Category: Finance & Capital

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Finance & Capital

Accounting Periods And Basis Periods For Self Employed Business

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Accounts are required each year for tax and financial control purposes with preset dates by which those accounting records must be submitted and penalties for failure to deliver on time.
While in the UK self employed business can use its own accounting period the tax position can become more complex if the accounts use a basis period rather than the standard financial tax year.
Self employed business in the UK is required to produce a set of financial accounts for a 12 month trading period. The format of the accounts is the personal decision of the proprietor and can be a full set of annual accounts including profit and loss account and balance sheet including using control accounts and cash and bank records and the self assessment tax return.
An appropriate accounting system for many self employed business would not be to prepare a full set of annual accounts but instead to prepare a simple income and expenditure account. Preparing an income and expenditure account allows a much simpler accounting or bookkeeping system where simple accounting software can be used.
The objective of any bookkeeping software being to maintain accurate financial records and produce the accounting records and totals required to complete the inland revenue self assessment tax return each year. Financial control is very important and the bookkeeping software should also produce regular financial statements showing the profit and loss of the business throughout the accounting trading periods.
The financial tax year varies depending upon which country business is conducted. In the US accounts are prepared during an accounting period from 1 January to 31 December each year. In the UK the standard financial year adopted by the inland revenue is from 6 April each year to the 5 April the following year.
In the UK tax rules are set for each financial year and by adopting the standard tax year a small business can benefit by preparing the financial accounts under a single set of tax rules and preparing the self assessment tax return accordingly. Adopting a different financial period involves straddling the official tax year and more than one set of tax rules might be applicable to the tax calculation resulting from the net profit being declared.
After choosing the April to April financial tax year accounts are required to be submitted by the submission deadline of 31 January the following year. Earlier submission is recommended as by submitting the final accounts and tax returns online by 31 October each year the inland revenue will calculate the income tax and national insurance payable.
When a self employed business has been in business for two or three years and has chosen a different 12 month accounting period to the financial tax year the 12 month tax is calculated according to a basis period. Up until that point the accounts may be subject to apportionment to calculate the tax due.
The basis period under which the business tax is calculated is the 12 month accounting period ending in the specific tax year. A business which has a 12 month trading period ending 31 December 2007 would be taxed under the basis period 2007 to 2008 being the basis period 6 April 2007 to 5 April 2008. The same rules apply if the accounting periods are shorter or longer than the standard 12 month period.
If the accounting date is changed by a sole trader the inland revenue are informed of the change on the self assessment tax return and the reasons for the change. If as a result the self assessment tax return arrives late the tax will be assessed on the previous basis period.
Changing an accounting date that overlaps two basis years results in the business being taxed twice for the same accounting profit as the business would be taxed under both basis years. The extra tax paid can be highly unwelcome but can be reclaimed at a later date through the self employed tax return.
The penalty for late submission of the self assessment tax return in the UK is 100 pounds and interest is also charged on any outstanding income tax and national insurance from the first day after submission was due.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Get The Funding for Your Business

