3 Ways To Manage Your Business Effectively

by | Mar 13, 2018

Management is all about managing in the short term, while developing the plans for the future.

Jack Welch

We are managing and thinking about our businesses all the time.  I’m attending an Added Value Solutions Ltd (AVN)) intensive 3-day master class this week to give me the opportunity to concentrate on my business.  We all need to spend this time to help us move our businesses forward.  In this blog, the specific areas I’ll be looking at are using management accounts, considering VAT registration and thinking about your exit strategy.  These are all areas you need to consider in order to manage your business efficiently and proactively.

Management accounts are a planning tool for your business and will help to make it more successful.

A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.

Brian Tracy

The Gift of Self-Confidence

You need a plan otherwise your business will lack direction. You need to keep a regular eye on the company’s figures otherwise you may not recognise that your pricing is too high or that your profits are lower than you thought even though turnover is high.

Information needs to be timely – basing your decision on end of year accounts is too late as you aren’t in a situation where you are predicting what to do next but in fact fire-fighting a situation which has occurred.

Information needs to be the correct regularity for you and your business – this can be monthly, quarterly, 6-monthly, or whatever suits you, but at least 6-monthly and means you are keeping an accurate eye on what’s going on now and what you need to do.

Management accounts are basically a profit and loss account and balance sheet at a particular point in time. The budgeted figures are compared with the actual figures and any variances (differences) are investigated.

Management accounts can be prepared using software or spreadsheets. If you’re asking your accountant to prepare them, make sure he/she knows what the important figures are that you need highlighting, e.g. labour costs, net profit, advertising, corporation tax.  Which numbers are important will depend on your particular business; for example, the ones to highlight will be labour and fuel for a transport company.  But for a catering company, this will be labour and raw material costs.

How management accounts will help you to achieve your goals:

  • By planning
  • By preparation
  • By encouraging you to be more forward thinking
  • By helping you to see the next step you need to take to reach your goals.

Management accounts are useful for a business as they:

  • give a summary of significant figures,
  • highlight differences between actual and budgeted figures, and
  • focus your mind on moving your business forward.

Work through the action plan at the end of this blog to see how management accounts could help your business.

Maintaining management accounts will help you to know when you reach the turnover figure that means you need to be VAT registered.

Why become VAT registered?

Value Added Tax (VAT) is charged on the majority of goods and services provided by VAT registered businesses in the UK, as well as certain goods and services that are imported from non-EU countries and those imported into the UK from other EU countries.

VAT registration is a voluntary measure for any small business with a taxable turnover of less than £85,000 for the previous 12 months of trading, but above £85,000, it is mandatory.

Advantages of becoming VAT registered (whether voluntary or legally required)

  • VAT can then be reclaimed on most goods or services that are purchased by the business.
  • Being VAT registered can give the appearance that your business is bigger than it actually is. So if you are trying to give the impression that your business is a large established one, then becoming VAT registered will benefit you.

Disadvantages of becoming VAT registered

  • You suddenly make your goods and services 20% more expensive to customers who aren’t VAT registered.
  • You could end up with a large VAT bill from HMRC if your business has generated more VAT from goods and services sold, than VAT paid on goods and services purchased.
  • It adds to the admin side of your business. You have to keep records of all VAT invoices and receipts, maintain accounting records and submit a return every three months.

VAT schemes

When registering for VAT, think about when you want your VAT quarters to end. It is always easier for your accountant if your year-end date is the same as the end of a VAT quarter.

There are several VAT schemes to choose from (here are some) and it is important to choose the right one for your business:

  • Standard VAT
  • Cash Accounting Scheme
  • Flat Rate Scheme
  • Annual Accounting Scheme

All schemes except for the annual accounting scheme require quarterly returns to be made.

Once you are registered

You must keep accurate records of sales and purchases. If you have a significant number of transactions, it is worth investing in a computerised accounting system. HMRC can visit your business to inspect your record keeping and charge you a penalty if your records aren’t in order. You must keep your records for at least six years.

You should ensure that each sales invoice has a unique number. You should also quote your VAT number on each invoice.

You must keep copies of your VAT returns and the proof for each one. You will need these in the event of an inspection.

Always ask for VAT receipts for any purchases that you are reclaiming VAT on. Some businesses may not be VAT registered and you cannot reclaim VAT on these purchases.

You cannot reclaim any VAT on entertainment expenses, and there are special rules for working out how much VAT to reclaim on motor expenses and staff travel expenses. For more information, go to the HMRC website.

