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Banking and Accounting
Types of banking for businesses
The day-to-day running of your business will occupy enough of your time
without you having to worry about lengthy bank queues or reams of paperwork.
Modern banking is flexible, which means you can have instant access to
your account via telephone or online to make transactions anytime.
Online banking
Private individuals and business-owners alike are quick to praise the
flexibility and availability of Internet banking. Not only do you not
need to leave your desk, you can bank at any time of the day or night
to suit your needs. This will help you avoid banking fees as you can
check your finances anytime and keep potential shortfalls to a minimum.
In addition, you may also be able to download information from your
online account directly into your bookkeeping software, saving you even
more time. Your bank may offer free compatible software as part of its
business start-up accounts.
Telephone banking
Like online banking, telephone banking is a useful alternative for managing
your business account if you don’t have time to go into your bank
and has been popular with business for many years. You can bank on the
move, and most services are available 24 hours a day, all year round.
You can also make appointments or arrange overdrafts and loans.
Bookkeeping
Although you will probably need the services of a good accountant, you
will inevitably have to undertake some bookkeeping yourself. The days
of manual double-entry ledgers are long gone, thankfully, and you can
save a lot of money in accountancy fees by taking on the basic tasks
yourself. Fortunately, this can be mostly automated through simple accountancy
software packages which require only a small amount of self-training
to use.
Most accountancy software allows you to:
- Control your business finances and cash flow
- Manage VAT, tax and National Insurance, including completion of
your VAT return.
- Produce your annual accounts
- Manage your profit margins
- Manage and record your stock levels
- Keep accurate records of your customers and suppliers
- Identify late payers and reduce the risk of debt
- Run your payroll
- Track your credit card payments and record cash sales
- Automatically reconcile your books with your online bank accounts.
Accountancy programs do all the calculations for you using the basic
information you enter. Start with a package that is easy to use and work
your way up to more advanced bookkeeping items until you have as much
control over your finances as you aspire to.
This will help you make financial projections, accurate budgets and
forecasts and produce in-depth reports on your business performance,
ultimately saving you time and money.
One of the advantages of computerised accounting is the ability to instantly
compile records for any period of time. You can present profit and loss
accounts to accountants or auditors in an instantly recognisable way.
You may also find it becomes easier to secure funding, as you can produce
accurate up-to-date financial reports for lenders at the click of a button.
Lenders will also be able to see who owes you money and when it is due,
giving them a clear picture of your financial health and potential.
As with any accounting system, there is the possibility of user error,
but that also applies to manual bookkeeping, so as long as you are thorough
and keep information up-to-date, you shouldn’t have a problem.
Before you invest in accountancy software, speak to your bank, accountant
or financial advisor to see if they offer a free package with their services.
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Choosing your accountant
One of the most important business partnerships you will form will be
the one between you and your accountant. This is someone to whom you
will trust all of your financial secrets, and who will be keeping you
on the right side of the law but the good side of the taxman.
Although all businesses are required by law to keep financial records,
it's only larger limited companies that have a legal obligation to involve
an independent, professionally qualified accountant.
However, most businesses use accountants to provide services ranging
from basic bookkeeping to tax advice or strategic business planning.
They do so for many reasons, for example to free up time for core business
functions, to improve profitability, to comply with the law or to help
develop a vision of the business’ future direction.
When looking for an accountant, there are many factors to consider.
Accreditation, location, experience, and price. So how do you go about
finding the right one for you?
A personal recommendation is one way of finding a good accountant. However,
you should be sure that your business needs are similar to those of the
person making the recommendation, otherwise you may not get a good match.
Before you start…
The first step is to work out what you want from your accountant. How
much of your own bookkeeping will you undertake? The more you do yourself,
the more money you will save, but do you need your time free for other
things?
An accountant can also provide valuable start-up advice so it’s
worth finding one as soon as possible. You might need a good ‘all-rounder’ or
your business may require the services of a specialist accountant.
