation shows you how much money you would have left over if you paid all your bills and debts and sold all your assets at a given date. This amount is the Owner’s Equity. 

Get crystal clear financial statements every month 

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Reading a balance sheet: 

Because of this snapshot nature, it’s important to compare the balance sheet over time, I.e. last month, last year. In terms of reading the balance sheet, there are a number of ratios that can be used to give you greater insight. Ratios can tell you whether your business is built on solid foundations or is unlikely to be able to pay its debts. 

Financial ratios are like compressed bits of information that describe your company’s financial health. They describe the health of your business by looking at the relationship between different elements of the balance sheet. By tracking ratios over time can tell you how your business is improving at some things, or where there’s space for it to get better. 

So that you can get started straight away let’s go through 3 of the key ratios. 

Debt to equity ratio = total liabilities/total shareholder funds 

This ratio assesses how reliant your business is on external debt funding compared to equity (shareholder) funding.  It is often looked at by investors as they don’t want to be left empty handed. 

Generally, 2:1 is acceptable, but it can depend on industry-wide factors.  You could compare against similar businesses in the industry. You can ask yourself these questions when considering the ratio: 

  1. Is sales revenue predictable and are invoices being paid?
  2. Is debt repayment due soon
  3. Is the business vulnerable if the economy takes a downturn? (I think most businesses will be able to answer this now).

 

Current Ratio = Current Assets / Current Liabilities 

 Basically, can your business pay its debts?  

 A ratio of more than one would mean you could pay all the business current liabilities at once with funds you already have in the business.  The business would not need to seek external funds or sell off assets such as stock. 

 Once you drop below a current ratio of 2:1, liquidity is not looking so good. And if you dip below 1:1, it means you don’t have enough liquidity to pay off your debts. 

 You can improve your current ratio by either increasing your assets or decreasing your liabilities. 

 The Quick Ratio = cash + cash equivalents + accounts receivable/current liabilities 

 How quickly can you cover your short-term liabilities?  

 If your ratio is 1:1 or better, you can cover current liabilities in a flash. 

 Balance sheets can tell you a lot of information about your business, and help you plan strategically to make it more liquid, financially stable, and appealing to investors. But unless you use them in tandem with income statements and cash flow statements, you’re only getting part of the picture.  

 

Need more information? 

Talk to us. Get the complete picture of your business performance and financial position, regardless of what stage of business you are at. Would you like to know more about the relationship between assets and liabilities to assist business decisions? Book a session now to analyse your reports with an experienced business advisor.

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/

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Categories
Business tips Cash Finance Function

R&D – How to get more cash back into your business

Research and Development - How to get more cash back into your business

 

In February 2020, the government pledged to increase public investment in R&D to £22bn a year by 2025, meaning there is a significant opportunity for businesses to invest more on innovation and get cash back into their bank. 

R&D is a tax relief which is massively underclaimed by UK businesses, it is money that many businesses need right now. You can claim up to 33% of eligible costs incurred and better still you can go back up to two years. The average claim made by SMEs in the UK is £53,714 (2017-18). 

You can decide if to receive a cash payment now or a corporation tax reduction. R&D exists in every sector, it is not just for scientists in white coats. 

How can R&D help your business get more cash? 

There are two schemes available, this article will concentrate on the SME scheme (companies which have less than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.) 

A SME company that qualifies for R&D tax credits can account for an extra 130% of qualifying costs on top of the 100% already deducted. Loss making companies can in certain circumstances surrender their losses in return for a payable tax credit. 

If as a loss-making company you decided to carry forward that loss for future tax benefits, you may want to consider changing your tax return to so the carried forward loss is a tax credit. This would give you cash now when you might need it most.   

What is R&D? 

HMRC are looking for R&D that seeks to make a worldwide advance in some area of science or technology. It doesn’t have to be earth-shattering and it doesn’t have to succeed. In fact, failure on technical grounds e.g. it was too technically challenging. is often some of the best evidence of a qualifying R&D project!  

The work needs to involve technical ‘uncertainty’ i.e. it’s not straightforward and requires some iterative work and testing; and the work is carried out by staff who have either training or experience in the area of science or technology being advanced. 

Who can claim? 

To be eligible for R&D tax relief, your company must be Limited, and subject to corporation tax. Your company must have fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category. 

What are the criteria: 

1) There must have been at least one technical goal.  

2) There must have been at least one significant technological or scientific difficulty to overcome while trying to achieve this goal. 

3) There must have been people with the right skills and experience involved in overcoming this technical goal. 

What do you need to do: 

Once you have established if you have a valid R&D claim you will need to: 

  1. Work out when the R&D project starts and ends. 

  1. Collate qualifying costs 

  1. Complete the calculations 

  1. Send HMRC details to support your R&D claim, you may wish to use the online service. 

  1. Submit you CT600. 

This article does not go into the specifics of the claim and qualifying costs. Please speak to a trained professional if you require additional information and support.  

So, don’t wait to make a claim, assess your projects to determine if your business has been involved in Research and Development and get that cash back into your business’ pockets.  

2. Download our free guide on “stopping your fitness business running out of cash”  https://debbiebaileymoney.co.uk//fitness-ebook/  

3. Download our free Coronavirus support guide: https://debbiebaileymoney.co.uk//coronavirussupport/  

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