Some items are outside the scope of VAT, such as staff wages and payments to HMRC for Pay as You Earn (PAYE), National Insurance Contributions (NIC), Corporation Tax and VAT. These should not be included in your VAT return. Other items that should be excluded include road tax, MOT costs, rates, loan repayments, drawings and dividends paid.

If you choose to use spreadsheets to keep your records, it is worth considering using the example below as a template:

Record keeping spreadsheet template example

If you import goods from non-EU countries and use an agent to deal with the declarations and import duty and VAT payments, you will receive a form C79 each month. This form shows the import VAT paid that month which should be included on your VAT return. You must keep these forms as they are the proof for your VAT reclaim.

Moving goods between EU countries is much simpler and the VAT return form has specific boxes for recording the sales and purchases figures.

Exit Planning

It’s easy to concentrate on spending your time helping your business to run smoothly. Of course, this is essential as it’s your livelihood, but it’s also crucial to think long term.

Peter Gray, Partner at Cavendish, a consultancy that helps businesses to find buyers, states that exit planning needs to be thought about 3 to 5 years prior to selling a business.

Maybe take some time to think about it now, answering the following questions:

  1. When would you like to retire?
  2. Do you want to retire in one move or plan ahead and do it in a specific amount of years?
  3. Do you want to ease yourself out of the business over a few years?
  4. Are you emotionally ready to let go of your business?
  5. What will happen to your business when you retire?
  6. Will you sell your business to an outside buyer or will it be passed to your family/children?
  7. What do you plan to do when you retire?

If you are thinking of passing your business on to your family, then you need to consider whether this is the correct course of action.

  1. Is this something you would like to happen but you haven’t asked your family/children?
  2. Is this what they want to do with their life?
  3. Are they interested in your business?
  4. Do they have the necessary skills?

As Elizabeth Bagger, Executive Director of the Institute for Family Businesses, states:

The process must always be about answering questions like “what are we in business for?” and “what must we do to achieve our plans?” Framing it like this forces owners to assess the skills they have or don’t have, and who might need to come onboard. Only then is the emotion removed, and bosses can look at other solutions like employee-ownership, new management, buyouts or the family taking a side role on a family board.

Effective exit planning needs to start early and take into account a whole range of issues in order to maximise the value of the business when you sell.

What can you do now to get ready:

  • Timing — What will be the right stage in the business lifecycle to get the most interest from potential purchasers?
  • Getting organized — Make sure all your paperwork and records are tidy and easily accessible.
  • Systems — Are management systems, legal agreements, and so on, robust?
  • Tax — What will be the most tax-efficient way to extract money from the business?
  • Premises — How are they looking? Do they need to be spruced up?
  • Adding value —Is there anything it would be worth doing now to add value? For example, would you need planning permission for future expansion?
  • Keeping going — Don’t start slowing down yet. In order to make your business attractive, you need to work harder.
  • Your current role in the business — At the moment, do you have holidays? Who covers for you when you are away? Do you need to start delegating more of your duties and give your staff more responsibility? It’s a good time now to start reducing your day-to-day involvement with the business.

There are many areas to think of when managing your business and making it successful – from using management accounts, to VAT registration, to thinking of your exit strategy. Lots to think about as always! Here is a table to complete to help you use management accounts for your business.
 

Management Accounts Action Plan

No Item Action
1 Using management accounts will help me to:    
  Save time
  Plan
  Set strategies to achieve my goals
  Prioritise in order of importance

(1 being most useful)

 

2 I will start using management accounts from:
3 Management accounts will be prepared:

Monthly/quarterly/half yearly

(Delete as appropriate)

4 They will be prepared by:

Me/my bookkeeper/my accountant

(Delete as appropriate)

5 The numbers to highlight are:
  Turnover
  Gross profit
  Net profit
  Labour costs
  Advertising
  Corporation tax
  Other
  Other
 
6 I will review my management accounts compared with my budget each month/quarter/half year, starting on:
7 I will investigate all variances (differences) between the actual figures compared with the budgeted ones £

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About Anna Goodwin

With over 30 years’ experience in delivering an exceptional accountancy service, and more than 12 years of being in business herself, Anna Goodwin knows small businesses, how they work and also the highs and lows that come with self-employment. It’s hard work but also immensely satisfying and this has inspired her to enable more of you amazing people out there to succeed at what you do!

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