cost control

How to control costs

cost control

Cost control is different from cost cutting. Learn this financial discipline to keep a lid on your costs and improve profitability.

Not to be confused with cost cutting, cost control is all about financial discipline and it involves planning, managing and preserving your financial resources. It's good practice to follow in both good times and bad – and if you control costs consistently well over time, your business should benefit from a stronger operating position and better cash flow leading to a rise in the company’s current assets (such as more cash in the bank), which will undoubtedly strengthen the value of your company and its financial position.

In this article, our chartered accountants for small businesses in London aim to discuss all you need to know about cost control, including:

  • The difference between cost control and cost cutting
  • Cost control applications
  • Who should be involved in the exercise
  • Top tips to control costs
  • Quick wins
  • Habits to help you succeed

The difference between cost control and cost cutting

The main difference between cost control and cost cutting is that cost control is about the management of costs while cost cutting focuses on lowering costs.

Cost control is also about discipline and stewardship exercised throughout the business journey, during both good and bad times. Cost cutting, on the other hand, tends to kick in when the business is going through a rough patch and you want to save as much as possible.

Cost control is applicable to direct and overhead

Broadly speaking, costs can be categorised into direct and indirect. Direct costs are costs attributed to the production of specific goods or services.
Indirect costs or overhead costs, on the other hand, are ongoing expenses associated with running a business.

Here is a quick example – assuming you are a small publisher producing atlases to colleges. Your direct costs are cartographers, designers, printing, storage and the delivery charges from the warehouse to your clients. Your indirect costs are office rent, an e-commerce site to take orders, phone lines and emails to communicate with your clients, staff to support and market the products, among others.

Cost control can be applied to both direct and overhead costs. For example, you may engage freelance cartographers when possible and negotiate with your printer for a better deal to manage your direct costs. When it comes to controlling overhead expenses, you can choose to modernise your e-Commerce site and marketing efforts, implementing referral programmes that only cost you when a sale is realised.

Who should be involved in cost control?

Contrary to cost cutting which is usually a top-down approach, cost control involves your team members liberally, particularly your managers. Your employees are more likely to cooperate if they can understand how cost control can benefit the company and also themselves.

Here is an example – a client has three bank accounts in three different currencies and in the past, their in-house bookkeeper spent almost £1k a year on bank transfer fees because no one was ‘thinking about such small costs’. When the company director decided to make financial discipline as part of the corporate culture, ideas started to flow. The bookkeeper switched to using an online money transfer service when paying overseas suppliers and the company immediately reduced its bank fees significantly.

It is also possible to involve your suppliers as part of the cost control exercise. Once your suppliers know that you are taking a proactive step to control costs, they are likely to share with you options that can help lower your bills.

As cost control starts with a careful review of financial data, naturally you want to involve your accountant too. Talk to one of our small business accountants in London if you are looking for someone who can help you identify under-performing cost centres and suggest ways to reign in control.

Top four tips you can take to control costs

1. Reviewing the variances between actual costs and budgets

The main purpose of budgeting is to reduce careless spending and improve profits.

Every month our small business chartered accountants share a vital set of financial data called the management accounts with our clients. Among them is a document called budget variance which tracks how much you have budgeted to earn and spend in a particular month versus how much you have actually earned and spent during that period. Ideally, you want the actual figures to be as close to the budgeted figures as possible, as they indicate good planning, good execution, and less careless spending.

It is worth pointing out your budgeted figures must be realistic, based on historical data and market trends. For example, you shouldn’t expect to sell £10k worth of Christmas decorations to consumers in March (unless the figure is after some massive discounts). Equally, you can’t have a budget of £1k a month for marketing but choose to splurge on TV commercials.

2. Enhancing internal processes

Many businesses have their own set of procedures created years ago and some of these are so set in their ways to the point that no one questions if they are still relevant. Review every part of your internal processes and make the necessary changes to increase efficiency.

For example, your staff may still spend time on endless meetings, often involving everyone in the team and each meeting has a designated note taker. In reality, many companies have started to streamline meetings with clearly defined expectations and use apps to take notes.

3. Focusing on quality

Quality control is an essential tool in manufacturing, not just in producing an excellent product, but also in refining the production process as it can lead to zero wastage. Even if you aren’t a manufacturer, you can still apply the same principle to every product and service you offer.

Once you start to focus on quality, you will see an increase in satisfied customers, which is likely to lead to more sales and referrals. Together, they will create a positive feedback loop that will yield more favourable results, such as higher quality that will enhance value and allow you to potentially differentiate and charge higher prices to more customers.

4. Be well prepared

No business is risk-free and yet surprisingly, many small business owners aren’t prepared for the associated risks, let alone having robust plans to manage an uncontrolled loss of something valuable.

