As the cost-of-living crisis continues, small businesses and sole traders are once again battling through tough times.
With more and more small businesses struggling or going out of business, people are trying to make extra money on the side or taking on second jobs to supplement their income.
It’s now more important than ever that businesses can access the advice and support they need to ensure that we all get through these times and survive the current economic climate.
Every person and business is different, so at JMC Accountancy we want to share some of the most frequently asked questions, and the most common issues that we encounter.
Why is bookkeeping important for small businesses and sole traders?
Aside from the fact that you are expected to keep tip-top financial records for HMRC, bookkeeping is the foundation of any company and will tell you everything that is going on in your business.
Every transaction in your business tells you so much information!
Start with your bookkeeping – Good Bookkeeping is the foundation of any business.
Sales invoices will tell you how much of a product or service you’ve sold, to who and how often, and whether they have paid on time.
You can use this to analyse who your best customers are and how to market certain products to them, as well as looking at which products or services are selling the best and often more importantly, which ones are not.
Purchase invoices will tell you how much of a product or service you purchased, and how often. You can use this to look at any fluctuations in prices or if you can get a bulk order discount from suppliers.
You can probably see where I’m going with all of this, but I can’t stress how important and useful this information is for each business. The more up to date and detailed your bookkeeping is, the more accurate and timely your accounts will be.
There is little benefit to financial information that is 9 months old when you are running a business and making daily business decisions. You need to know what happened last week and last month.
Did you make money? What was your best selling product or service? Who was your best customer? Who owes you money?
What to review in your financial reports
I know I sound like I am banging on like a broken record, but good bookkeeping habits will help make sure that your financial reports are as accurate and detailed as possible.
But as a small business or sole trader, why do you need to look at financial reports?!
Financial reports – sometimes called ‘management accounts’ – disclose everything about what’s really happening in your business.
Profit & Loss reports
Profit and Loss (sometimes referred to as a ‘P&L’), lays out the turnover (sales) and expenses of the business over a period of time and more importantly, can show you what is left over as profit. The results can often be surprising.
Review your prices
Knowing what your turnover and costs are, can help you look at your prices.
For example do you need to increase them? When did you last put your prices up? Have they gone up in line with inflation? What are your competitors currently charging?
Review your spending
We don’t often review our spending habits. If there is money in the bank to cover it and the price you are paying seems reasonable, then you need to go deeper than the cost on the bank statement and consider the value that it has on your business.
Try considering the following – Are you really using that piece of software? Was that the best insurance quote you could get? Is your spending out of habit or is it a business necessity?
Review your cash flow
You’ve heard the saying ‘Cash is King’ and it is never more true than in business, well cashflow anyway.
Cashflow is the timing and movement of money in and out of your business, and getting this wrong can have a huge strain on your business.
If you have paid for materials for a job but the client hasn’t paid you, you are not going to have the money to pay for the materials for the next job.
It’s very common for small businesses to overlook their cash flow and minimal spare cash. Monitoring what comes in and what goes out will help you ensure that you are not put in a financial squeeze.
Are you as Tax efficient as possible?
There are other things that could change the tax efficiency of your business such as:
Is your business structure the most tax efficient? Perhaps you are currently a sole trader but it would be more tax efficient to incorporate and become a limited company?
Limited companies are taxed differently to sole traders, so it may be time to look at these options if your business has changed over time.
Registering for VAT
You have to registered for VAT when your business turnover reaches £85,000, however did you know that you can voluntarily register for VAT under the threshold?
In some cases it can be useful as you can reclaim VAT you pay on your purchases. If you need help with your VAT returns our team of accountants are here to get you prepared.
Review your business Plan
As a small business owner or sole trader, you may think it over the top to have a business plan, when in fact it is a useful document as it outlines what you want to do and how you are going to do it.
Even just a one-page business plan will help keep you on track as it can look at things such as:
- Your goals for the business
- Your target market
- How to promote your business
- How are you going to generate income
You can then review this in 12 months time to see if anything has changed. You may have met your goal and need to set a new one, or you may have lost your way and need to understand what the original vision for the business was.
If you would like a one page business plan or need more small business or sole trader advice, then contact us today.