Understand Your Numbers

The numbers in your business can seen scary and intimidating at times, so this blog is here to help demystify some of them and help you put good processes in place. 

Bookkeeping

Bookkeeping is the recording, on a day to day basis, of the financial transactions within your business. It ensures that transactions are captured and recorded correctly so that you can have meaningful financial information. Software is the best way to do this... it might cost you money, but it will save you time. There are lots of options out there, my favourite is Xero. Most software will allow you to link your business bank account to it and then you will have a live bank feed that pulls your ins and outs into the software for you. But, it's not as straight forward as just clicking a few buttons! 

You need to ensure these transactions are recorded correctly and using receipt capture software (ie Apron, Hubdoc, Dext) to pull through all bills and receipts. It also means you don't need to keep stacks (and stacks) of papers as they are then recorded inside the software. Once you have everything linked you can of course DIY your bookkeeping but your focus and expertise is your business and so outsourcing to a qualified bookkeeper will free up time and give peace of mind - it's their superpower after all! And remember - without up to date and accurate books, any reporting you look at within your business will be meaningless - it all starts with getting the basics right.

Income

Income / Sales / Turnover - it's all the same thing. It's the number at the very top and what comes in from your customers and clients. So why do you need to understand it rather than just say "YAY" or "EEK"? If you know what is coming in then you can plan as you can see when it is quiet and when it is busy. This means you can decide if you want to bolster your income in the quieter periods, or have time off or use it work on your business rather than in it. It can allow you to work out what sells and what doesn't so that you can factor that into any new products or launches, and it can allow you to understand your customer and clients better. 

And importantly, it allows you to track it over a rolling 12 month period so that you can keep an eye on the VAT threshold (currently £90k VAT-able income in a rolling 12 month period) so that you know when you need to register so you can proactively plan rather than reactively panic!

Yes, it's a bit of a vanity metric (cash is king after all) but understanding your income can give lots of insights into your business. 

Debtors

Debtors are those who owe money to your business and unless you only have customers who pay at point of purchase then you will have customers and clients who owe you money. Knowing who owes what, and when by, is essential to looking after your cashflow. I recommend that you raise your invoices via your accounting software and that you have clear payment terms and due dates detailed on your invoices plus your bank details - otherwise how will they know when or how to pay? You then need to keep on top of your bookkeeping to ensure that you are matching up your customer payments to their invoices so that when you look at your debtors / aged receivables report you are looking at up to date figures.

Once you are up to date with your bookkeeping and records, I would recommend setting up automatic chasers within your accounting software so that it does it for you, as I know chasing up payments can feel icky at times. And remember - that cash is owed to you and should be in YOUR bank account, not theirs!

Profit

In basic terms, profit is your income less your costs - us accountants then do some "magic" (checking your assets are correctly treated, payments made in advance, later invoices etc) to get the right profit but for getting an idea of how your business is doing then this is going to be "good enough". Once you know your profit you can look to estimate your tax bill and put aside the cash for it (I know, proper adulting!). If you are self employed then once your profits are over the personal allowance, you pay tax at the relevant income tax band (basic rate is 20%, higher rate is 40%) plus National Insurance (basic rate 6%, higher rate 2%) - plus payments on account could impact your payments too.

If you are a limited company and your profits are less than £50k, then your Corporation Tax rate is 19%, so set aside 230%. If your profits are over £50k and less than £250k then your tax rate will be between 19% and 25% - set aside 25% to be safe and if your profits are over £250k then it will be 25%.

Knowing your profits will allow you to plan and budget for your tax bill and also for the next steps of your business.

And remember…

If all this seems too daunting then remember you are the specialist on your business, on your products / services and on your customers / clients. If the numbers are too much for you to do too - then get help - we can't and shouldn't do it all.

Rachael