Risks that can affect a small business may include economic risk, compliance risk, financial risk, operational risk, fraud risk, reputation risk, and competition risk.

For instance, business owners know that the economy can fluctuate between periods of strong growth and weakness. As a business owner, you must be able to analyse the changes and trends pertaining to your industry. Your business must innovate, evolve, and adapt to stay relevant. Also, it is wise to set up a rainy day fund to tide the company over during an economic downtown.

A few quick wins

Controlling costs should not be a burdensome exercise and here are some easy savings you can make immediately:

  • Finding alternatives to lower bank transfer fees – plenty of online money transfer services now charge less for each transaction than your bank.
  • Using cloud computing – subscription-based or pay-as-you-go software and data storage remove expensive infrastructure in-house. At Tax Agility, we work with Xero, cloud-based accounting software that streamlines many common accounting processes, saving you time and money.
  • Eliminate unnecessary costs – unneeded insurance, unused telephone lines, subscriptions that your staff don’t use, hiring staff when outsourcing can do the work, these are some costs you can eliminate immediately.
  • Negotiating with your suppliers – apart from asking for discounts and better payment terms from your current suppliers, find out if there are alternatives. Also, look for alternative suppliers where possible.
  • Rejuvenating your marketing programmes – try new approaches such as rewarding your loyal customers when they refer other buyers to you.
  • Maximising your staff’s skills – many modern offices look for staff who can step up and be responsible for a variety of tasks. For instance, a marketer today should be able to manage a CRM system, design a newsletter, write compelling product descriptions, know how to take good product pictures and publish them online, among other tasks. If your marketer can only do limited functions, consider training and encourage them to grow, or find somebody who can.

Good habits can help you reach your goals

Financial discipline is about being consistent in your approach when it comes to planning, managing and preserving your financial resources. It is definitely not a one-time exercise. To be successful in cost control, you must be able to plan, set realistic goals, review results and spend time to sharpen your financial knowledge regularly.

At Tax Agility, we know that not every small business owner has the time to plan and interpret financial data, this is why our small business accountants are ready to assist. Our biggest strengths are in number crunching and applying solid financial principles to help you create and maintain the economic value for your company. So give us a call on 020 8108 0090 when you are ready to instil some financial discipline into your business.

Tax Agility can help you to control costs

Cost control often starts with a careful review of your major cost centres – your direct costs, sales and marketing, finance and administration, IT support, legal costs, to name but a few – over a period of six to 12 months. After that, you proceed to rank each cost and identify areas where savings can be made.

Your accountant is vital to your cost-control effort. At Tax Agility, our small business accountants have the experience to help you review your financial data and suggest ways which you can take to manage your costs and improve profitability.

We have three offices – in Putney, Richmond, and also at Cavendish Square in Central London – conveniently located to assist company directors and owners across London with a complete range of financial and business services, including Accounts & bookkeeping; Payroll management; Management consultancy; Personal tax planning and many more.

Call us today on 020 8108 0090. Alternatively, use our online form to arrange a complimentary, no-obligation meeting.

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.


A living room interior

Changes to Capital Gains Tax on the disposal of residential properties

A living room interior

From 6 April 2020, disposals of certain residential properties must be reported and with any Capital Tax Gains tax due paid within 30 days of completion.

Before 6 April 2020, if you sold a residential property in the UK and made a gain, you would be required to report and pay Capital Gains Tax when you were ready to submit a Self Assessment tax return. As many property owners knew, the length of time between the disposal and the deadline for filing Self Assessment could be a year or even up to 22 months. This meant some owners might have forgotten about the transactions and failed to pay the relevant Capital Gains Tax due many months down the line, leading to penalties.

Accordingly, HMRC has now launched a new regime which brings forward the reporting and payment of Capital Gains Tax on disposals of certain residential properties. In this article, the Tax Accountants at Tax Agility outline the changes and encourage property owners who plan to sell their buy-to-let residential properties across London, Putney, Richmond and in Surrey to come and discuss the implications of this regime and Capital Gains Tax with us.

What are the new rules

In essence, all UK residents who sell a residential property (like a buy-to-let property) and make a gain of more than £12,300 (the tax-free allowance for 2020-21) will need to report to HMRC and pay any Capital Gains Tax due within 30 days of completion. Subsequently, you will also need to disclose the transactions on your Self Assessment tax return for the relevant tax year, usually on 31 January after the end of the tax year for most people.

To be sure that you can report within 30 days, you must have a government gateway account ready, along with information that allows you to calculate the gain. HMRC has confirmed that computations can be attached when you file the report. If you don’t have enough information to compute the gain, then you must give the best available estimates and amend the Capital Gains Tax return within 12 months.

If you make a loss, like you sell the property less than what you have paid for, then you do not need to report to HMRC within 30 days unless the loss is expected to be used against other gains made on other residential property disposals later in the year.