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In general terms, the banking industry has turned its back on the small and midsize business owner. Statistically, banks reject 70% of all loan applications that pass over their desks. With the national mortgage crisis continuing to spiral out of control the entire banking industry is under immense pressure and it has tightened its stoic grip on lending standards. Just ask any business owner who is currently seeking financing from large prominent banks and small community institutions. Everyone will tell you that these establishments are simply not extending financing to small and midsize businesses. According to a recent New York Times article, a Wachovia banking executive was quoted as saying, “We’re saying NO to almost everybody” when it comes to small business loans. And frankly, if a business has little history, marginal credit, and no tangible assets they need not apply at all.
The major problem is that business owners are mentally programmed to go to banks when they need money. (After all, these owners have been putting their hard earned money into the banks and the banks have been making considerable profits from the deposits, so it only makes sense for the bank to grant the business owner a loan when it is needed.) However, when the bank rejects the request of the owner, the owner feels there are little or no alternatives for the funding of his business. But, there is an alternative to traditional bank financing and as an informed business owner it is imperative that you understand what options you have.
One of the best kept secrets in American small business is the idea of FACTORING. This financing medium provides an almost limitless source of working capital for growth and is a proven powerful financial source for small to midsize businesses. Factoring, in its purest form, is simply the process of buying the accounts receivable of a company. As a small business owner, it is not financially feasible to wait 30-90 days for payment. But, if we are marketing to large businesses and governmental agencies, these entities expect extended payment terms. If those terms are not granted, the small business owner will forfeit the sale. Factoring allows the small business owner to offer terms of payment and still receive the funds immediately, in essence receiving a net zero term on invoices. With a factoring relationship in place the small business owner can meet weekly payroll concerns, pay taxes and vendors in a timely manner, and purchase necessary materials.
One point that should be duly noted is that this method of commercial finance is NOT A LOAN. The factor actually purchases the invoices. A typical scenario works like this: A business needs working capital for some immediate purpose. The owner contacts a factoring company and a financial relationship is started. When the factor purchases the accounts receivable of the business, the factor directly advances 80% of the invoice face amount at the time of purchase. This means that if $100,000 in total invoices were submitted for factoring, then an initial working capital advance of $80,000 would be provided. The $20,000 balance that is not advanced is called the reserve. The reserve is used as a cushion against potential non-payments. When the reserve is distributed to the business owner, the factor will calculate and deduct any fees for services and additionally will chargeback any invoices that have aged beyond the factor’s normal holding period, generally 60-90 days. The factor’s fees can range anywhere from 1.5% – 3.5% for advances.
Factoring companies are the mirror image of banks. The most important feature is that factors are not lenders, which means that a factor can provide financial assistance to companies that are growing without the traditional restraints of conventional financing. There are no cumbersome applications, no loan committees, and no rigid formalized production. Factoring is quite the opposite. The application process is fast and straightforward. Most factors require only a two-page application and can have funds to the small business within days of approval.
Furthermore, a business owner may consider factoring as an alternative because the business qualifies based on sales, not on assets. If a business generates $1 million in annual sales, it is a valuable operation. However, if it only has $50,000 in hard assets, that business will not qualify for much of a loan. In factoring, the issue is the strength of the receivables being sold, not on the collateral of the business – which is a major criteria for banks.
Another feature of factoring is that since factoring is not a loan, your business will not incur further debt. This is important for startup businesses that want to become “bankable” in the future. With factoring, there is no compromise on your balance sheet, you simply sold an asset.
One last vital element of factoring is that this form of financing is one of the few alternatives for businesses in bankruptcy. Banks cannot be involved with companies in bankruptcy, because they are lenders. Factors are not lenders, they are purchasers.
Any business that invoices another business for goods or services will qualify for factoring. Usually, businesses that are in the startup or expansion mode are the ones that benefit from factoring. But, factoring is designed to meet the needs of any business that has little credit history, is undercapitalized, or lacks tangible assets.
Factoring, as a funding source, works best for businesses in the service sector industry. Businesses such as employment staffing, janitorial, commercial landscaping, advertising agencies, security services, and consulting are prime candidates. These are the businesses that have human resources, but no tangible “loan-able” assets such as real estate, equipment, inventory, buildings or other structures.
For companies for whom bank financing is not a viable option, factoring provides access to cash. Companies in financial need are able to retrieve working capital from their accounts receivable quickly, easily, and without acquiring more debt. Factoring has gained popularity since the mortgage fiasco has overwhelmed the banking industry. Since small to midsize businesses are routinely being denied loans by banks, the owners of these companies have no choice but to at least ask, “What is factoring?”
Now, you know.
If you would like more information about this topic, or to receive a free booklet of “When Banks Say NO!…a Small Business Guide to Factoring” , please visit our website at www.KeyWorldFinancial.com. To schedule an interview please contact Annlette Key at 1-877-539-4321, or email info@KeyWorldFinancial.com

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Entrepreneurs Finance & Capital

What You Can Do About Managing Your Budget And Cashflow Starting In The Next 10 Minutes

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I bet just the very title of this article is enough to make you run for cover! Along with paper piles, budget and Cashflow is another area that can drive solo business owners over the edge! In your corporate days you would have had a bookkeeping/accounting department that took care of all of this for you – they paid the invoices, they tracked the receivables, they tracked the income, and they told you the bottom line!

