To thrive in the contemporary business ecosystem, SMEs need to optimise the use of resources and achieve maximum customer value.

Being lean in every business process gives SMEs the ability to compete and deliver outstanding value in an ever-changing economic environment. The term ‘lean’ was first used by MIT researchers to describe Toyota in the late 1980s on how they eliminated waste and inefficiency. Since then, every wise business owner – be it a CEO of a large-scale manufacturer in India, a specialist healthcare provider in New York or a business owner with 10 employees in London – aims to optimise every business process, thereby enabling the company to grow in a structured, disciplined way.

For a small business owner, being lean requires you to think differently, plus taking a critical look at your operations and finding ways to eliminate inefficiency, in everything from your office facilities, labour costs to marketing strategies, to name but a few.

As labour costs typically account for 20% to 35% of expenses in a small business (and could be up to 50% if you’re a service-based company), staffing is an area which many small business owners want to optimise. So in this article, our local small business accountants in London aim to discuss ways in which hiring specialist contractors may be more efficient than hiring an employee on a full-time basis, which in turn may lower operating costs for SMEs and start-ups.

What is a contractor?

Recently we have optimised our contractor pages and published a series of posts relating to contractors. For the purpose of this article, we want to outline what a contractor is with respect to business before getting into how they may be able to assist with reducing your company’s operating costs.

Simply put, a contractor, often referred to as a freelancer or a consultant, is an individual who supplies a service for a company on a short-term or a project basis. A contractor works outside of the normal employer-employee paradigm, meaning they work for themselves (as self-employed, usually through a Limited Company) and they supply a service to a ‘client’, the company that has enlisted their services.

There are many complexities surrounding contracting, particularly with respect to the Government’s IR35 legislation which dictates the terms under which a contractor can supply his/her contractor services to a client and vice versa (the conditions under which the business owners can enlist their services).

Benefits of hiring an independent contractor

In circumstances where you, the business owner, are able to legitimately employ a contractor on a short-term contract, this can be incredibly beneficial with respect to the level of expertise they may be able to bring to your company, as well as being a cost-efficient way to employ this expertise. The four main benefits of hiring a contractor for an SME are:

1. Cheaper workforce

In the UK, the true costs of hiring a full-time employee can be substantial if factoring in National Insurance Contributions, pension, benefits (sick pay, holiday pay among others), private medical, insurance and office facilities. Hiring a contractor means your company only pays an agreed fee to the contractor.

2. Niche areas

For many small business owners, areas of expertise such as web development, copywriting, database management and cybersecurity measures are best left to specialists who know what they are doing (unless your business is based around these disciplines). As it is unlikely that you would require these specialists permanently, hiring a contractor only when necessary will save you money.

3. Flexibility

Hiring a contractor gives you greater flexibility, one that you can’t achieve with a full-time employee. For example, you can require the contractor to come periodically depending on your needs. In most circumstances, you can also terminate the contract with short notice without giving a reason. With flexibility comes the ability to adapt quicker, for instance you can respond to market changes by increasing or decreasing your staff number.

4. Reduced liability

Businesses are required to have employers’ liability insurance which protects you against the cost of compensation claims from your employees due to a workplace-related illness or injury. Contractors usually have their own insurance which covers them should the unforeseen happen.

Tax Agility can help SMEs to reduce costs

At Tax Agility, we are small business accountants that deliver more to our clients across London, helping them on accounting and tax-related services including:

  • Accounting and bookkeeping: helping you to manage day-to-day financial tasks.
  • Payroll: outsourcing this function to us can help your business eliminating inefficiency.
  • Tax planning: lowering your tax obligations legitimately.
  • VAT: improving cash-flow and preparing returns and reconciliation.
  • Management consultancy: working with you to put an actionable plan in place and set your business on the growth path.

To speak with a professional SME accountant or to discuss how we can ensure your finances are always up to date and in order, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.