It is also worth noting that this new reporting requirement applies to each taxpayer rather than for each property.

Exceptions

  • This new Capital Gains Tax regime excludes no gain/no loss transfers (like transfers of property between spouses and civil partners), charities, pension schemes and companies.
  • It also excludes disposals that realise a gain that is relieved to leave no tax liability such as selling of one’s main residence.
  • Any gain made that is equal to or less than the Capital Gains Tax annual exempt amount (£12,300 for 2020-21) is also not in the scope.

Penalties

If you don’t report the transactions and pay the Capital Gains Tax due within 30 days, the penalties are:

  • £100 initial late filing penalty,
  • Further penalty if six months late, which will be 5% of Capital Gains Tax due or £300, whichever is greater
  • Interest will also accrue on late payment

Complicated scenarios

Tax is a complicated subject and you are likely to find yourself in a situation where you aren’t quite sure how the rules apply to you. Talk to one of our Tax Accountants if this is the case by calling 020 8108 0090 today. With offices in Central London, Putney, Richmond and in Surrey, we have helped many families and taxpayers by giving them independent and trusted tax advice.

Here are two examples of how we can help pertaining to the changes to Capital Gains Tax from 6 April 2020.

Example 1: Multiple owners on a property

If you and your spouse jointly own a buy-to-let and each of you stands to make a gain of £50,000 after selling it, then each of you must report it individually as this new regime applies to each taxpayer rather than each property, unless the property is transferred first into the sole ownership of a spouse on a no gain/no loss basis.

Example 2: Computing gains

Calculating Capital Gains Tax requires information such as brought forward losses from previous tax years. We can also help to gather information such as length of ownership, base cost, costs of improvements, incidental costs, among others. While losses realised on assets that have not been reported cannot be deduced from the residential property gain during computation, we can help you to include them (and other losses made throughout the year) when completing your Self Assessment tax return, thereby reducing your tax liability.

Tax Agility can help with Capital Gains Tax

At Tax Agility, we believe in providing solid tax advice that complements your investment strategies and saves your hard-earned cash. Make use of our free initial consultation so we can understand your situations and make the appropriate recommendations.

If you will soon be selling your buy-to-let and these new Capital Gains Tax changes are likely to apply to you, give us a call on 020 8108 0090 or contact us via our Online Form to kick-start the conversation today.

 

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

 


How can management accounts be used effectively?

Produced monthly or quarterly, management accounts contain financial data that business owners can use to make decisions.

As a small businesses owner, success is always on your mind and amid your busy schedule, you are likely to receive a set of financial reports from your accountant every month or every quarter. These are management accounts and their purpose is to give you a snapshot of the business activities. The data also allow you to find out how healthy and resilient your business is – for example, is your business running efficiently? Does it have enough cash to pay its bills? How much working capital should you retain in your company?

At Tax Agility, our chartered accountants for small businesses in London send out management accounts to our clients regularly. What goes into each set depends on the clients and their business activities but typically each set may consist of:

  • Executive summary
  • Profit & Loss
  • Budget variance
  • Balance sheet
  • Aged receivables
  • Aged payables
  • Cash summary

In this article, we aim to discuss some vital data in management accounts that require the attention of small business owners.

Executive summary

An overview of your financial information, this shows the performance of your company, income and profitability in a given period.

Profit & Loss

P&L for short, a Profit & Loss account shows your company’s income minus its expenses. The income can be from sales or other sources like interest earned. On the other hand, expenses can be directly linked to your sales (known as cost of sales) or they can be general operating expenses like rent, insurance and office supplies.

If your income is greater than your expenses, then you have a net profit. But if your income is less than your expenses, then you have a net loss.

It must also be noted that your net profit (or net loss) does not equate to the cash your business has in the bank. For instance, last month you sold a dozen of office chairs to a dozen of clients and they are recorded in your P&L, but only half of them have paid you. The money owed to you by customers who have yet to pay is considered accounts receivable and it is recorded in your balance sheet which we will explain later.

A typical P&L usually has the following components:

  • Income
  • Cost of sales or cost of goods sold
  • Gross profit (income less cost of sales)
  • Expenses, anything from rent, national insurance, IT support, legal expenses to subscriptions
  • Net profit or net loss (gross profit less expenses)

How is the P&L account useful?

1. Determine efficiency

Gross profit (the difference between your income and cost of sales) is an indicator of efficiency. If your gross profit is high, it means your business is keeping more money from each sale made and is efficient.

2. Determine profitability

If your business is recording a net profit, you know that your business is selling products or services that are desirable and well-received, your price structure is right and your expenses are controlled.

3. Work out tax payable

All taxable profits made by your company are subject to corporate tax (the rate is 19% at present).

