Interpreting a balance sheet and how it can help you to make better business decisions
As a successful business owner, you understand that financial stability is key in order to maintain the longevity of your company; it’s essential for continued growth. One primary factor of achieving this goal is having an accurate understanding of one’s balance sheet and how each asset contributes to the overall picture. Furthermore, applying this to your clients and suppliers, can also provide valuable insights into the stability of your business overall!
Having resources available to decipher what affects or influences bottom-line numbers can assist you in making strategic decisions based on reliable data – so let’s dive into why understanding a balance sheet is important here!
Not all financial information is available all of the time
When assessing the viability of other companies, whether suppliers or clients, their annual accounts posted on Companies House may not provide a full set of financial reports, only the balance sheet may be available. As this is the most usual financial report available, we’ll look at the balance sheet in more detail below, but having access to income statements and cash flow statements would provide a more balanced view of a company’s financial standing. These may be possible to acquire if your company is entering into a more formal business relationship with the other party and as such would form part of your own due diligence process.
However, on its own, the balance sheet can still provide some useful first insights into a company’s standing, as well as your own.
Here are some of the questions we pose in this article:
- What is the balance sheet and why is it important to understand?
- What are the essential elements of a balance sheet that help somebody understand the health of a company?
- What are key ratios and how are these derived from a balance sheet?
- I’m looking at doing business with a new supplier, what specific aspects of their balance sheet should I be looking at?
- How can you use a balance sheet to assess whether a new client is worth doing business with?
What is the balance sheet and why it is important to understand?
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a given point in time. It summarises the company’s assets, liabilities, and equity, and is an important tool for assessing the financial health and stability of a company.
A balance sheet is particularly important for several reasons:
- Compliance: Companies are required by law to prepare and file annual financial statements, including a balance sheet, with Companies House. These statements must comply with the UK accounting standards, and failure to comply can result in penalties.
- Financial analysis: A balance sheet is a key tool for financial analysis, allowing investors, creditors, and other stakeholders to evaluate a company’s financial position and make informed decisions about whether to invest in or lend to the company.
- Decision-making: A balance sheet provides important information for decision-making within a company. For example, it can help management assess the company’s liquidity and working capital, which can inform decisions about capital expenditures, dividend payments, and other strategic initiatives.
- Transparency: A balance sheet provides transparency and accountability, allowing stakeholders to see how a company’s assets are deployed and how its liabilities are managed. This can be particularly important for companies with complex financial arrangements or significant debt.Understanding the elements of a balance sheet is an important part of smart financial management for any business owner. While it takes some training to intuitively understand how to interpret the information on balance sheets, keeping up with its evolution can be immensely beneficial for running a successful business. With an increasingly digital world, technology advancements have put critical data only a few clicks away, so it’s easier than ever to stay ahead of compliance regulations and use this data to make informed decisions about your finances. Whether you’re just getting started or are a seasoned veteran in the business ownership game, having awareness of the basics of a balance sheet can go a long way towards setting your company up for success.
What are the essential elements of a balance sheet that help somebody understand the health of a company?
There are three essential elements of a balance sheet that can help somebody understand the health of a company:
- Assets: Assets are what a company owns or controls, such as cash, inventory, property, plant and equipment, and investments. A strong balance sheet typically has a healthy mix of short-term and long-term assets, indicating that the company has enough resources to meet its obligations in the near term and invest in its future growth.
- Liabilities: Liabilities are what a company owes to others, such as loans, accounts payable, and deferred revenue. A strong balance sheet typically has a manageable level of liabilities relative to its assets, indicating that the company is able to meet its financial obligations.
- Equity: Equity represents the residual value of a company’s assets after its liabilities are subtracted. It includes items such as common stock, retained earnings, and other comprehensive income. A strong balance sheet typically has a healthy level of equity, indicating that the company has a strong financial foundation and is able to withstand economic shocks.
In addition to these essential elements, other factors that can help somebody understand the health of a company include the quality of the assets (such as whether they are depreciating quickly), the maturity and interest rate of the liabilities (such as whether they are due in the near term or the long term), and any off-balance sheet items that could impact the company’s financial health.
I’m looking at doing business with a new supplier, what specific aspects of their balance sheet should I be looking at?
As experienced accountants, we would recommend that you consider several specific aspects of a potential supplier’s balance sheet when evaluating their financial health. Also, if you can get hold of them, there are a few other factors you out to consider, we’ve included these too. Together these factors can provide valuable insights into the supplier’s liquidity, debt levels, inventory management, profitability, and ability to meet their financial obligations.
Liquidity:
When evaluating a supplier’s balance sheet, it is essential to consider their liquidity. This can be assessed by reviewing their current assets and liabilities. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term loans, and other short-term obligations. A supplier’s liquidity is crucial because it indicates their ability to pay their bills on time and keep their business running. If a supplier has a low current ratio, it could indicate that they may struggle to pay their bills on time or may be at risk of insolvency.
Debt levels:
The supplier’s debt levels are also an essential aspect to consider. Total debt includes short-term and long-term debt, such as bank loans, bonds, or other financing agreements. The debt-to-equity ratio is a crucial indicator that measures the amount of debt a company has compared to its equity. A high level of debt can be a warning sign of financial risk or potential difficulties in meeting their financial obligations. It is also essential to review their interest expense and maturity schedule of their debt to gain a better understanding of their ability to service their debt.
Accounts receivable:
The supplier’s accounts receivable balance and aging schedule are important to assess their ability to collect payments from customers. A high level of overdue accounts receivable may indicate potential cash flow problems or issues with their customer base. You want to ensure that the supplier has a low level of overdue accounts receivable and that they have efficient processes for collecting payments from their customers. Additionally, reviewing their credit policy and customer concentration can provide insights into potential risks in their accounts receivable.
Inventory turnover:
Assessing the supplier’s inventory turnover ratio is also important for understanding their inventory management practices. A low inventory turnover ratio may indicate potential obsolescence or inefficiencies in their operations, while a high inventory turnover ratio may indicate strong sales or efficient inventory management.
Gross margin:
The supplier’s gross margin can provide valuable insights into their pricing strategy and cost structure. A low gross margin may indicate pricing pressures or high costs that could impact their profitability, while a high gross margin may indicate strong pricing power or efficient cost management.
Working capital:
Reviewing the supplier’s working capital is important for assessing their ability to meet their short-term obligations. You should ensure that the supplier has sufficient working capital to cover their current liabilities, such as paying suppliers or employees. Additionally, reviewing their trade payable and receivable terms can provide insights into their cash conversion cycle and working capital management practices.
Capital expenditures:
Finally, reviewing the supplier’s capital expenditures is important for assessing their investments in property, plant, and equipment. You want to ensure that the supplier is investing in their operations and has the capacity to fulfill your business needs. Additionally, reviewing their depreciation schedule and asset quality can provide insights into their long-term capital investment strategy.
By considering these specific aspects of a potential supplier’s balance sheet, you can gain a deeper understanding of their financial health and make more informed decisions about whether or not to do business with them. As expert accountants, we are always here to provide guidance and support to help you make the best financial decisions for your business.
How you can use a balance sheet (and other reports if you can get them) to assess whether a new client or partner is worth doing business with?
Analysing financial health doesn’t have to be a daunting prospect. Evaluating key metrics like liquidity, debt levels, accounts receivable and inventory turnover can all provide insight into their ability to generate cash flow for the future. By taking time to understand these numbers as well as analysing potential clients’ capital expenditures are essential steps in determining whether they’re suitable for your business goals.
Review the current assets and liabilities:
By looking at a potential client’s current assets and liabilities, you can assess their liquidity and short-term financial health. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term loans, and other short-term obligations. You want to ensure that the client has enough current assets to cover their current liabilities. A high current ratio is generally seen as favourable, as it indicates that the client has sufficient liquidity to meet their short-term obligations.
Assess the long-term financial health:
To evaluate a potential client’s long-term financial health, you should review their total assets, liabilities, and equity. This will help you understand the client’s overall financial position and their ability to meet their long-term obligations. You should also review their debt-to-equity ratio to see how much debt the client is carrying compared to their equity. A high debt-to-equity ratio may indicate a high level of risk, as the client may have difficulty servicing their debt obligations in the long-term.
Analyse the accounts receivable:
The client’s accounts receivable can provide valuable insights into their credit and collection policies. You want to ensure that the client has an efficient process for collecting payments from their customers and that they have a low level of overdue accounts receivable. A high level of overdue accounts receivable may indicate potential cash flow problems or issues with their customer base.
Assess the profitability:
By reviewing the client’s income statement, you can assess their profitability and revenue trends over time. You should review their gross margin and net profit margin to understand how well the client is managing their costs and pricing their products or services. You can also review their revenue growth rate to see how their business is expanding over time.
Analyse the cash flow statement:
Analysing a potential client’s cash flow statement can help you understand how they generate and use cash, including cash flows from operating activities, investing activities, and financing activities. By reviewing their cash flow statement, you can assess their ability to generate cash and manage their cash flows effectively. A positive cash flow from operations is generally seen as favourable, as it indicates that the client has sufficient cash to fund their operations.
Review the working capital:
Reviewing the client’s working capital is important for assessing their ability to meet their short-term obligations. You should ensure that the client has sufficient working capital to cover their current liabilities, such as paying suppliers or employees. Additionally, reviewing their trade payable and receivable terms can provide insights into their cash conversion cycle and working capital management practices.
Assess the capital expenditures:
Finally, reviewing the client’s capital expenditures is important for assessing their investments in property, plant, and equipment. You want to ensure that the client is investing in their operations and has the capacity to fulfil their business needs. Additionally, reviewing their depreciation schedule and asset quality can provide insights into their long-term capital investment strategy.
By considering these specific aspects of a potential client’s balance sheet and other financial reports, you can gain a deeper understanding of their financial health and make more informed decisions about whether or not to do business with them. Additionally, being able to analyse the firm’s cash flow statement can provide valuable insights into their ability to generate and manage cash effectively, allowing you to make more informed business decisions.