Now that you’re running your own business you are also the Chief Financial Officer, and it can be very overwhelming. However, it needn’t be… let me share with you three simple steps that you can put in place to manage your budget and Cashflow.

What is a Cashflow projection?

One important area of your Financial Management System is that of a Cashflow projection. Put simply, a Cashflow projection shows whether your anticipated income will be able to cover your expected (projected) expenses and this report is very beneficial to you in your business.

It is an annual report and, if set up correctly, will show you how cash will flow through your business throughout the current financial year. I’ve been using a Cashflow report in my business for many years and find it invaluable. Just recently the chance to participate in a high-profile teleclass series came up, and because I have my systems in place, I knew straightaway that it was something I could take part in!

Step 1 – Create Your Cashflow Report

This is very easy to do using a spreadsheet. Create a column that lists all of your expenses, i.e. office supplies, legal & professional fees, membership, advertising etc. and a column for each month of the year. You will need to create formulae that will tell you your total income, total expenses, and subtracts the expenses from the income, and also carries forward any amounts from month-to-month. This is so you can see how your finances are ‘flowing’ throughout the year.

Step 2 – Input Your Data

Taking your financial data from your bookkeeping system input your actual income and expenses, and list any projected expenses in the appropriate row/column. Your Cashflow report will now show you at-a-glance any time periods for which you will need to be especially aware of. For example you may have a lot of expenses in one particular month so you’ll know that the previous month you’ll need to make sure that you have the funds kept back in your bank account to take care of those upcoming expenses.

It will also show you if you can afford to make an investment in your business, whether that’s signing up for a new service or membership club, taking out an advertisement, or buying new equipment.

Your Cashflow projection can also be used as a budget planner. You can plan out when annual memberships are due and put those in ahead of time. You can also add in an amount for when your taxes are due. This will provide you with a really good feel of how cash is flowing through your business, month after month, throughout the year, and you can also tell how much you can take off for owners draw, but still leave enough to cover the anticipated expenses.

Step 3 – Schedule In The Time

Now that you have your Cashflow report in place, it’s important that you update it regularly so that you can stay aware of how cash is flowing through your business, and take any actions necessary so that you have enough to cover all of your anticipated expenses.
I recommend scheduling in at least 30 minutes once a month to update this critical financial management report.

A Final Thought…

Having an annual Cashflow projection will provide you with all of the information you need so that you can keep on top of your business financially and know where you are.

If you have a bookkeeper taking care of all your financial records for you, ask them to prepare your monthly Cashflow report for you.

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Finance & Capital

How To Keep Your Business Afloat if You are Under-Capitalized

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Article contributed by Luis O. Rodriguez
It has always been said that owning a home is the American dream. Millions of small business owners will argue, however, that owning one’s own business is really the American dream.
While being your own boss offers its rewards, owning a business is not easy. Without a doubt, entrepreneurship has its obstacles which, if not navigated correctly, can keep the dream from being fulfilled. One of these obstacles can be the lack of access to financial resources.
Just as a credit card company will look at your credit score before extending you credit, business lenders rely on a similar credit scoring system to determine your ability to borrow money for your business. But until you’ve developed business credit history within the various business credit reporting agencies such as Dun & Bradstreet, Experian Business, and Business Credit USA, lenders will be reluctant to extend business credit to you. It is for this reason that your personal credit history and personal credit score is so important.
As a small business owner, there are usually three reasons why you need to borrow:

  • The first and most common reason is to purchase assets such as inventory and would be repaid once the new inventory is converted into cash as inventory is sold to customers.
  • The second reason is to replace or repay other types of credit such as money you may have borrowed from credit cards, unsecured lines of credit, or private investors.
  • The third reason is to replace equity. If you wish to buy a partner’s share in your business or need to repay monies borrowed to start your business and don’t have the cash to do it, you may consider borrowing.