You can start by searching the databases of the following professional
associations:
The
Institute of
Chartered Accountants in
England
and Wales : www.icaew.co.uk
The Association of Chartered Certified Accountants for accountants in
England and Wales : uk.accaglobal.com
The
Institute of
Chartered Accountants of Scotland
: www.icas.org.uk/directory
Another useful site is Search Accountant: www.searchaccountants.co.uk
If you need a comprehensive accountancy service, approach a few firms
with an informal tender process. Find out what you need to know and match
each firm against your benchmarks. Choose based on every criteria, not
just price.
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Stock and credit management
Managing stock control
Running out of stock can be disaster for your business. Good stock (or
inventory) control is the process of managing your stock so you always
know what you have available, and how you keep track of it.
Keeping an efficient stock control system will keep your capital free
and avoids supply chain hold-ups.
Methods of stock control
You can keep manual records, or use software to control your inventory.
Many businesses opt for a combination of both to suit their needs and
stock types.
Minimum stock levels
Identify a minimum stock level and have a process in place for re-ordering.
The more automated you make this, the less chance you have of running
out of stock.
Regular stock reviews
Also known as stock-taking, a review will help you ascertain what your
current levels of stock are, so you can order to return stocks to the
required levels.
Record stock sales or usage
Every time you sell a piece of stock you should record it, either manually
or automatically via a till system. This is also useful practice for
internal stocks such as stationery.
Minimum re-order times
A good working relationship with your supplier is essential if you need
emergency stock. However, you should always adhere to suppliers’ re-order
times if possible, allowing time between placing the order and receiving
it.
Rotate stock
First in, first out. Make sure you rotate stock regularly to ensure
it does not become dated or deteriorate. Keep date records of each item
or batch and move stock on in order.
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Managing cash flow
Cash flow is the money that comes into and goes out of your business.
Money coming in is called ‘Receipts’ and can include; cash
from sales of goods or services, loans, cash from private means, sale
of fixed assets (eg. computers), and cash invested to buy company shares.
Money going out is called ‘Payments’ and can include; cash
to suppliers for stock and services, loan repayments, purchase of assets
(e.g. vehicles), tax and salaries.
Your goal is to receive more cash than you spend, but if in the short
term you find yourself with a cash shortfall, it doesn’t have to
be the end of the world. It simply means you will have to secure funding
to pay your bills until you yourself are paid by customers. The best
way to insure against cash shortfalls is to build up a cash balance to
plug any gap. You can also ask your customers to pay sooner or ask for
extended credit with your suppliers.
Profit versus cash flow
Profit is not the same as cash –a business can make a profit but
not have any short-term cash available.
Profit is when a customer buys your product or service for more than
it costs you to provide it. That makes you profitable. However, until
they actually pay for it, you don’t have a cash inflow. This means
that even a profitable business can run into trouble if the cash dries
up.
How do you manage cash flow?
To keep a ready supply of cash to pay your bills and suppliers, you
must employ good practices. Devise a good cash flow management strategy
to include the following five key elements:
1. Manage the credit you give
Set out reasonable payment terms and do not be afraid to ask for partial
or full payment up front. Payment terms can be up front, on delivery,
or a number of days from invoice (usually with a maximum of a month).
You may not feel comfortable doing it, but keep on top of late payments
and chase! Send reminder invoices promptly and follow up with a phone
call if needed.
You have a right to charge interest on late payments and in serious
cases can threaten or carry out legal action to recover monies owed.
You might want to consult your accountant, solicitor or business advisor
on the best way to go about this.
Set up as many methods of accepting payment as possible, for example
credit or debit card, Internet payments etc. The more ways a customer
has of paying, the easier it is for them.
2. Update your books
If you have regular inflow and outflow of cash, you can’t manage
it in your head. Keep accurate up-to-date records of every invoice and
transaction. Accountancy software will make this easier, so consider
investing in a package if you haven’t done so already.