Talk to TaxAgility about improving your business efficiency
TaxAgility are experts in analysing the performance of your company and helping you find ways to improve your business’s efficiency. If you’d like understand more about how we can help you manage your business, call TaxAgility today on 020 8108 0090.
Changes to the VAT Penalty System in 2023
Situations often arise where we are unable to hit payment deadlines, whether human error, or circumstances conspiring unfavourably, it happens. So, it’s good to see HMRC taking a positive stance in this regard, in its latest revision of the VAT penalty system. In this article, we’ll review the changes to the VAT system you can expect in 2023.
As of January 1 the default VAT penalty system has been replaced by a scheme that on the face of it seems to be less punitive for the occasional late payment or submission. The new system treats late submissions and payments separately. It also calculates interest on late payments differently too.
Period of familiarisation
While the new system is already in operation, HMRC has said that it will allow a period of ‘familiarisation’, to allow businesses to adjust. If your business misses a payment deadline, so long as the payment is made within 30 days, or if you have a ‘Time to Pay’ agreement in place, no penalty will be levied. This familiarisation period extends to December 31 2023.
How penalties are applied
The penalty system applies in two ways:
- Late VAT submissions
- Late payments
A new development is that late submissions for zero or even repayment returns can incur penalties under the new system.
One of the likely reasons for the new system is to help HMRC reduce the administrative overheads associated with chasing and processing late filings.
A new points system for late submissions
The new points system applies to VAT submission deadlines. It adopts a scheme similar to a driving licence. The more infractions a VAT payer racks up, the more points you get. Each time you miss a submission deadline, 1 point is added. The threshold at which a penalty is applied depends upon the filing submission period. These thresholds are given as:
- Annual – 2 points
- Quarterly – 4 points
- Monthly – 5 points
If you hit your threshold, you’ll incur a penalty of £200. If you continue to miss deadlines, you’ll continue to receive £200 penalties.
You won’t incur a penalty if:
- Your business is newly VAT registered and is your first VAT return
- You have cancelled your VAT registration and this is your business’s final VAT return.
- Single case VAT returns covering periods of a month, quarter or a year.
Can a business clear its accrued penalty points?
Driving licence points usually expire automatically after 4 years, not so with VAT penalty points.
For penalty points under the VAT system to expire, you will have to meet a test of good compliance. The period of time this applies for depends upon your submission period:
- Annual submissions: 24 months
- Quarterly submissions: 12 months
- Monthly submissions: 6 months
More information about the penalty points system can be found on the Government’s VAT site here.
Penalties for late payment
The new system aggressively targets late payers by introducing a two stage system that uses fixed penalties and then daily penalty charges. If your business has not paid its VAT bill and does not have a ‘Time to Pay’ agreement in place, it’s going to get expensive quickly.
Here’s a summary of how it works:
Up to 15 days overdue
The good news is the system does allow for circumstances where you may encounter some unavoidable delays in submission. So, if you have a problem, talk to HMRC as you won’t be charged a penalty if you pay the VAT you owe in full or agree to a payment plan on or between days 1 and 15.
Between 16 and 30 days overdue
If you are late in submission, your first penalty will be calculated at 2 per cent on the VAT you owe at day 15, IF you pay in full or agree a payment plan on or between days 16 and 30.
31 days or more overdue
For circumstances where your submission is 31 or more days late, then your first penalty will be calculated at a rate of 2 per cent on the VAT you owe at day 15 plus 2 percent on the VAT you owe at day 30.
As a further inducement to pay on time, HMRC will levy a second penalty which is calculated at a daily rate of 4 per cent for the duration of the outstanding VAT balance. This is calculated once the outstanding balance is paid in full or a payment plan is agreed.
Don’t forget about interest charges
Receiving a 2% penalty on late payments is only part of the overall costs you’ll incur. HMRC will continue to charge interest on late payments at a rate of 2.5% above the BOE base rate. This is even the case if you have an agreed ‘Time to Pay’ arrangement.
All is not equal under the sun where VAT repayments are concerned though. HMRC will only pay interest at a BOE rate -1% and a minimum rate of 0.5%! It’s probably best to ensure you get your payments correct.
Right to challenge
HMRC VAT right to challenge policy is a policy that allows taxpayers to appeal against HMRC tax decisions. This remains the same under the new scheme in 2023.
It is important for taxpayers to know their rights when it comes to challenging HMRC decisions, as this can help them ensure that they are not paying more than they should be.
Under the policy, taxpayers have the right to request a review of any HMRC decision within 30 days of receiving the decision letter. During this review process, HMRC will consider all relevant information and evidence provided by the taxpayer and make a new decision on the matter. This new decision may result in an increase or decrease in taxes owed, depending on the circumstances.
Taxpayers also have the option of appealing against HMRC decisions in certain cases. This involves submitting an appeal to an independent tribunal which will review all relevant evidence and decide whether or not HMRC’s original decision was correct.
Ultimately, understanding your rights when it comes to challenging HMRC decisions is essential for ensuring you are not paying more than you should be.
How HMRC can use its powers to enforce payment
- HM Revenue & Customs (HMRC) has a number of powers available to them which they can use to enforce payment and collect any amount outstanding. These include:
- Taking legal action, including issuing court summonses or seeking orders from magistrates’ courts.
- Making deductions from a person’s salary or pension payments.
- Placing a restriction on the bank accounts of individuals or businesses, preventing them from making any further transactions until their debt is paid off.
- Using third party debt collectors to chase up outstanding payments.
- Using bailiffs and seizing goods in order to cover the cost of unpaid VAT.
In extreme cases, HMRC may even take criminal action against someone who has deliberately evaded payment of their taxes, leading to potential fines and/or imprisonment. Therefore, it is important for businesses to ensure they remain compliant with all applicable legislation surrounding their VAT payments and make sure that all amounts due are paid on time in order to avoid any of these serious consequences.
Why it makes sense allowing a VAT professional manage your VAT submissions
VAT for all but the smallest VAT registered companies can be a complex affair where mistakes can easily be made. TaxAgility are experts in VAT and can remove the burdens of managing and calculating your VAT liabilities from your daily business management routine. We’ll ensure your VAT returns are accurate and make sure they are filed on time.
If you’d like to simplify your VAT management, call TaxAgility today on 020 8108 0090.
How to mitigate the impact of inflation on your business
Inflation is a major factor that entrepreneurs and small business owners must take into consideration when crafting their business plans and setting prices. With careful planning and adaptation, businesses of all sizes can weather the effects of rising prices and stay competitive in today’s economy. Inflation affects many areas of businesses, such as pricing strategies, supply chain costs and marketing. It is important to assess the effects of inflation on a regular basis in order to remain profitable and successful. With proper management and strategic decision-making, small business owners can successfully navigate through periods of rising prices. In this article, we take a look at how inflation affects businesses and what business owners and managers can do about it.
What is inflation and how does it impact businesses?
Inflation is an economic phenomenon that results in a general increase in prices over a period of time. It can have a significant impact on businesses as it affects the cost of production and the revenue generated. When inflation increases, businesses must pay more for materials, labour, and other costs associated with producing goods and services. This can lead to higher prices for consumers, reduced profit margins, and even layoffs if companies are unable to pass those additional costs onto their customers. Additionally, rising inflation levels may also cause people to reduce spending due to decreased purchasing power caused by higher prices. This can further reduce demand for products and services leading to further financial losses for businesses.
What are the different types of inflation?
Inflation is typically divided into three main categories:
- Demand-pull inflation
- Cost-push inflation, and;
- Built-in inflation.
Demand-pull inflation occurs when consumer demand for goods and services increases faster than the economy can produce them. This causes prices to rise as businesses try to keep up with consumer spending, leading to an overall increase in the general price level.
Cost-push inflation happens when the costs of production increase without a corresponding increase in consumer demand. Some examples include higher costs of labour, raw materials, or energy needed to produce goods and services. When these costs go up, businesses will often pass those added expenses onto customers by increasing their prices—which raises the general price level across the economy.
Built-in inflation is a type of inflation that tends to happen over time due to the natural expansion of an economy. This type of inflation is usually seen in developing countries, where economic growth has led to a surge in demand for goods and services, pushing up prices as the country’s ability to produce them struggles to keep up with demand.
Inflation can also be categorised based on its speed or rate at which it occurs. Hyperinflation is a type of rapid, out-of-control inflation that typically happens when too much money is printed without enough real resources or assets backing it. This leads to an increase in money supply, which causes prices for goods and services to skyrocket quickly. By contrast, mild or moderate inflation is a slower rate of inflation that does not cause dramatic fluctuations in the general price level.
Overall, different types of inflation can have a huge impact on an economy, so it’s important to understand each type and how they are related. By recognising the various causes of inflation, governments and businesses can be better prepared to respond appropriately and reduce its negative effects.
How can a business protect itself from the effects of inflation?
One way businesses can protect themselves from inflation is by budgeting for it in advance. By staying abreast of current financial trends, business owners can plan ahead for any increases in the cost of goods or services due to inflation. This requires an understanding of the current market conditions, so business owners should keep a close eye on economic indicators such as the Consumer Price Index (CPI).
Businesses can also adjust their pricing to account for inflation. This may mean increasing prices in order to remain profitable, or it could involve finding ways to cut costs without sacrificing quality or customer satisfaction. Business owners should also look into hedging techniques such as futures contracts, options trading, and other methods of protecting against currency fluctuations due to inflation.
Finally, businesses need to be aware that inflation can affect the value of their investments and should monitor their portfolios to ensure they are not exposed to excessive risks. By taking proactive steps to protect against inflation, businesses can remain financially secure despite economic uncertainty.
What are some strategies for reducing the impact of inflation on a business?
One strategy for reducing the impact of inflation on a business is to increase operational efficiency. This is an area TaxAgility can assist with. We can help businesses review their operating costs and identify areas where they can improve efficiency, reduce waste, and save money. Additionally, businesses should look for opportunities to diversify their operations or enter new markets that may be less sensitive to inflationary pressures.
