1) Registering your Business
Although it seems obvious, one of the most important decisions is deciding what structure you want for your business. Choosing the structure depends on many factors, externally and internally such as: tax, annual costs, whether you want your accounts to be published, whether the company will need an audit report and regulatory requirements etc.
Although there are many structures I could choose for my business such as a Limited Company (Ltd), a Conventional Partnership, a Limited Liability Partnership or even a Joint Venture, whether incorporated or unincorporated, I feel that acting as a Sole Trader is most beneficial.
Because there are so many different structures, there are of course different people to contact in relation, e.g. as a sole trader/partnership, HMRC (tax and NI) need to be contacted within 3 months of trading, whereas for Ltd’s, Companies House, HMRC and VAT are compulsive. This is one reason why I need to have a well organised structure from the beginning, as late notification can result in penalties.
2) Why Keep Records?
For me a good reason to keep records is that I know I will forget several months down the line, and the best way to remember anything and be organised is to write stuff down, especially with something as important as finance! After all, a big part of running a business is to earn money and make profits.
Records need to be as accurate as possible in order to report profits to the HMRC because of tax liabilities. Although the HMRC only receive a summary of the business information they hold the right to access more at any point to ensure profits have been properly disclosed and only genuine expenses have been claimed against income.
Most expanding business will need to approach banks, venture capitalists etc for working capital. There is very little chance that this will be secured without demonstrating past performance and finance forecasting for the future. I know that a cash injection is something I will need for my business to get it up and running so in order to inspire confidence in my business I will definitely ensure I spend time doing my books!
HMRC now further assess up to 10% of returns of self assessed businesses. It is likely that messy records will prompt the HMRC to make assumptions where the source documentation isn’t available; assumptions which will not be to the businesses advantage! However, well kept records indicate a well run business, allowing HMRC to deal with enquiries faster and with less cost.
3) Basic Records- Where to Start?
Organising the finance in my business is something I dread to think about because knowing where to start is so confusing! But I found the way this information was broken down in the workshop much easier to understand than I expected. There are several areas to consider:
Cash Book (always enter from source documentation): This includes chequebook stubs and paying in books always being competed. Direct debits and standing orders from bank statements need to be recorded. However, I was told not to just copy entries from the statements as banks do get it wrong sometimes-but to always double check! It was also explained to only enter payments in the book when cheques have been sent out, or received. It is important to keep a separate file of unpaid purchase invoices which can be later removed to the paid file when paid. Always cross reference and keep all source documents on file. (Although this seems like a lot to take it, I realise that by doing this my business will run much more efficiently!)
Bank Reconciliations: This process is basically comparing and matching figures from your businesses
Petty Cash Book: It is important to always keep vouchers or receipts for any cash expenditure in the PCB and reconcile to cash in hand on a weekly basis.
Sales Day Book: It is pretty obvious to keep a record of all sales, but I didn’t know that I should consecutively number them or that if a number is missed then to note it down in the SDB. All sales invoices should be stored and filed numerically.
Sales Ledger and purchase ledger will be necessary as my business will be conducting a large number of credit sales transactions and should be updated regularly as well as being part of a double entry system. VAT Records are also necessary, but will be explained later.
As a sole trader there is no need for year end accounts but only tax returns.
4) Double Entry Book Keeping
The majority of businesses work on a double entry system as using single entry bookkeeping means there is no way of reconciliation. Double entry is basically when debit and credit information is entered for each transaction, allowing profit and loss to be calculated much easier.
Within this arises the question of whether to hire a bookkeeper to do this work. For a new business, managing the cash efficiently is essential and as a result most people think hiring a bookkeeper is a bad idea… but apparently not! The lecturer explained that new businesses tend to be so wrapped up in running the business, generating sales or in production that keeping the books in order is at the bottom of the list, and if left too late is expensive to correct! With a pile of unfiled invoices and statements, they don’t know where to start! This is definitely not what I want for my business, but there are lots of ways around ‘hiring’ a bookkeeper such as computer packages which I was relieved to hear about. These packages can produce reports and analysis of my business performance, I can begin with using simple spreadsheets to record information and all the records will we stored in once place and easy to find, making double entry bookkeeping much easier without the help of a professional. Of course these records should be backed up.
5) VAT in Relation to my Business
Before this lecture I had a brief idea of what VAT was, but didn’t know how exactly it related to my business and what aspects of it applied to me as a sole trader rather than a limited trading company.
Once my business is over a certain level I will have to register for VAT, however I can voluntarily register below this point if I want. We were told this level was £61,000 turnover for the year. Although that feels like a long way off for me now, I realise the value of understanding VAT and tax (despite the fact I’m not a fan of figures!). If my business does make over £61,000 for a while, but the annual level falls to less than £59,000, I can deregister. This also applies if the business stops trading. However, it was stressed that seeking the advice of a professional before deregistering was essential.
VAT consists of 2 main areas- Input and Output tax. Outputs cover all supply of services and goods whereas input refers to the business’ purchases. Luckily completing a VAT return only happens on a quarterly basis, after which a return is issued and submitted to HMRC no later than 30days after the quarter (Some businesses using the Annual Accounting Scheme only have to do this once a year, however this is for businesses with a much higher turnover). Ensuring I do this in good time will mean I don’t receive penalties, something which any new start-up could do with avoiding! If this payment is late more than once, a penalty called a default charge is added, calculated as a percentage of between 2% to 15% of the VAT that is paid late. Being organised with this will definitely pay off!
I was confused at understanding exactly what a tax invoice was. I have seen plenty in the past because my dad runs a business, but I never thought to study one. The workshop explained exactly what was required in an invoice, so I made sure to take plenty of notes for the future (All tax invoice copies are to be kept for a minimum of 6 years, unless agreed with customs). Things to be included are:
- An identification number,
- The date of supply and the date of issue of the invoice,
- Name etc and registration number of the supplier,
- The type of supply by reference to categories e.g. hire, lease etc,
- Description of goods/services supplied,
- For each description, the quantity of the goods/ extent of the services is required as well as the rate of tax, and the amount payable excluding tax.
As I plan to purchase fabrics from suppliers and have my garments manufactured, keeping these invoices and making sure all these details are included will save a lot of time and potentially money for my business. However, I will not just be purchasing from suppliers but as an online retailer I will be selling directly to the public, for which I learned no invoice is required. Obviously a receipt is required for this, which should still show:
- The name, address and registration number of the retailer,
- Date of supply,
- Description of goods/services,
- Total amount payable including tax.
Summary
I have learned many things from this workshop such as the importance of double checking information, seeking professional help if unsure, but most importantly how organisation can have a huge impact on the efficiency of a business and its finance; a well run business can quickly build a good reputation, something that every start-up business aims for! There are so many websites and books that are specifically for new businesses and I would recommend having a look, because despite how much you may think you know, there is always more to learn!
I hope you enjoyed reading! I would love to hear your feedback,
Faith
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