Again, if you have been in business for less than two years and have not established credit in your businesses name, then prospective lenders will review your personal credit worthiness and decide whether or not they will lend to you based on your personal credit history and personal credit score.
If you have not already done so, you should perform a “Credit Audit and Verification” on your personal credit file to ensure accuracy of your credit history as well as remove those inaccurate and negative items that you will find. In fact, a study conducted by the PIRG (Public Information Research Group) out of Washington, D.C., revealed the following;

  • 25% of credit reports surveyed contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the consumer.
  • 54% of credit reports surveyed contained personal demographic information that was
    misspelled, long out dated, belonged to a stranger, or was otherwise incorrect.
  • Almost 8% of the credit reports were missing major credit, loan, mortgage, or other consumer accounts
    that demonstrate the credit worthiness of the consumer.
  • Altogether, 79% of the credit reports surveyed contained either serious errors or other mistakes of some kind.

All of these items work to suppress your credit score and when it comes to applying for unsecured lines of credit, business credit cards, and other loans that will ensure your business survival, the higher your credit score, the lower the interest rate you will pay. But even more
importantly, it may stop you from actually obtaining that approval that would continue to allow your business to grow and ensure its long term success.
The latest statistics from the Small Business Administration (SBA) show that two-thirds of
new employer establishments survive at least two years, and 44 percent survive at least four years. In short, a significant percentage of new business start-ups do fail. Again, if you have not established business credit, how do you keep your business afloat and possibly sinking
forever?
You need capital and in the beginning, that capital will be obtained by your personal credit history and your personal credit score. Having insufficient operating funds is a common mistake for many a failed business venture. Business owners underestimate how much money is needed and they are forced to close before they’ve had a fair chance to succeed.
For this reason, it is imperative to ascertain how much money your business will require to survive and you must take into consideration the fact that many businesses take, at the very least, a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs.
To this end, the attorneys at the National Association for Credit Responsibility and Advocacy (NACRA) can help. Through NACRA’s “Credit Audit and Verification” process, we have realized a legal means for addressing flawed consumer credit reports. The difference of having an experienced consumer law attorney working for you through this process is invaluable and will make all the difference in your life, your business, and your financial future moving forward.
ABOUT THE AUTHOR
Luis O. Rodriguez is the Founder and President of the National Association for Credit Responsibility and Advocacy (NACRA), a consumer advocacy organization dedicated to helping consumers recover, rebuild, and then maintain their good credit and good name. He has been interviewed for many consumer articles and websites including Creditcards.com and CCHWallStreet.com.

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Finance & Capital Operations