Businesses should also consider hedging strategies when dealing with inflation. Hedging involves taking measures to limit losses due to price fluctuations in commodities or currency exchange rates by investing in derivatives or forward contracts. This allows businesses to protect themselves from spikes in prices due to inflation and ensure that their operations remain profitable even amid unpredictable economic conditions.
In addition, businesses should consider diversifying investments by investing in a variety of different asset classes such as stocks, bonds and commodities. Diversification helps protect businesses from the effects of market volatility and can help ensure the long-term financial stability of a business even amid periods of high inflation.
Finally, businesses should seek out financing sources that offer fixed rates of interest. This will allow them to protect their profits from the effects of inflation and reduce the overall cost of debt financing.
These are just a few strategies for reducing the impact of inflation on a business. Business owners and executives should work with their financial advisors to identify which tactics might be most beneficial for their particular operations. By taking proactive steps to manage inflation risk, businesses can protect themselves against unexpected changes in prices and ensure long-term profitability.
How can businesses stay ahead of the curve when it comes to inflation?
In short, planning, foresight and common sense. By taking a proactive approach to inflationary pressures, businesses can ensure that they are well-prepared for any possible changes in the economy. They should be prepared for various scenarios and have contingency plans in place to address them. This includes developing the strategies mentioned above for hedging currency fluctuations or investing in different asset classes that can provide some protection from inflationary pressures. Businesses should also consider ways to reduce their operational costs, such as utilising energy efficiency measures or outsourcing services that would otherwise be costly in house. Taking these steps can help businesses stay afloat during periods of economic volatility caused by inflation and remain competitive in the long run.
How TaxAgility can help your business fight inflation
At TaxAgility, we don’t just provide an accounting service, we’re an extension of your financial team. We are here to help you identify the ways best suited to your unique business to fight the impact of inflation. We can help you do this by ensuring you maintain proper up to date management accounting information which allows you day-by-day to track income and expenses and the impact of rising costs on profit margins and cash flow.
We’re here to assist and advise as problems and opportunities arise. Call us today to discuss how we can help you keep a lid on the inflation’s impact on your business. Call today on: 020 8108 0090.
Note: This article is not intended to provide financial advice or guidance, it is for interest only.
A Guide to Understanding and Improving Your Balance Sheet
Understanding and managing your business’s balance sheet is an essential part of any successful company. A balance sheet is a financial statement that provides a snapshot of what you own (assets) and what you owe (liabilities). It's important to keep track of this information so that you can stay within your budget, pay off debt, and make sure your cash flow is healthy. Let's take a look at how to understand and improve your balance sheet.
Components of a balance sheet
A balance sheet is a financial document that provides an overview of the company’s assets, liabilities, and equity. It shows the business’s net worth and provides detailed information about the company’s assets (what it owns) and liabilities (what it owes).
A balance sheet is made up of three components: assets, liabilities, and equity. Assets are anything that has value for the company and can be used to generate income or pay expenses. Examples include cash, accounts receivable (money owed to the company from customers), inventory, buildings, equipment, investments, or trademarks. Liabilities are any debts or obligations that the company owes money on. These can include loans, mortgages, credit cards, accounts payable (money owed by the company), accrued expenses (like wages or taxes), or other debts that need to be paid off in the future. Equity is the difference between all the assets and liabilities, it's what's left over after all debts are paid off. This includes any profits that have been retained by the business rather than distributed as dividends to shareholders.
Tips for improving your balance sheet
Once you have an understanding of what makes up your balance sheet, you can start making improvements. Start by looking for ways to reduce expenses; for example, renegotiating contracts with suppliers or seeking out cheaper sources for materials or services. You can also look for ways to increase profit; for example, expanding into new markets or offering new products/services. Finally, review your debt level; if they are high then consider refinancing them through lower interest loans which could save you money in the long run.
- Monitor Cash Flow: Monitoring your cash flow will help you ensure that you have enough money on hand to cover expenses. This will also help you avoid overdrawing from accounts or taking out unnecessary loans.
- Utilise Loans Wisely: Use any loans you take out wisely by paying them back on time and using them for their intended purpose only. Taking out more than necessary in loans can increase interest payments over time, which can affect your bottom line negatively.
- Consider Investing: Investing in stocks, bonds, mutual funds, or other investments can help grow your business’s asset portfolio over time, meaning more money available for future projects or expansion opportunities down the road. However, be sure to do research before investing so that you know exactly where your money is going.
- Reevaluate Expenses: Take some time to regularly review expenses for any unnecessary items that could be cut back on or eliminated altogether in order to save money in the long run. This could include things such as subscriptions or memberships that may not be used often enough to justify their cost each month.
How to read your balance sheet
The best way to read a balance sheet is to start with understanding its structure. The left side of the balance sheet should contain all assets listed in order from most liquid (cash) to least liquid (tangible assets like buildings). The right side should contain all liabilities listed from most current (accounts payable) to least current (long-term debt). Once you understand how a balance sheet is organised you can begin reading it more thoroughly looking at each asset and liability individually. This will give you an idea of how much money is coming into your business versus how much money is going out, and if there’s enough left over for profit!
- Cash: Cash on hand plus any short-term investments in marketable securities
- Accounts Receivable: Money owed by customers for goods or services provided
- Inventory: Goods held for sale by the business
- Buildings: Long-term real estate investments owned by the company
- Equipment: Tools used for production or office use owned by the company
- Investments: Securities such as stocks and bonds owned by the company
- Trademarks: Intellectual property owned by the company
- Loans: Loans taken out by the business from banks or investors
- Mortgages: Long-term loans taken out from lenders secured against real estate investments
- Credit Cards: Credit card balances owed to creditors
- Accounts Payable: Money owed by businesses to vendors/suppliers
- Accrued Expenses: Expenses incurred but not yet paid such as wages/taxes
- Long Term Debt: Debt obligations due more than 12 months in future
- Equity: Difference between total assets & total liabilities; retained earnings plus capital stock issued minus dividends paid out
Being aware of what goes on with your business’s balance sheet is essential if you want to succeed in managing finances effectively and staying within budget constraints while still growing financially over time. By monitoring cash flow carefully, utilising loans wisely when needed, investing strategically when possible, reevaluating expenses regularly, businesses will be well equipped with the knowledge they need to maintain a healthy balance sheet year after year!
Also, your balance sheet is an essential component of your management reporting. It gives you clear insight into your business’s financial health, providing instant access to the essential financial data required to make smart management decisions. From recording cash payments and invoices to reconciling cloud accounting transactions, the balance sheet can help you benchmark performance and position yourself for future growth. With easy-to-read insights, however complex your management report may be, the balance sheet clearly displays key performance indicators that reveal the true picture of your finances.
Choose TaxAgility as your accounting services provider
With these tips in mind, understanding and improving your balance sheet should become easier, allowing your business to achieve success without compromising its financial health!
Naturally, with TaxAgility as your accounting services provider, we can help you improve the financial strength of your company and lessen the burden of managing balance sheets and management reporting through our cloud based accounting solutions. Just call us today on 020 8108 0092 and find out how.
2023 trends businesses can embrace in the search for competitiveness
Developing or adjusting your business plan for the coming year, will likely take into account many of the broader economic factors that may affect you, such as the economic outlook, inflation, interest rates, supply chain issues and money supply. However, businesses are also affected by trends, such as customer expectations, enabling or disruptive technologies, working patterns, and societal values. These are more intangible, but nevertheless can have a significant impact on a business’s success. In this article we will look at some of the prominent trends in 2023.
Identifying trends and revisiting the GAP Analysis
Trends are powerful market signals that shouldn’t be ignored. However, understanding exactly how they may apply to your business can be a little more difficult to interpret, as they may or may not have an impact on many areas of your product or service, or even how your business operates or is perceived from a brand perspective by your customers and market in general. This is where a little bit of analysis and a tool called GAP analysis comes in handy.
A GAP analysis is a simple tool that takes data and observations from your customers, market and competitors and makes sense of where others may be focused or not. It allows a business manager to spot where competition is especially strong and why, and therefore probably best to avoid. It also shows where competitors may be weak, perhaps from the perspective of a whole product or down to specific features. Weakness may be because of a lack of customer interest or market demand, but for the savvy business person, it might be because the area or niche may not have been explored or developed yet. This is where monitoring trends is especially powerful, as it may point to an opportunity to leverage a trend to develop an area of business others may have ignored because of market weakness.
Performing a GAP analysis in concert with a regular review of your market and competitors, is a powerful way to spot opportunities that others may have missed. Smaller businesses simply can’t be everywhere at once and so tend to focus on specific areas of their market or certain features of a product that customers really like. As time goes by, trends will likely force small businesses to shift focus, sometimes subtly, other times though, quite significantly. As with the impact of Covid, some businesses had to fundamentally change the way they managed and engaged with the clients. This showed a lot of businesses new ways to be successful. However, many couldn’t meet the challenge and closed.
Where does the data to power a GAP Analysis come from?
There are different ways to conduct a gap analysis, one is to look at your business strategy and goals and where you’d like to be in the future, then identify the aspects of the business that you need to achieve your goal that currently are not in place. Another is to examine the strengths and weaknesses of a product and service compared to your competition and perceived market demand, or more importantly when considering trends - future market demand.
Essentially though, the analysis requires you to break down your product or service’s main features, pricing, distribution capabilities and other aspects of your business that contribute to market success. Then do the same for each of the main competition products. As you do this, rate them from 1 to 10 in terms of strength or attractiveness.
It requires some pretty extensive research, even maybe a little covertly as you try and peer into your competitor’s operation. Eventually though, you’ll start to see aspects of your product or service that either outperform, under perform or are completely missing from your’s or their offering. Add in the consideration for current and upcoming trends, and you’ll start to see areas where maybe you could outperform your competitor (or market), by acting early. You may even realise that your competitor is already doing this!
There are many sources of data for this research, examples are:
- Search engine searches around products, features, and capabilities will yield a fair amount of information.