3. Make a contingency plan
An overdraft or credit card facility can help to bolster any shortfall,
but if your plan is to rely on these in the event of a cashflow problem,
ensure your bank is willing to provide them, particularly at short notice.
4. Pay your bills
The good relationship you will build up with your supplier through paying
bills promptly can be very useful if you need a short extension. The
better your history with them, the more likely they are to be lenient
when you need it most.
5. Set up adequate funding
Ensure you have a supply of cash for short-term expenditure. A good
rule is to use long-term borrowing such as a mortgage or bank loan to
fund fixed assets like premises or vehicles, and short-term borrowing
like an overdraft to manage supplier debts whilst awaiting payment from
customers.
And remember – you aren’t in this alone. Talking to your
accountant or business advisor about the best way to manage cash flow
can help you to build a better business.
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Credit-checking your customers
Credit checks can reduce the risk of bad debt, but many businesses extend
credit to customers without thinking about it. If you want to avoid the
risk of not being paid, it’s worthwhile vetting the customer first
to ensure they are creditworthy.
There are many ways to credit check potential customers, but the simplest
is to ask them to complete a short form
The form should ask for the following information:
- Full name of the business and the customer
- Company information such as type of business and number of employees
- Amount of credit required
- At least two trade references
- Bank details
- Length of time the business has traded.
If the potential customer is a limited company, they should also supply:
- Company registration number
- Name(s) of directors and date of formation
The more credit required, the greater the risk, so it’s worth
setting yourself a limit over which you always check references. You
can follow up trade references (ideally with a standard questionnaire
to ensure you don’t miss anything) or you can ask the customer
for permission to approach their bank for a status enquiry. However,
you will probably have to pay a fee to the bank for this service, and
it acts only as the bank’s opinion rather than a guarantee so should
not be your only source of reference.
Another source is to use a credit reference agency. This only applies
to limited companies, as they have to file their accounts with Companies
House. The credit reference agency will assess the risk on your behalf
(for a fee, of course) and make a recommendation about whether or not
you should offer credit.
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What to do when customers owe you money
Bad debt and late payments can destroy your business. If your cash flow
dries, you will be unable to pay your own suppliers and that could
spell disaster. Getting paid on time is essential, but if all else fails
and your customer ceases to communicate with you, you will have to enter
the debt recovery cycle.
Your solicitor or debt recovery company will firstly send a ‘letter
before action’, which outlines the nature of the debt and the requirement
for payment. The letter will state that if payment is not made within
a certain number of days, court proceedings will begin. This is often
enough to jolt a late payer into action, at minimum cost to yourself.
If the debtor still does not pay, you will need to submit a claim form.
You will incur costs, and going to court should always be a last resort,
but if you have stated your intention clearly in the letter before action,
the debtor will be liable for your costs.
When the debtor receives the claim form from the court, the court proceedings
are officially started. The debtor will also be sent a response pack
to acknowledge or deny the debt.
If the debtor fails to respond to the claim, then you can obtain a judgment
which requires them to make a payment. This also applies if the debtor
disputes the claim but you have firm evidence to defend it (for example
proof of a returned Direct Debit). Your solicitor will handle the application
for judgment. A hearing will take place and an official will judge whether
or not the debtor must pay, in which case the debtor is usually ordered
to pay the debt, interest and costs.
If the debtor still does not pay, they will receive a County Court Judgement
which remains on record. You may then take action to secure payment,
including use of a bailiff to seize goods or a garnishment of salary.
You must do this under the guidance of your legal advisor as both actions
require a court order.
For information of users: This material is published
for the information of clients. It provides only an overview of the regulations
in force at the date of publication, and no action should be taken without
consulting the detailed legislation or seeking professional advice. Therefore
no responsibility for loss occasioned by any person acting or refraining
from action as a result of the material can be accepted by the authors
or the firm.
© Copyright JE Consulting 2008. All
rights reserved.
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