Identifying and Reducing Cost Generating Friction In Business

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On average 25% of the Total Cost of Doing Business is tied to inefficiencies…the waste of time, energy or materials, and I’ve had many CEOs tell me that 25% is on the low end.
Nobel Prize winner Ronald Coase, of Coase’s Law , says that there is friction/costs involved with being in business.There is the original friction or cost of finding suppliers, employees and customers. There’s the on-going friction or transactional costs, and then there’s the greatest friction of all…the friction of failure.
Prior to entering the training field in 1982 I had a real job as the corporate credit manager for a regional company based in Denver. My duties as the credit manager included the approval of new credit customers and the management (not collection) of past due A/R. I soon found that on average 70% plus of all past due customers had not paid on time due to “something going wrong somewhere.” In the process of fixing things that had gone wrong I found that I could identify areas of opportunity for improvement throughout the entire supply chain thus driving down everyone’s cost of doing business.
The New Guy Only Thinks He Learned From the Old Guy Who Only Thinks He Learned From The Dead Guy:
It may not be so in all companies, but sometimes employees and business managers operate like automatons, they repeat how they do things over and over again until it becomes ingrained, and as with any habit thinking isn’t required. . And all too often CEOs and top management are complicit if not directly responsible.
If you are a business manager pull out your job description, if you’re a CEO pull out your managers’ job descriptions and check to see if it/they say anything about “Constant Improvement”.
A business manager not focused on improvement becomes an administrator at best and a bureaucrat at worst.
Before improvement/change for the better can take place two thing must happen; first there must be an acceptance or acknowledgment that a business doesn’t have to be sick in order to improve, there is always room for improvement.
Then there must be a commitment made as to who will do what when…and the efforts must be tracked and measured.
Change always generates resistance, expect it in others and in yourself. Tell the affected employees of the changes to be made and then ask why the changes won’t work…take notes for this will become a “to do” list.
Keep changes small so that people can succeed, but once they mastered a change introduce the next small change…no stress no change.
And of course pay people for doing what you want done…like thinking and coming up with improvements.
An old axiom says that “People respect (do) what is inspected (measured) not what is
expected” .
Can you imagine the chaos that would result if traffic cops were pulled off the roads? In much the same way business managers need to be told that a primary function of their job is to think, to always be looking for ways to save a step, a minute or a penny…and then they must be measured.
Over the years I found that this method for organizing and documenting the knowledge needed to do things as right as possible the first time… worked with any business function.
The Five Organizational Ps
Purpose: Every business function must have a clearly stated purpose which answers the question, “Why incur the costs that go with the function?”
Policies: Goal driven guidelines for each major component within the function.
Process: The step by step method for achieving the goals established by the policies.
People Requirements: The right people for the job based on the process.
Process Monitoring and Performance Measurements: Monitoring key steps in the process to ensure quality and measuring against the goals established by the policies.
If the established goals are not achieved either the process is wrong or you have the wrong guy in the job.
Financial profit is necessary for any business to stay in business and the best way to improve on profit is to do things as right as possible the first time. We will never achieve perfection because things keep changing and that’s why Policies and Procedures are never done and we need to place a cover sheet on them that says “UNDER CONSTRUCTION”.
One Size Does Not Fit All
Every person on the planet sees things differently, His Holiness, The Dalai Lama says that there are six and a half billion of us and six and a half billion versions of reality and if you’re married you know what the Dalai Lama is talking about…it’s the same with companies. Businesses are a collection of many different people, none of whom define the business but collectively they make up the business. And what works at one company may not work at another… every company and it’s people are unique . The process for best business practices must be based on each company’s understanding of what is… is.
In Closing
It was time to rotate the tires on the pick-up and for an oil change and lube, I knew it was time because of the sticker on the corner of the windshield. I’ve learned it’s best to make an appointment rather than just show up at the tire place and have to wait if they’re busy…guess what? …no phone number on the sticker. This is a national tire chain and yet I had to wait and remember to look up their phone number when I got home. If I had been able to call them from the pick-up at the time I’d noticed the sticker I’d might have been able to get in sooner, and at my age they were lucky I didn’t space it out altogether. I mentioned all this to the asst. manager when I was checking in and he got it at once…he pulled out a note pad and wrote it all down saying as he did so ,”This is one for corporate, we all use the same stickers.” Good for him…now lets see if Big O corporate gets it.
When people are told that on-going improvements are desired and that they will be measured on coming up with them, they become different people.
They find that they are capable of thinking outside the established box and that it gives far more meaning to their work lives, than just a paycheck.
And it drives down the cost of doing business for everyone in the supply chain.

AbeWalkingBearSanchezPhoto.jpgAbe WalkingBear Sanchez is an International Speaker / Trainer / Consultant on the subject of cash flow / sales enhancement and business knowledge organization and use. Founder and President of www.armg-usa.com, WalkingBear has authored hundreds of business articles, has worked with numerous companies in a wide range of industries since 1982 and has spoken at many venues including the Shakespeare Globe Theater in London.