- Independent market analysis reports that highlight company and product capabilities.
- Product comparison sites set products or services against each other and may also tear down products to examine how they are built.
- Annual reports, shareholder reports, investor analysis.
- Buy some of your competition’s products and test them yourself.
What are some of the trends small businesses will likely experience in the company year that businesses can explore and potentially plug into a GAP analysis?
Sustainability and brand responsibility
Consumers are becoming more sensitive to sustainability issues in their purchasing habits. While many are seeking to minimise the purchase of products that employ single use plastic, others are looking deep at the products themselves, for instance, once they have outlived their useful life, can they be reused for something else. Or, if they break, can they be repaired? Many products are simply not worth sending back to a manufacturer for repair, but just like used cars, some products can find repair solutions from third party providers.
As time marches forward, more and more consumers will give more credence to the reliability and durability of products. While affordability must remain a priority for businesses, the old adage of ‘cheap and cheerful’ is less likely to apply. However, given the economic hardship many are experiencing, the challenge for businesses is to deliver affordable sustainability.
Sustainability also requires businesses to look at where their product components originate from. Are those manufactures using materials that have been sustainably sourced?
In short, consumers, or indeed other businesses (B2B), increasingly expect a business to demonstrate responsibility throughout their business practices, for environmental issues.
Immersive experiences
As technology delivers new ways to experience and interact in our daily lives, expectations on the consumer front also grow. Introducing new ways for your customers to experience your products or services before buying is a growing trend. Technologies such as augmented reality and virtual reality, provide ways for businesses and clients to interact in new ways, whether that be at the customer service level, or in being able to experience or examine a product without actually being in contact with it, or even in the store.
As sustainability concerns grow, more customers will want to know a lot more about your product and the processes and materials used to bring it to market. The use of augmented or virtual visualisation technologies, will enable customers to ‘up close and personal’ to a product in the comfort of their own homes or at their leisure in a store.
A fully immersive experience, such as through virtual reality headsets, will enable a business to personalise their customer’s experience of their brand. This is especially important for higher value purchases, such as homes, cars, investments, leisure, travel, hospitality, design services, etc.
Ethical consumer spending and your ESG strategy
Consumer ethics have been shifting for some time, but over the past couple of years concern for the environment has accelerated. The pressure is now considerable for brands to do more than just talk about the ethical issues, they now have to live and breathe them.
Enter the subject of ‘Environmental, Social, and Governance’ strategy. An ESG strategy sets out your understanding as to how your business impacts the world it operates within and how your business is responding to help mitigate any negative consequences, or to eliminate them altogether.
By focusing on ESG, one also becomes aware of the potential for a growing raft of legislation around sustainability issues to impact the business. One can therefore put better plans in place to embrace these changes, and even identify new opportunities.
Popular terms have arisen that cast doubt on a brand’s commitment to ecologically sensitive practices, workforce welfare and labour exploitation in overseas supply chains. No brand is above this and one only has to look at a huge list of companies called out for ‘greenwashing’: Volkswagen, BP, ExxonMobil, Coca-cola, Nestlé, IKEA, Starbucks . . . the list goes on.
While this sounds like a problem for the big brands, it actually affects all businesses. If a smaller business wants to attract clientele from its local community, one way to stand out is through promoting the ethicality and sustainability aspects of the business. Most communities want to support the local businesses amongst them, but full support falters when the business can’t tell customers the source of their products and services, or provide inaccurate information in doing so. As an example, fresh produce providers, such as one’s local butcher or baker go to great lengths to promote factors such as ‘locally’ sourced, organic feed, hormone free, etc. But many others either don’t go to such length, or simply don’t understand or care.
The same ethical standards apply to any business, even if it’s a matter of the working practices, from where basic materials are sourced, employee welfare, recycling, energy use, outsourcing strategy and controls, etc.
Having a well documented and publicised ESG strategy is becoming crucial to even smaller firms and will help businesses in highly competitive markets to differentiate. It shows that your business is not just ‘talking-the-talk’, but is also ‘walking-the-walk’.
ECO sensitive supply channels
Given the discussion in this article’s previous two topics, ensuring your business adopts the same principles with your supply chain would appear obvious. However, ‘greening’ the supply chain can be seen by businesses as “somebody else’s problem”. While you can’t dictate how the businesses in your supply chain go about their business, it is still your problem, as you have a choice as to the companies you work with.
It’s important then, not to overlook the greening issue when reviewing your suppliers, whether this is simply office supplies or a more extensive supply issue within a manufacturing process. Put simply, any ESG strategy you have needs to audit those upon whom you rely on to complete your product or service offering.
The plus side of working with other firms committed to greener businesses, is that you know they are committed to providing a more sustainable service to you. This helps you future proof your own business!
Ongoing digital transformation
Streamlining your business processes through the use of new technologies that integrate and automate multiple areas of your business’s processes, creates a wealth of ways to enhance efficiency. Much of this is discussed on our services page on Digital Enablement and some benefits further discussed in our article on how digital enablement can help reduce fraud.
Digital enablement activities within businesses are set to accelerate over the coming year. For larger firms this may be part of a broader digital transformation strategy. For smaller firms, the activity may centre around consolidating functional areas and applications, and creating greater integration between previously disparate systems. On the simplest level, digital enablement may just mean adopting more online applications as a way to improve financial management information, for example Xero, or increase connectivity and communication around job functions or customer management.
One thing is for sure though; successful businesses in the future are going to be using the digital applications and services available to improve their own efficiency so as to maintain competitiveness. And, such efficiencies also play a strong role in supporting and achieving a company’s ESG goals.
Spend a little time considering how these and, no doubt a host of other trends, could be used in concert with a GAP Analysis, to look at new ways to not only build a stronger form sustainable business, but to find new ways in which to differentiate your business longer term.
Working with TaxAgility can improve the chances of your business’s long term success
As a firm of accountants and business professionals, we’ve had the privilege of working with many clients, helping them grow and understand how to make their business operate more efficiently. The challenges facing businesses today seem endless and often quite daunting. The crises businesses have faced recently haven’t helped either. Your business can benefit greatly by having a partner, like TaxAgility, both advise and support in helping your business become more efficient and grow successfully over the coming years.
Why not give us a call today and see how we can help you. Just call 020 8108 0090
Planning for a challenging 2023 and beyond
As we reach the end of another year, business owners turn their attention to their goals and objectives for the following year. In this article we will review the challenges ahead and some of the issues businesses will face and need to fully consider in their business planning for 2023 (and beyond).
Next year, businesses continue to face an unprecedented set of challenges. Globally, economies are highly unsettled, at home we face the significant challenges presented by high inflation rates and a looming economic recession. So how should business owners approach business planning in 2023?
The purpose of this post isn’t to teach you how to write a business plan. Its intention is to help you look at the implications of what has happened over the past few years and some issues you might need to consider in more detail as you set out your plan for 2023.
With that in mind, let’s recap the events of the past year or two, as this has a fundamental impact on the scope of planning and the considerations that need to be made.
What are the principal events that have occurred recently that will likely shape your business in 2023?
Over past year we have and continue to experience the impact of five major events:
Covid 19
Covid has had and continues to have an impact on not just business but also on the attitudes of employees and consumer trends. Whether you run a business or not, you were affected in some way, and for many, this changed their outlook on life. This can’t be underestimated when considering how your business may have to change in the next year.
Covid also shut down or severely impacted many global supply chains, especially with those in the east.
Russia’s invasion of Ukraine
Just like Covid, this was somewhat of a surprise event. Its main impact has been on energy markets. As energy underpins just about everything we do in life, it has affected everyone, from everyday fuel costs, home heating bills, office energy bills, manufacturing, transportation, the list goes on. As for many businesses, energy is a basic cost, it impacts the bottom line. In a bid to maintain profit margins, suppliers and manufacturers have had to increase prices. Along with this and the rise in energy prices, we have seen inflation rise to near historic levels, leaving many homes and businesses alike wondering how they can simply stay afloat.
So, simply put, the impact of Russia’s invasion of Ukraine has been on inflation.
Liz Trust’s disastrous budget
In an attempt to win the hearts and minds of her party and the people, her actions which included tax cuts and new spending had the opposite effect. A crisis in bond markets and lack of global confidence sent the pound falling against the Dollar and Euro, pushing the UK towards a recession.
This has made importing raw materials more expensive, adding to the cost pressures businesses face.
Inflation & industrial action
Although we have already mentioned inflation as an outcome of Russia’s actions, it stands as an event on its own. Inflation hits everyone's pockets. This has led to a wave of industrial action in recent months, particularly transportation, as workers seek to balance income and costs.
We all need to get around to either go to work or do business, and so transport strikes hit the hardest. Covid, has in many respects, toughened our ability to cope with this issue, largely because businesses had to adapt to new working practices through the lockdowns. Working from home is now widely practiced and so many companies have just learned to adjust to this.
However, many businesses rely on foot traffic. Retail, hospitality, travel and many service industries rely on people being able to get to them. So while it’s easy to say “we’ll just work from home”, the pubs, bars, cafes, restaurants, hotels, and shops in the major cities that benefit from the large influx of office workers, will suffer. And, given the pressures they are already under, many may still fail.
Brexit
We’ll not say much on this much maligned subject, but needless to say, while some insist ‘Brexit is done’, it really isn’t. Many businesses that regularly trade with the EU are still suffering from the impact of legal changes and the heaps of new administration (or lack of) required to continue as ‘normal’.
Furthermore, for some businesses, it has caused a crisis in staffing, because of a heavy reliance on foreign workers.
What is the economic outlook for 2023
Faced with the challenges above, we need to consider the economic environment our businesses will have to cope with in 2023. Several government and government aligned organisations and independent think tanks have commented on the outlook for 2023, here are some of the soundbites coming out of the Government, the Office for Budget Responsibility (OBR), the CBI and the Bank of England.
- With the OBR forecasting a contraction of 1.4% over 2023, the UK is expected to be the first major economy to enter recession.
