The FreeAgent Blog

haunted house on hill

Have you discovered any unwanted ghosts lurking in your books this Halloween?

If so, you may be tempted to leave them alone, and hope that they just quietly disappear. But beware! This may be a dangerous move for your business, as some of these ghosts could come back to haunt you later in the shape of wasted time or, even worse, an increased tax bill.

Emily Coltman FCA, Chief Accountant to FreeAgent - who provide a multi award-winning online accounting system specifically designed for small businesses and freelancers - gives her top tips to exorcise the ghosts already in your books and prevent them from returning!

Cast out any errors in contact balances

Do you have any customer or supplier accounts showing a balance due, when there really isn’t? This can often happen if a customer overpays you by a couple of pounds, or if you end up paying a supplier less than they charged you.

You’ll only be able to remember the reasons for these mismatches for so long, after which it’ll be much harder to put them right. Later on, you could find yourself having to pay extra, or to keep manually altering your customer statements so as not to show the mistake.

How to exorcise this ghost:

Correct your accounts with credit notes or additional invoices, and tie up the payment differences to these credit notes and invoices.

And if you ever get another payment mismatch, remember to correct it in your books straight away to stop that ghost coming back!

Put unexplained transactions to rest

When you don’t know how to categorise a transaction in your account, you may leave it unexplained, thinking “I’ll come back to it later”. The problem is, if you leave it too long, you may have forgotten what the transaction was, and in the meantime, your books can’t give you a true picture of what you’ve earned and spent.

How to exorcise this ghost:

Set aside some time to go through your paperwork, your email inbox and anywhere else where you might have information about what these transactions are. Explain all of them - then banish the ghost for the future by explaining all your new transactions straight away - it’s worth the extra hassle!

If you’re not sure where to put a particular transaction in your accounts, check with your accountant.

Dig up forgotten VAT queries

When you’re explaining a transaction, you may not be sure of whether it has VAT on it to reclaim, or whether you can reclaim the VAT you can see on the receipt. If you reclaim the wrong amount of VAT, then you risk paying too little money to HMRC, which can result in you being charged interest and penalties.

How to exorcise this ghost:

If you have a few of these transactions, ask your accountant to spend some time with you going through your queried items and making sure you have reclaimed the right amount of VAT on each one.

Protect your business from this spectre in future by checking with your accountant as soon as you have a query, or even putting together a “cheat sheet” with your accountant for regular transactions. You can ask your accountant to check your quarter’s transactions before filing your VAT return.

Banish your banking backlog

If you’re uploading your bank transactions, it can be easy to miss out a week or a month. Without these transactions, you won’t have complete information about how your business is doing, and you could pay the wrong amount of tax.

How to exorcise this ghost:

Double-check that you’ve uploaded (or manually entered) all of your transactions. If you’re using FreeAgent, you can also set up automatic bank feeds, so that your transactions pull through into your accounts with little or no effort required on your part.

Resurrect buried expenses

If you travel on business, you will almost certainly spend some of your own money on business costs while you’re out and about, such as a train ticket or car parking. Do you always remember to include those expenses in your accounts, or are they buried under paperwork on your desk? They may feel like small amounts, but we’ve found that one third of small business expenses are under £10. These small amounts could total to a big portion of your expenses, but many small business owners don’t record them, and so can’t benefit from any tax relief.

How to exorcise this ghost

Send that ghost packing by setting aside some time to go through the pile of receipts in your wallet or purse and posting those which relate to your business costs into your accounts. Don’t forget that FreeAgent lets you do this using your mobile phone!

You can keep this ghost away in the future by posting your receipts into your accounts as soon as you incur them. Your smartphone is the ideal tool to use here. Why not make use of the time you spend on the platform waiting for your train by photographing your ticket and recording the journey in FreeAgent? That way, if the barrier at the other end swallows your ticket, you already have proof of the journey to show to HMRC.

Remember that your accountant is also your best friend in this fight against the ghosts in your books. Enlist their help as a ghostbuster, to make sure these ghosts never return! A ghost-free set of books gives you accurate timely information to help you make the best choices about your business’s future.

Emily Coltman FCA is Chief Accountant to FreeAgent, who provide a multi award-winning online accounting system specifically designed for small businesses and freelancers. Try it for free at www.freeagent.com.

Customer feedback is the lifeblood of any business; if you don’t know what your customers think about you, it’s incredibly difficult to know what’s working and what isn’t. But what are the best ways to gather insights from your customers? Here are four strategies that successful companies followed to get great customer feedback and adapt their businesses.

Do you know a great way to get useful feedback from your customers? Hit us up on twitterand let us know!

In the final part of our series on some of the tools that can help you review the health of your business, our Chief Accountant Emily explains “debtor days”. This is a ratio that indicates how quickly your customers pay you.

The smaller this figure is, the better, as it means that your customers usually pay you quickly. If your debtor days figure is higher than the number of days’ credit you give your customers, then you certainly need to improve your credit control, possibly by using a tool like FreeAgent’s automatic invoice reminders.

To work out your debtor days, take your business’s trade debtors figure from the end of a 12-month period. You’ll find this on your balance sheet.

trade debtors on balance sheet

Then divide that by the business’s sales for the previous 12 months, which you’ll find on your profit and loss account.

turnover on profit and loss account

Multiply the result by 365 to give your debtor days.

This business’s debtor days figure is £23,362 / £61,558 x 365 = 139.

This means that, on average*, the business’s customers take 139 days to pay outstanding invoices, which is a long time! This business needs to get busy collecting its dues from its customers.

If you haven't already, why not check out Emily's earlier posts in the series, where she explains how liquidity ratios and the break-even point can help you to review the health of your business.

*Remember that as this is an average figure, it may be distorted if, for example, you received a big order from a customer just before the end of the year

In the second part of our series on some of the tools that can help you review the health of your business, our Chief Accountant Emily explains the break-even point.

So what is the break-even point?

In a nutshell, the break-even point is the point where a business’s costs are equal to its sales. When an accountant checks through your financial information it’s likely they’ll use this to see if your business is healthy.

The break-even point is also often used in planning. If you have a profit and loss account from a previous period, and you know that your costs are about to increase, perhaps because you’re taking on a new member of staff or renting a larger workshop, you can use the break-even point to make sure your income from sales will still cover your increased costs.

You might also want to allow for reduced sales. For example, time spent training a new staff member is time you can’t charge your clients for.

Calculating your break-even point

So how do you work out your business’s break-even point?

Here’s a profit and loss account generated in FreeAgent.

profit and loss account

The gross profit margin in this example is 88%, which is worked out as (sales less cost of sales) / sales = (£61,558 - £7,608) / £61,558.

To work out your business’s break-even point, add up all its overheads, and divide that figure by the gross profit margin. Remember not to include cost of sales, because you included those in the gross profit calculation.

For this business, (£19,358 + £11,454 + £2,299 + £59 + £2,013) / 88% = £39,981. This is how much the business needs to earn in sales to break-even. The business has earned almost half as much again and therefore has nothing to worry about in the short-term, and could potentially plan growth, for example an office move or recruitment.

In the third and final part of this series, Emily looks at “debtor days”, a ratio that indicates how quickly your customers pay you.

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