4. Work out dividends

Many small business owners draw a low salary and use dividends to make up the income. If you are taking this approach, you can only declare dividends to you and your fellow shareholders after the company has paid its corporation tax.

Budget variance

The budget variance shows you the original budget versus what was actually earned and spent in a specific period. Ideally, you want the actual figures to be as close to the budgeted figures as possible.

How is the budget variance useful?

1. Identify issues

Assuming December is a good month to sell toys and accordingly, you have a healthy £10k budget for toy sales in that month. But when January rolls around, you realise that toy sales were only £2k in the previous month, well below the £10 budgeted figure. In this case, the sooner you find out the reasons, the better it will be for the business.

2. Minimise careless spending

Assuming your marketing budget is only £1k a month, you are not likely to splash out on TV advertisements without knowing what positive results they can bring. Instead, you are likely to use the budget wisely, such as using the money to target online shoppers or run advertisements in your local areas.

Balance sheet

A balance sheet shows you what your business owns (assets) and what it owes (liabilities) at a given moment in time.

Assets

Assets are divided into current (items of value that can be converted into cash within the next 12 months) and fixed (items that cannot be converted into cash quickly). Examples of current assets are cash, accounts receivable and inventory while examples of fixed assets are equipment, vehicles and goodwill.

Liabilities

Liabilities are financial obligations that the business must fulfil. Liabilities are divided into current (bills that the business is expected to pay within the next 12 months) and non-current (bills that the business cannot settle within the next 12 months). Examples of current liabilities are accounts payable, PAYE payable, wages, pensions, VAT, among others. Examples of non-current liabilities are long-term loans and deferred tax (deferred tax usually happens when your financial year does not match the tax year).

Equity

For a limited company, the first line under equity is usually capital, which means the purchased shares. The next lines are current year earnings (net income or loss of the business for the current year) and retained earnings (reserves of profit made in previous years). Total equity refers to the assets left in the business after it has paid its bills and you (the shareholder) can have a claim to.

How is the balance sheet useful?

1. Compare performances

If you compare the numbers between two specific time periods, you can see if the business has performed better or worse. For instance, last month you had £10k in your net assets versus £2k a year ago, this means your business is doing better when compared to the same period a year ago.

2. See how the business is being funded

The formula for debt to total assets ratio is total liabilities divided by total assets. If the ratio is high, it means the company relies on borrowed money and money owed to others to operate, which is worrying.

3. See if the business can meet its financial obligations

The formula for liquidity ratio is total current assets divided by total current liabilities. Assuming your total current assets are £50,000 and your total current liabilities are £10,000, you have a ratio of 5, meaning you have £5 to cover every £1 owed, sufficient money to meet all short-term obligations.

Aged receivables and payables

Aged receivables or aged debtors show outstanding amounts your clients have yet to pay you. These invoices are usually outstanding for 30 days or more. In England, small business owners are painfully aware of the negative impact of aged receivables – they limit your growth and development, which in turn can put your business in jeopardy.

Aged payables or aged creditors, on the other hand, show you which suppliers your business owes at a particular time and how much you owe them.

Cash summary

Sometimes the management accounts also include a cash summary – information about your cash flow like how much money is leaving your company and what is coming in for a selected period. Ideally, you want the inflow of cash to be greater than the outflow, otherwise you will have something called a cash flow gap.

Cash summary is a powerful tool as the data allow you to rethink your budget and reallocate your resources. For more information about cash flow management, this article "Five ways to improve your company’s cash flow" will make a good read.

Sharpen your management accounts with Tax Agility

At Tax Agility, we have been championing small businesses across London since 2008. Our team of chartered accountants for small businesses work closely with our clients and our objective is to help your business grow.

Knowing that you are busy, we run management accounts for you and explain the key findings clearly, some of the things we look for may include:

  • Compare your original budgets versus actual
  • Check if your business is operating profitably
  • Check if your costs are under control
  • Work out how fast (or slow) your stock is turning over
  • Work out how many days your customers take to pay you
  • Determine how much sales you need to cover your expenses
  • Determine if your business can survive in an economic downturn

Based on this data-driven information, you can make sound decisions like the followings with confidence:

  • Evaluate which products or services are profitable
  • Work out the optimal sale price and allocate the right resource to sell your products/ services
  • Determine the financial effect of your management strategies
  • Lower your expenses
  • Modify your budget
  • Plan for the future
  • Measuring results

At the end of the day, every business deserves the best opportunity to succeed and your business should be no exception. To make money, your business needs to run efficiently, control costs, and sell products or services that meet the demands of your clients. Using data from your management accounts, you can make the all-important decisions that keep your business healthy and on track.

Tax Agility is here to help small business owners

Any questions you have pertaining to your management accounts, give us a call on 020 8108 0090 or use our online form to get in touch. The first meeting is always free and without obligation.

Our philosophy is simple: You win, we win.

 

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.