- Recently The Bank of England warned that the U.K. is now headed for its longest recession since records began a century ago.
- It’s expected that Britain's economy will shrink 0.4% next year as inflation remains high and companies put investment on hold.
- Unemployment is projected to peak at 5.0% in late 2023 and early 2024, up from 3.6% currently.
- In October, British inflation hit a 41-year high of 11.1%, sharply squeezing consumer demand. The CBI predicts it will be slow to fall, averaging 6.7% next year and 2.9% in 2024.
- The U.K.’s hospitality sector is in trouble, again. More than a third (35%) of members say they are at risk of closure early next year due to higher costs, soaring energy bills and weakened consumer spending.
Again, it’s not a pretty picture and so any company reviewing their business plan has a lot to take into account, especially the cost of borrowing and a general increase in costs across the board.
Review your business performance for 2022
Before you can make any planning considerations for 2023, you must review your business’s performance for 2022. There are a number of fundamental aspects of business planning that need to be covered whatever the challenges faced. These include:
- Performance of the company to the current plan.
- Internal challenges that affected your ability to meet the plan.
- External challenges that affect your ability to meet the plan.
Performance
- How did the business perform in relation to the plan for 2022?
- Did you make a profit?
- Did you find you had adequate cash to fund day to day operations?
- Did any operational issues arise that were not planned for and how might these be considered in the future?
- Regardless of whether you made a profit or not, did your sales receipts perform according to plan? If they didn't, what exceptions contributed to this?
- If you made a loss, why? Did competitive price pressures result in price reductions? Was the cost of sales higher than expected, and if so, is this a trend that’s set to continue?
- If sales didn’t perform as expected, what reasons do you attribute to this, such as ‘lack of demand, competitive alternatives, failing brand awareness or poor perceptions, or perhaps a market contraction?
- Have your accounts receivables increased excessively and did this adversely affect your cash flow?
- Did you take advantage of any tax advantages your business may have been entitled to?
Internal Factors
- How did your workforce perform?
- Were there any increases in sick leave, pay demands, etc., that increased your overall costs?
- Are you aware of ongoing inefficiencies that contribute to fluctuations in operations costs, such as legacy systems, poor communication or lack of digital enablement?
- How did your marketing and PR campaigns perform? How might they be improved in the future?
- Did you have to make use of any government or other loans and are the repayments being met?
External Factors
- Did your supply chain perform as expected? I.e. costs held, no disruptions in raw materials or supplies that may have affected product deliveries and sales income.
- Has your market audience’s expectations changed significantly in terms of the products they expect or the messages that support them.
- Have your competitors adjusted their positioning recently in a way that may warrant a response?
- How is your firm responding to the growing expectations from consumers for sustainably produced products and an environmentally friendly organisation?
Every business is different, so one must pick and choose the factors that apply to your business, but for the most part the points above are a checklist most businesses can follow.
It’s a good idea to actually sit and write out answers to these, rather than make a mental check of each, as the answers to these questions are fundamental to modifying or even creating a new plan for 2023.
Setting out the plan for 2023
In this part of the article, we’ll look at some of the key areas of your plan and how the above issues may have an impact.
Scope - take nothing for granted and make no assumptions - the world has changed
While doom and gloom has run riot in the news recently, such downturns may yield opportunities for some. Companies that have acted prudently over the past few years and weathered the storm, may be able to take advantage of those that didn’t.
Competitors, for instance, may have gone out of business. Some however, may be ripe for acquisition, as owners may have decided they have had enough. We mentioned earlier that Covid made people reflect quite harshly on their own individual realities and quality of life. This has led to more than a few walking away from their businesses and looking for a complete change. These businesses are still out there and owners are going through similar thoughts in the face of inflationary issues and significantly higher costs.
One of the first tasks to perform, which may be out of the ordinary for the usual year end planning, is to conduct a new audit of your business. For instance:
- How have the events of the past year or so affected your target market?
- Are your target customers still looking for the same products and services or have their attitudes and expectations changed in some way that may mean your products and services are not as enticing as they were, or simply don’t hit the mark any more?
- Have price points changed?
- Which of your main competitors are still there? How have they been affected? Have their recent actions exposed any changes in their strategy you should take note of?
- Have any new competitors arrived on the scene? Often, dramatic changes in markets see new competitors entering the fray, taking advantage of more mature companies' inability to change quickly enough. Sometimes, these competitors introduce disruptive technologies, products or services, sensing that consumer attitudes and needs have shifted.
- Attention to customer care has featured highly since Covid and it’s a key area for businesses to differentiate. How does your customer care and support services stand up to more critical reviews by your intended customer base?
- How are your systems and processes holding up? Are you burdened by legacy systems that lack integration with other, newer, company systems? How could digitally transforming your company help improve efficiency and ultimately increase profits, or, in the face of higher cost pressures, maintain your profit margins?
Overall goals and objectives for 2023
In light of the changes we have highlighted and those that you may have experienced, think about the goals you set in the next year and how you may logically expand upon them with the knowledge and experience you have now.
You may have an opportunity to expand far beyond your original plan’s expectations, simply because the business landscape you are in may have changed significantly too. It’s rather like looking back at stock market drops; one often laments upon not buying certain stocks when they were at historic lows. Hindsight is a wonderful thing, but today, you really might have an opportunity to grow in ways you didn’t expect. Make sure you seriously consider these as they may not present themselves again.
Conversely, you may realise that the time now is for consolidation and improving the operation you have, rather than any dramatic growth. You may want to consider your business’s progress towards digital transformation and the significant improvements in productivity, performance and security it can offer.
In short, ‘don’t be normal’, because there is no normal, at least for the foreseeable future.
Creating the business plan
Your business plan will comprise several sections, including the financial plan, operational plan, and the sales and marketing plan. Each of these will be unique to your business, shaped by the industry you operate within, the types of products and services you offer, and your approach to competition and pricing, etc. Our concern here relates again to the larger picture, the factors that help you shape your plan. We believe there are some key areas you should consider when drawing up the new plan for 2023. These relate to:
- The economic environment
- Rapidly accelerating business technologies
- Competition for resources
- Customer expectations
- Sustainability
The economic environment
Answering the question outlined earlier in this article will help you gauge your operational capabilities in the face of the challenges we believe you will face. The critical point here is to ensure you fully appreciate how your business has been affected by events to date and its ability to perform in the face of what economic experts believe will occur during 2023.
For many businesses the chief concerns in times of economic turmoil lie with costs, availability and cash flow:
- The costs associated with borrowing money and finance availability
- Costs and availability of supplies
- Cost and availability of labour
- The ability for your client base to pay on time to fund cash flow
Ultimately, you’ll come to a determination that will lead you to either grow aggressively, because:
- You’ve maintained your financial strength and are able to exploit gaps left by competitors who may have suffered.
- Found new niches that have opened because your customer base has evolved over the past few years as they have had to adapt.
Or, you may decide to manage growth more conservatively, by:
- Consolidating your market position.
- Refining and improving your systems and processes to help improve margins and operational effectiveness.
- Focusing on core product and service areas to increase your competitive strength.
- Improving your customer service performance to retain existing and attract more clients.
Of course, for some, a third option is that you may decide that enough is enough and look to exit from the business, which is beyond the scope of this article.
Rapidly accelerating business technologies
The pace of change in the world of technology has been breathtaking in recent years. Many business owners are still struggling to get their heads around the implications of new payment technologies such as blockchain (eCurrencies such as BitCoin) and how artificial intelligence could apply to their systems and processes.
Digital transformation has been a key buzz word for business for quite a few years now, but has accelerated in the past two years, to some extent because of the changes brought about by Covid and the need for remote working, but also because of the surge in online fraud and general criminality associated with business. A business that has successfully integrated its core systems and processes with the remote endpoints of its work forces, and supply chain, is far more resilient to these external forces.
All businesses, big or small, need to embrace digital transformation, have a core digital strategy, and the ensuing digital enablement of key services and processes. The impact of doing this cannot be overstated as it will likely provide the basis for a more competitive business in the coming years.
Competition for resources
Employee attitudes have changed over the past few years. Again, much can be attributed to the trials and tribulations we have all experienced over the Covid years. people’s attitude to the work / life balance has hardened too. It’s made people think about how they want to work and who they want to work for.
It is becoming much harder to attract and retain good talent. Brexit has added its own set of complications where foreign talent is concerned, but needless to say, the process of hiring the right people for the right job is not as it was. You’ll likely find your business competing for talent in areas other than how much you pay, for instance, how much flexibility you’ll allow employees to manage their work/life balance, the facilities you offer them and any benefits associated with the job package.
Customer expectations
In a digital world, instant gratification becomes a de-facto standard. Consumers are now very used to ordering and receiving goods quickly, sometimes even on the same day. Within this world, customer service is not a by-word, it’s a way of life. Many businesses caught out by Covid survived because they reacted quickly to the changes and quickly evolving needs of their clients. Part of this was in having a customer relationship led strategy.
Another rapidly evolving trend is the need to offer immersive and experiential buying processes. The digital world has evolved into a world of augmented reality and virtual reality, that enables customers to experience your brand and products virtually.
Even walk-in stores are not immune to this. Customers want to have memorable and immersive in-store experiences. Here too, augmented or ‘extended’ reality experiences can be incorporated into the in-store experience.
Sustainability
No matter what your buying experience is, whether it’s a basic consumable or booking a holiday, the issue of sustainability and eco-friendly businesses is ever present.
Your business plan absolutely must have a section that outlines your approach to operating a sustainable business; from how you buy your energy, your purchasing processes, the attitude in your business and the expectation on your supply chain.
It’s no good ‘greenwashing’ - the act of talking the talk, but not walking the walk. You must show your customers that you are sincere in your approach and that sustainability is a core tenet of your business plan and corporate philosophy.
Conclusions
It is without doubt that 2023 and probably a few years more will present considerable challenges to business, especially small to medium sized businesses(SMEs). However, by making wise planning decisions based on a sound understanding of the specific issues your business will face, you may find that a surprising number of opportunities reveal themselves.
The main point of this article was to help SME business owners to think in broader terms, specifically because the range of issues facing the world’s economies is so broad.
Years ago, there was a phrase used to captivate thinking around global businesses: “Think global, act local”. This can be applied within the context of issues faced today. Think about the factors affecting your business globally - but not global in a world context, think about the ‘macro’ issues that affect your business - such as customer attitudes, evolving technologies, changing employee behaviour, higher costs affecting supply and demand and sustainability, rather than just the day-to-day uses of running your business. Then consider how these can be adopted at a local level, i.e. within your business and its day-to-day operations.
Those businesses that are creative and flexible enough, typically in thinking and will power, will likely be those that build a successful, competitive and sustainable business long after 2023.
TaxAgility growth advisors
While TaxAgility is a well known and recognised firm of chartered accountants operating in the South London (Putney, Richmond, Wimbledon, Fulham) and Surrey areas, we are intimately involved in the running of client’s businesses. As such we are uniquely positioned to assist businesses like yours meet the growth challenges faced over the coming years.
For TaxAgility, it’s not enough to simply assist clients with their day-to-day accounting requirement, we want to help our client’s businesses grow and succeed.
If you feel your business needs assistance in coping with the challenges outlined in this article, do not hesitate to call and talk to one of our advisors. Call 020 8108 0090 today and find out how we can help.
The 2022 Autumn statement impact on small businesses
For many, the contents of the Chancellor’s Autumn statement cum budget, came as no surprise. The country has suffered many significant setbacks over the past 2 years, as indeed have most countries. However, at some point, all the assistance and support that has been handed out over these years needs to be paid for. As small to mid sized business accountants, here’s how we see this budget impacting your business.
Before we look at the impact on small businesses, let’s remember that small businesses represent 95% of all businesses in this country. Most are run by ordinary hard-working people. Home-owning, family centric people.
A quick review of the events of 2020 to 2022 that have ultimately led to the contents of this budget
Covid had a major impact on all of us. That is probably an understatement, but to put it into perspective along with this budget, consider the following.
The Covid-19 pandemic resulted in exceedingly high levels of public spending. This included the furlough scheme and assistance packages to businesses and healthcare. In all, it is estimated that between £310 and £410 billion was spent. That needs to be paid for and equates to around £4,600 to £6,100 per person (Commons Library).
Covid related issues saw global trade significantly impacted which resulted in supply shortages across many industries. This began to have an inflationary impact as the costs of numerous imported items started to rise affecting retail prices in the UK.
If that wasn’t enough, 2022 though saw another unexpected development; Russia’s invasion of Ukraine. The impact on European energy supplies and to a degree global food prices, has been unprecedented, both practically and politically. Prices at the pumps for regular unleaded petrol rose around 66% from Early 2020 to September 2022. Meanwhile 2022 has seen wholesale energy prices heading for an increase of over 80%, with many homes experiencing energy bills that will more than triple.
Such economic pressures have resulted in an inflation rate that is now at over 11%. To control inflation, governments increase interest rates. Ordinarily, higher interest rates are good for savers. However, few home owners will have cash to save because of the economic pressures they are now facing. Many homeowners are now feeling considerable financial pressure, with mortgage payments and interest rates rising considerably above the historic lows we’ve seen in recent years. The relatively short space of time over which rates have risen has caught many off-guard, with few having the financial reserve to cope with such trends. In short, many ordinary people are now facing a severe cash flow shortage. Having enjoyed mortgage interest rates as low as one or two percent, some home owners are facing rates of over 5%. For many, this is unsustainable.
What can business expect over the next year?
In many respects small businesses are unique in how they are affected by such conditions and the measures imposed by the budget, even though they constitute 95% of all UK businesses. This is because small businesses are run by people directly connected to the business. This opposed to regular employees or directors of larger firms often with the resources to weather such storms out. Small changes to smaller businesses can have a significant impact. Large changes, such as we are seeing, can have a traumatic impact.
Here’s why.
Measures that impact the tax paid by a small business and its owner
Corporation tax. This was already set to rise from 19% to 25% in April 2023. However, businesses with profits below £50,000 will continue to pay the current 19% rate. Those between £50,000 and £250,000 will pay 25% but with a rate relief deduction. As dividends are taken net of tax paid, increased corporation tax will lessen dividends payable.
Dividend tax relief. Currently £2000, this will reduce to £1000 in 2023 and then further to £500 in 2024. When added to current personal allowances, a director could expect their tax payment threshold (20%) to start at £14,570, this will now be £13,570 from April 2023. Given the current inflation rate and the freeze on personal allowances, this constitutes an overall reduction in income in real terms.
Capital gains tax exemption is currently at 18% for residential property gains and 10% for all other gains, such as investments, for basic rate payers, and 28% and 20% respectively for higher rate payers. The threshold for this in 2021 to 2022 is £12,300. However, from April 2023 this will drop to £6000 and to £3000 from April 2024.
Other measures that directly affect tax payments and operational costs, include:
The national minimum wage will increase by 9.7% for employees aged 23 or older. As many smaller businesses with employees paid at this level may struggle to increase their revenues by 10% this coming year, and hampered by a raft of other costs spiralling upwards, this will further pressure small business’s finances.
Class 2 National Insurance for self-employed to increase to £3.45 per week from April 2023.
Income and National Insurance thresholds for both employers and employees will be frozen until 2028. In a similar way to personal allowances, if these don’t rise in-line with inflation and other costs, they have a negative impact in real terms.
The VAT registration threshold has been frozen at £85,000 until 2026. This means that many more small businesses may have to register for VAT in the next few years if their profits increase.
Businesses are major energy users too. So while the Chancellor announced that the Energy Price Guarantee will stay in place for households until April 2024 at a higher rate, he didn’t mention support with energy bills for businesses after April 2023.
Since October this year, non-domestic energy users can get a discount to bring the price of gas and electricity in line with the government supported price. So if a business had to pay more than this, they could claim a discount for the difference from the energy provider. No information has been given to say what happens after April 2023, leaving small businesses concerned about this.
Was there any good news for smaller businesses?
In short, not much. The Chancellor did announce the following measures:
The Employment Allowance, which reduces the amount of National Insurance Contributions an employer has to pay, will remain at £5,000.
The smallest businesses impacted by measures that change their eligibility for small business rate relief or rural rate relief, will see their increase in bills capped at £600 per year from April 2023.
A plan to increase business rates by 10.1% will not go ahead in 2023, instead this has been frozen. If it had gone ahead, it would have represented the biggest hike in business rates in 32 years.
The hospitality, retail and leisure sectors will see their business rates discount go up to 75%, which will also be extended for another year.
Final thoughts
Many small businesses who successfully weathered the Covid storm, were looking forward to calmer seas ahead during 2022 and beyond. However a catalogue on global issues have resulted in increased pressures at home. For the next few years, as Brexit continues to play out, combined with the ongoing energy crisis, high inflation and interest rates, businesses need to run a tight ship.
Maintaining a healthy cash flow and building a small reserve to help weather the uncertainty ahead is going to be very important. A firm grip on costs through a plan that makes allowances for much wider variability in base assumptions, such as the cost of borrowing, fluctuations in the costs of raw materials and pressures on employee’s own financial circumstances is a key part of this.
Let’s not forget the struggling company owner who, years ago, decided that it would be a great idea to take the risk and run their own business, given what at the time were some reasonable incentives to do so. TaxAgility can help them through this tough time, navigating a path through the tax changes and streamlining the financial aspects of their business efficiently and hopefully, surviving the worst that is thrown at them over the next couple of years.
Call us today on 020 8108 0090 and find out how.
How digital enablement can help reduce cyber crime and fraud
While most business owners understand the risks they face from fraud, whether that be threats from cyber attacks or as we will consider here, internally from white collar crime, a surprising number lack the systems and controls to mitigate these threats. TaxAgility Accountants can help you fight these threats through digital enablement.
For instance, a report by Symantec, the antivirus software firm, highlights that 43% of cyber attacks target small businesses. Why? Because the fraudsters know that these firms haven’t invested in the security, control systems and processes that they ought to have.
In this article, we’ll look at how the process of digitally enabling your firm can help mitigate a lot of the threats facing your business today.
Fraud isn’t just a problem faced by larger firms
When hearing about the problems faced by large firms caused by fraud, often internal fraud, smaller business owners may not relate to them. Often, owners feel that their firms are unlikely to suffer the same issues, the - “we’re a small fish, why would fraudsters bother with us?” syndrome. What these owners fail to realise is that often, external attacks are not perpetrated by people, but by bots. Only when a bot breaks through, do the real fraudsters get involved. Then they’ll take what they can get.
While the technology challenges of doing business in a digital world expose businesses to online attacks, another threat vector that smaller business owners overlook is the people they employ. Owners may feel that their staff are entirely trustworthy. Many may have been with the firm for years. However, when someone’s circumstances change, whether because they run into personal issues or whether they are being coerced by external forces, a trusted person can often cause more long term damage than a direct external threat, especially if such an event leaks out to customers and suppliers. This is one of the main reasons a large number of such fraud incidents go unreported.
Many factors may drive employees to commit fraud within their employment, also known as white collar crime. The most common scenario is when an employee gets into dire personal financial stress. If the employee is able to manipulate or embezzle small amounts of cash unnoticed, and that eases their pain, they may well be tempted into stealing larger sums. When somebody is under significant financial stress, it becomes easier for them to self justify, even telling themselves that what they are doing is justified and that they will pay it back before anyone notices. Unfortunately, that seldom happens, and the employer eventually finds out. Trust is then eroded, not just with the individual concerned, but suspicion may fall on others which will likely upset harmony in the company.
With threat vectors originating both internal and externally, what can a small to medium sized business do, and what do potential solutions have to do with digital enablement.
The role of digital enablement in reducing fraud
Cynics may suggest that it’s because we are communicating more and our company’s operations have become more complex digitally, that being digital is the problem. There is of course an element of truth to this, as new technologies and automated processes can lead to data exposure, as indeed we’ve seen in the news.
Digital transformation though, is unavoidable, largely because it is mainstream and those your firm does business with are in the same boat. Financial systems are almost entirely digital now, your customers and suppliers are transforming. Failure to transform and enable digital service connections will mean that your business will not be able to compete and will suffer severe performance issues.
So, the question therefore centres on how digital enablement technologies not only increase your business’s efficiency, through process automation and service connectivity, but also increase your firm’s resilience to the threats we have seen?
Common types of fraud in the workplace
To see how digitisation of a company’s systems and processes may help with fraud, it is useful to summarise some of the most common types of workplace fraud, these include:
- Holiday and sick leave manipulation.
- Theft of cash or equivalent - such as, inventory/equipment/office and raw materials.
- Falsified overtime, fictitious employees.
- Unauthorised corporate credit card purchases.
- Fabricated receipts.
- Fictitious travel vouchers or purchase orders - i.e. non-existent vendors.
- Forgery of official document approval .
- Falsification of transaction details such as false mileage expense claims.
- Entertainment without a legitimate business purpose.
Most often these examples of fraud can only happen because of lack of management oversight, poor controls, poor ledger and reconciliation reviews and, in busy companies with tight resources, poor separation of duties that allow the same individual to raise and approve purchases, work orders and payments to suppliers - typical in smaller businesses.
How can digital technologies assist in reducing and even preventing fraud?
Most fraud in businesses originates from the lack of oversight and process integration. Fragmented and dissimilar accounting and reporting systems, such as those used to track sales, expenses, payroll, purchases, accounts receivables and accounts payables, provide a wealth of opportunities for an internal fraudster to hide their tracks.
We are continually surprised to find smaller businesses that still track many of these processes using Excel spreadsheets. They’ve used them for years, many are customised using complicated macros developed by external consultants, and so they have been reluctant to drop them. Such systems hide multiple opportunities for manipulation.
The key aspect to reducing fraud in such systems is by reducing manual entry complexities and through automation and oversight. Digital systems and applications target key functional aspects of a business, such as payroll, accounts receivables, sales and purchasing. Such systems provide enhanced visibility, tracking, reporting and authorisation through the creation of process rules, making it very difficult for an employee or external threat to commit fraud without an alarm being generated.
Historically, it’s not been that easy for a manager to gain a detailed look at cash flows without having to deep dive into the back end accounting systems. The reports generated are simple summaries and hide the real issues that may be lurking behind the scenes. Today’s digital applications, though, allow the full detail and authorisation change of transactions to be revealed with a click of a button. Xero, is a great example of this, providing easy to understand management information, but an equally easy audit trail to pursue if things don’t look quite right. There’s no need these days to wade through reams of paper statements looking for problems, cloud based systems can be accessed from your mobile devices wherever you are.
Improving and integrating your business processes through the use of advanced digital applications and services increases transaction transparency and accountability, and improves the overall efficiency of your business. Here are some examples as to how this may work in your business.
1. Decoupling the old and the new
It helps to maintain a dose of realism when tackling process improvement. Smaller businesses are limited by resource and budget. There may be legacy systems, perhaps an inventory system, that can’t be replaced immediately. Identifying the slower systems from those that need to be faster paced, helps a business focus on what can be achieved shorter term. Often the greatest improvements to a business can be realised by improving the customer facing systems and processes. Decoupling these systems from the legacy systems helps, as it compartmentalises potential fraud opportunities and increases the number of your business’s processes that have greater transparency.
2. Automating basic accounting functions.
This is where the latest generation of cloud based services excel. If processes such as accounts payable, accounts receivable, payroll, etc. are automated to a high degree, it’s very difficult for them to be tampered with without triggering some form of alert.
3. Streamlining and automating aspects of customer facing systems.
Companies that use e-commerce extensively in their business, perhaps because they operate an online store, understand this very well. Such systems are highly automated and provide a high degree of customer satisfaction. They minimise the need for staff to be involved in the processes of sales, order fulfilment and inventory control. By thoroughly examining your business processes, especially those that are customer facing and choosing to digitise them through the use of sales or customer service portals, again reduces the opportunity for fraud.
4. Use the cloud
Long gone are the days where there’s a need to update critical software on a PC. Of course, such software still exists, but for the most part applications focused on the basic operations of a company, particularly the financial operations, are available in the cloud. This means they are accessed through a secure web browser connection. Using cloud based ERP & CPM systems (for larger businesses) and cloud based accounting software suites, can drastically cut costs and increase the time people have to focus on the core of their business. Not only that, but many cloud based accounting services have a multitude of plugin additions that can be used to customise your operations through functional additions (e.g. payroll, financial controls, enhanced AR, online payment tools), further increasing efficiency. Many are available on an industry related basis too.
Integrated cloud based systems decrease the number of exposed end points often used by fraudsters to gain access to sensitive financial operations, such as through hacking office based systems, exploiting employee based phishing schemes, accounts payable fraud, etc.
5. Analytics and reporting
It’s critical that as a business owner and manager you have fingertip access to data, whether that be raw data or interpreted. There are artificial intelligence applications and advanced analysis tools available that help make sense of your day-to-day operations and in developing forecasts. The enhanced reporting they provide makes it much easier to spot nefarious activities or to trigger internal alarms and restrictions when rules are broken - whether intentional or not.
TaxAgility can assist with your digital transformation process
As an accountancy firm and tax advisers, we’ve had the privilege of working with a huge variety of small and mid-sized businesses. We are familiar with typical systems and processes they employ within the finance and operations departments. We're also very aware of the digital applications and tools available to these companies that are essential to achieving the goals of process improvement, enhanced business efficiency and fraud reduction.
As our client, we can take a look at your operations and make recommendations as to the ways you can achieve these goals. We may have seen or have been involved in similar improvement examples to your business.
Call us today and talk through your needs and we’ll explain how our digital enablement experience can help your business.
Thinking about selling your business? Here’s how we can help
There comes a time with any business, large or small, when the owners decide they want to move on and sell their business. There can be many reasons for this, often it’s because they want to retire or maybe because they have just had enough and want to reap the benefits by selling on the business. There’s a well worn path to follow when selling a business, a process Tax Agility has been part of with businesses in the Richmond, Putney and surrounding London areas. However, as the saying goes “the devil is in the detail”. Key aspects of any business sale need to be carefully prepared so as to provide a fair representation of the business’s health and outlook that can be presented to prospective buyers.
This article takes a look at some of the specific areas that Tax Agility pays close attention to when supporting the sale and how we can help businesses create a package of information ready for presentation to a prospective buyer. We can even assist with the presentation of the material in a professional manner too.
What’s my business actually worth?
Quite understandably, a business owner’s first thought and maybe that which prompted thoughts of selling in the first place, comes down to their perceived value of the business. Emotions can run a little high and lead to over optimistic expectations, especially with smaller businesses. This is why it is important to have professionals on hand who can review your business’s operating position and provide a fair view on market value.
The process of valuing a business is multifaceted. There are simple ‘rule-of-thumb’ guides that can help you. Often though, these are only suited to companies that have an established track record. One in particular is P/E (price/earnings ratio), or multiples of profit or EBITDA to arrive at an enterprise value. The multiple used depends on the market conditions and desirability of the sector the business is in. The other simple way to value a business is simply to assess its ‘assets minus liabilities’.
However, these are just snapshots of the business and don’t take into consideration a host of other factors, such as the business’s prospects going forward, or what the current owners plan to leave in the business, such as cash and other assets. Plus, of course, sellers have a number of ways in which they can make a business look more attractive than it actually is. An example here would be the timing of the sale where seasonal cash flow variations in working capital can influence the value of the business on first glance.
Areas where Tax Agility can assist
To present as fair a view as possible of the business’s financial operating position, it’s important to establish some baselines - or ‘normalisations’. These are essentially financial views that try and iron out variations that could cause significant shifts in aspects such as working capital.
In assisting the business sale process, we focus on:
- Acting for vendors and purchasers of businesses.
- Reviewing your business records to ensure they are in the best possible shape for due diligence by the buyer.
- Assistance with the drafting of normalised earnings schedules to determine your true underlying earnings on which to base the valuation.
- Assistance with the drafting of net debt schedules, which are required in cash free, debt free valuations of businesses.
- Assistance with the drafting of normalised working capital. This is necessary to ensure the valuation is accurate and that there is sufficient cash headroom in the business.
- Management accounts while the business is being sold. Monthly management accounts may be required to give potential suitors crystal clear visibility, affording them the confidence in presenting their bids.
- Although we are not solicitors we will review the legal mechanisms in sale and purchase agreements and the accounting representations and warranties, which should be reviewed by a suitably skilled accountant.
- We explain to vendors the different ways a company can be sold and the underlying tax implications of each. This includes a sale of the shares of the company the vendor owns, or as a sale of the assets and liabilities of the company, leaving the cash shell of the company in the vendor possession.
Will your business records stand up to due diligence?
Any potential buyer is going to want a full view of your company and as such, if they are really serious about buying (or investing) in your firm, they will want to conduct a due diligence audit as part of the sale closure process. This can be an extensive process, depending on the size and scale of your business. Nevertheless, undertaking one should be seen as a positive sign, but you must have prepared for this.
What will the due diligence process involve?
The simple answer is, everything, literally - from the business itself, its commercial and legal contracts, its assets and its people.
The type of company involved will of course dictate where the process may spend more time. For example, if you are a technology development company, focus may lie with ongoing development contracts, overseas facilities or contracts, ownership rights to key technology IP, technical competence in the company in the form of key personnel, etc. Generally though, the typical areas that detailed information will be requested on are:
- Operations - typically everything from your products and services, manufacturing processes, product warranties, ongoing contracts with suppliers and other third parties, pricing, client contracts, profit margins and the company’s infrastructure, such as IT, software, etc.
- Financials - cash flow statements, P&L, balance sheet, shareholdings, share valuations, expenses, debt, equity, depreciation and financial projections.
- Asset base - from property, fixed and variable, equipment and Intellectual Property.
- Compliance - financial returns, e.g. tax and VAT, insurances, any licences, any environmental issues.
- Human Resources - company structure, external consultants / employees, executive and board bios, employee salaries, employee handbook, benefits, pension plans / policies, disputes, etc.
- Sales and marketing - current programs and performance, budgets, etc.
This list is only meant to provide a perspective on what types of information will likely be requested. Based on your business type, Tax Agility will take a thorough look at the information that will likely be requested. We will work with you to ensure information pertaining to all the areas of interest are available and presentable.
Drafting of normalised earnings schedules
During a financial year there can be many financial events that impact a company’s apparent earnings. While there may be regular income from client contracts and investments, there can also be non-recurring exceptional income events, such as an asset disposal. On the flip side, there can be one-off non-recurring expenses such as a directors bonus payment, or the settlement of a legal claim. Furthermore, the nature of the business may be seasonal, meaning at any given time, the earnings position of the company may appear artificially high or low because most orders come through during a particular time of year or that suppliers may not have been paid. This variability makes it hard for potential purchasers to get a real feel for the business’s earnings over a year.
Normalisation, therefore, seeks to remove income or expenses that are exceptional or unusual, in other words, events that the new owners may not reasonably expect to pay. The process of doing this helps smooth out the effects of those events, presenting a normalised trend to purchases giving greater accuracy towards projecting future earnings and therefore the potential enterprise value of the company
TaxAgility will work through your operations and accounts to identify such events and produce a normalised earnings schedule (adjusted) showing earnings over the current year and usually two preceding years.
Drafting of net debt schedules
The amount of debt a company carries affects cash flow, as interest expense flows into a company’s income statement. The debt balance appears on the balance sheet and the repayments the business makes on the principal sums owed flows through the cash flow statement. It’s therefore essential to make sure the debt a company carries and its impact on the company’s operations is clear to any prospective purchaser. This is where a debt schedule is key.
Many businesses are sold on a cash free, debt free basis, meaning the enterprise value of the business is calculated by computing enterprise value and deducted net debt.
Enterprise value is computed by multiplying sales or earnings or EBITDA by a suitable multiple (sales multiple, earrings multiple or an EBITDA multiple).
Adding the net cash in the business or deducting the net debt, from the enterprise value, to reach a net consideration for the share capital of the company.
Types of debt that is shown in the debt schedule include:
- Loans
- Leases
- Bonds
- Debentures
Tax Agility will assist in creating a Debt Schedule. This seeks to provide a realistic view of a company’s debt position, It shows debt based on its maturity and helps a prospective purchaser construct their own cash flow forecast and to structure the sale in the most sensible way.
Drafting of normalised working capital
Working capital, or rather ‘net working capital’, is the money relating to stock, accounts receivable and accounts payable left in your business, excluding Net Debt items.
Cash flow shows the ‘ebbs and tides’ of money coming in and going out relating to earnings, working capital movements, investments and disposals, shareholders withdrawals and injections and movements in net debt, over a specific period.
If your business income suffers a setback, such as losing a major client or through a wider economic downturn, it’s the cash or cash-like assets that you’ll need to turn to in order to ride out the problems. This is your working capital.
Normalising your net working capital takes into account the typical day-to-day fluctuations in levels of working capital the business experiences so as to provide a fair view. A business may experience seasonal swings in working capital too, this is also factored in. A normalised view can then be used when valuing the business. If this isn’t done, then irregularities can occur, such as the temptation by a seller to over value working capital by delaying certain payments. This would artificially increase cash equity value.
Tax Agility will walk through your working capital requirements and trends to produce a fair view taking into consideration all of the factors (and more) discussed above.
Management accounts while the business is being sold
The sale of a business can take some time depending on the size and scale of the business concerned. Meanwhile, normal business activities continue. It’s essential during this period to maintain a tight management view on the business’s operations, so as not to impact the due diligence audit taking place unduly, or as a tools to inform them of any important changes taking place, such as supplier or client changes, unforeseen cash or capital expenditure, perhaps due to unscheduled maintenance needs.
Management reports are a key part of any business’s reporting mechanism. They show a period by period (weekly, monthly, etc) snap-shot of changes in the business financial status. A typical management report can include:
- Executive summary
- Profit & Loss
- Budget variance
- Balance sheet
- Aged receivables
- Aged payables
- Cash summary
You can read more about the importance of management accounts and reporting in our article here:
How can management accounts be used effectively?
Check out our other article on exiting a business here.
Conclusion
The process of selling a business is a multifaceted operation, one that can distract a business from its normal day to day activities. It’s essential to be prepared well before any potential suitors begin their due diligence process. In this way, you will minimise the impact on the business and make the due diligence process proceed faster and more efficiently. Resolving any deficiencies can increase the value you realise for your business by unlocking its true underlying value.
At Tax Agility our goal is exactly this - to prepare your business for sale and assist in making the due diligence process as painless as possible. Ultimately, we want to help you extract the maximum possible value out of the sale of your business as effortlessly as is realistically achievable.
Call Tax Agility’s business sale specialists today on 020 8108 0090 and discuss how we can help in the sale of your business.
Super deductions - how to maximise your business’s tax efficiency
Most business owners understand that it is important to ‘capitalise’ certain company assets. These ‘fixed assets’ can be used to reduce your corporation tax bill. However in April 2021, the Government increased the usual 100% deduction to 130% until April 2023. Read on to find out how you could benefit from this increase.
What is a super deduction?
Over the years, successive governments try to find ways to incentivise industry or stimulate areas of business. This is especially true during troubled times, such as the financial crisis of 2008 and more recently the problems brought on by the Covid pandemic.
Reducing broad ranging tax rates, such as reducing corporation tax, VAT, capital gains, etc, introduce problems of their own, most often political, as they can appear to favour selective groups in society, so governments look for more niche methods to achieve their aims. The ‘super deduction’ is one of them, as this applies purely to businesses that qualify for corporation tax. It’s also limited in its range, as it can only be applied to new plant and machinery that ordinarily qualify for the 18% main pool rate of writing down allowances.
How does this affect the Annual Investment Allowance?
Essentially, it compliments it. Since January 1 2019, companies have been able to annually invest up £1 million in qualifying assets, these already benefit from 100% relief. This is known as the ‘Annual Investment Allowance’. Prior to 2019, the AIA was set at £200,000.
The £1 million limit has been extended to March 31 2023. The Introduction of an extra 30% deduction is, therefore, a most attractive additional incentive for owners to invest in their businesses - or even start new ones.
What is the SR Allowance that was also announced?
Along with the Super Deduction, the Government also introduced the SR Allowance.
Not all purchases can qualify for the super deduction, such as those that qualify for the 6% write down allowance rate - typically long life assets such as those associated with buildings and property. To incentivise this industry, the Government has introduced a ‘special rate for first year allowance’ - the SR allowance. This affords new plant or machinery in this bracket with a 50% first year allowance.
What businesses qualify for Super Deduction?
This benefit is only available to those entities who qualify for corporation tax. In other words, it is not applicable to those in business as individuals, sole traders, or partnerships.
What purchases qualify for the Super Deduction?
There are a wide range of asset types that can take advantage of the SD beyond the most obvious forms of fixed assets, such as computers, IT systems, manufacturing equipment and the like. In short, most purchases that contribute to the operation and functioning of your business should be treated as an asset, rather than an expense, and capitalised accordingly.
However, there are other less obvious expenditures that can close be capitalised and gain SD relief. The most common of these include:
Development costs: Under FRS 102 costs associated with bringing a system into working condition, such as those attributed to the development, can be classified as tangible fixed assets. For example, developing a new website or piece of software, could be treated as such and gain the SD allowance benefit.
Borrowing costs: When developing a new product or building a new manufacturing plant or product line, a business may be required to finance the operation. The costs of borrowing may be capitalised.
Hire purchase: Assets on hire purchase or similar purchase contracts where possession rather than ownership passes to the business can also benefit from super deduction, but only at the point where the asset began use.
The most obvious test of applying the SD benefit is that the purchased plant or machinery needs to be new and not second hand. Also, you cannot decide to capitalise something bough in prior accounting periods just to take advantage of the SD.
What happens if I don’t make a profit, can I still apply the Super Deduction?
Yes. Not all businesses make a profit each year. Indeed, some businesses may choose to capitalise equipment porches in a financial year specifically to reduce their tax bill to zero - typically smaller businesses. If you make a loss in a year where capital purchases were made, you may carry any unused deductions forward to use as losses.
Selling an asset that qualified for Super Deduction
It may enter the minds of some that as the government is giving away an extra 30% in the form of a tax deduction, which is true, if they quickly sold the purchase, they may benefit further. Also, there are legitimate reasons why a firm may have to sell assets that benefited from the SD. So what happens and how is this accounted for?
Naturally, the Government is going to want their ‘pound of flesh’ in this instance. You will need to carefully track any asset that benefited from the SD, so when it comes to selling the correct treatment can be applied.
The first thing to note is that if the disposal of an SD qualifying asset is before April 1 2023, its disposal value is 1.3 times the actual disposal value. This income should then be treated as taxable profits and not allocated to ‘pools’.
Read more about the government's super deduction scheme here.
Is this a good time to start a business?
This may indeed be a good time to start a new business if that business is going to need significant investment in new capital equipment. Furthermore, if your established business is an entity in the form of a sole-proprietorship or partnership and you are looking to grow, this may be a good time to incorporate.
Talk to Tax Agility about how your business can take advantage of the super deduction scheme.
Tax Agility are chartered tax accountants operating in the Richmond, Putney and Wimbledon area. We specialise in assisting small and medium sized businesses navigate the complexities of company taxation. Our goal is to ensure your business is as tax efficient as possible and to effectively exploit incentives such as the super deduction scheme.
Why not call us today on 020 8108 0090and discuss how we can help take your business to the next level of tax efficiency.