BOOKKEEPING AND ACCOUNTANCY

It is essential to initiate good bookkeeping practices from the beginning of the business so that investors, accountants and the Inland Revenue can see at a glance the cash flow, expenses and profit and loss margins.

Record all your transactions on computer if possible (buy a computer software package) as this will give you immediate information on the operation: the sales, its mix (from different kinds of functions, other sales from conserves, cakes, for example), stock turnover and food and drink cost percentages.

Computers also offer a cost-effective way of reducing paperwork but if you prefer to hire a bookkeeper/accountant, add the cost of employing one into the capital costs.

Choose an accountant who has experience of the catering trade and a liking for it, and do a cash flow forecast together.

Bookkeeping and accountancy requirements

You will need:

• cash and bank records;
• weekly sales of all aspects of the business (e.g. food and alcohol sales);
• weekly payments (suppliers, wages, rent etc).

Record the weekly income and expenditure on print-outs or summary sheets so that management can see at a glance where the money is going out and coming in.

The accountant will also require information regarding VAT, sales, wages, purchases, operating costs (rent, rates, utilities, telephone, laundry for example), drawings for investors and owners and capital costs (maintenance, repairs, improvements).

This analysis of breaking down the business into the sum of its parts can be of immense help to see where the business is going, its strengths and weaknesses, its seasonal swings. For example, are you spending too much on laundry or petrol, and can these be reduced?

It can also be helpful in combating fraud and theft. If you see higher than usual meat bills but know you haven’t been catering for large quantities, it needs to be investigated.

At the end of the financial year (31 March), two summaries need to be prepared: the trading profit and loss accounts showing the gross profit and the net profit and the balance sheet showing the company’s financial position. The latter shows the assets owned and the debts owed. The difference between the two is the capital value of the business, representing the capital invested by the owner/investors and the retained profits.

VAT

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man. VAT is also charged on goods and some services imported from places outside the European Union and on goods and some services coming into the UK from the other EU countries.

All goods and services that are VAT rated are called ‘taxable supplies’. You must charge VAT on your taxable supplies from the date you first need to be registered. The value of these supplies is called your ‘taxable turnover’.

You must register for VAT if your taxable turnover, the amount going through the business, not just your profit, goes over a certain limit. The current VAT registration threshold is £60,000 but you can opt to register for VAT if your taxable turnover is less than this if what you do counts as a business for VAT purposes.

The benefits for registration under the limit include increased credibility for your business but once you are registered, you will have to account for ouput tax on all your taxable supplies which are not zero rated.

You will also have to send in VAT returns regularly and keep proper records and accounts so that VAT officers can examine them if necessary.

For small businesses, there are a number of simplified arrangements to make VAT accounting easier:

Cash accounting: If your taxable turnover is under £600,000 a year you can arrange to account to Customs for VAT on the basis of cash received and paid rather than the invoice date or time of supply. This means that you are not paying tax on unpaid invoices.

Annual accounting: If your turnover is under £66,000 a year you can join the annual accounting scheme and send in just one return a year rather than quarterly returns most businesses do.

Bad debt relief: If you supply goods or services to a customer but you are not paid, you may be able to claim relief from VAT on the debts.

Flat rate scheme: You may be eligible if your turnover is under £150,000. It helps save on administration due to not accounting internally for VAT on each individual ‘in and out’. Payment is over a set percentage of the total turnover.

Ten top tips for simplifying VAT for small businesses

• 1.Registering for VAT will change your pricing structure so always calculate these into any costings.
• 2.Apply to register in plenty of time so that you get the help available to you, your number in good time for printing onto cards, invoices etc, and for other purposes.
• 3.Be clear about the impact of VAT on your growing business turnover. Make sure you put aside funding to pay the VAT.
• 4.Good bookkeeping is vital for overall business management. Check the invoices you receive. You must have a VAT invoice to claim back VAT. Remember that a statement is not a proper invoice.
• 5.Always enter cash receipts in your books before using the cash to make purchases.
• 6.Many businesses take advantage of the VAT they’ve collected, making it work for them before being paid to customs. Pay the VAT into a separate bank account to accumulate interest. (Be sure to keep the VAT collections for payment only to Customs and Excise and not for other purposes.)
• 7.If you find yourself unable to send your VAT return or cheque on time call Customs on 0845 010 9000 and tell them why.
• 8.Consider making a part payment to reduce the surcharge (penalty for not paying the total amount) payment.
• 9.Always quote your VAT number on correspondence or delays/confusion will occur.
• 10.If you are not sure, ask. It’s in both your and Customs and Excise’s interests. If in doubt, shout!

PAYROLL

You need to keep records of all your staff, both full and part-time. Avoid the temptation to pay cash for labour which you don’t record as penalties for income fraud are severe. You will need the following records for each employee:

• name and address;
• tax code and national insurance number.

INSURANCE

You must be insured, and it’s not cheap, so take time to find the right deal. Do spend time and effort talking to the right insurers – i.e. those dealing in catering/restaurant businesses – and getting several quotes. Or get in touch with an insurance broker. Ask those who are in the catering business who they recommend.

Your business needs insurance for building and contents. It also needs liability cover for any litigation (such as a dispute or lawsuit brought against the business). Even if you are able to cover the costs of replacement or repair, or any loss that may occur such as a shelf giving way with a hundred plates tumbling to the floor, it would be irresponsible not to be insured against any problems regarding clients’ legal actions.

Your biggest risk may be from guests at functions and staff – with items being broken or simply taken. It is also possible that someone might fall in your premises – a staff member or visiting client. The building itself also needs monitoring for safety.

Your policy must include fire, storm, tempest (however ancient this terminology is), burglary, malicious damage, glass and other covers.

Additional cover you may wish to consider is business interruption, which replaces lost income in the event of a claim where your business is interrupted. This could be, for example, because of physical damage to your property. Be aware that if your business is your sole income, bills need to be paid regardless of an interruption to your business. Do ask for cover which guarantees you payment on a weekly basis for cash flow purposes and not payment once the claim is known some months after the event.

Payments should be made until normal business can proceed and you have regained the income you would normally expect. These are based on last year’s figures for the time of year and not necessarily during your busiest period. Even when the work to repair or replace is complete, it should pay on a descending scale until your business returns to normal.

Insurance details to look out for

Duty of disclosure. This means that you give the insurance company all the information they need, and is vitally important when confirming and agreeing to the conditions of the policy. The insurer must know what you wish to cover as your policy must be an accurate reflection of your business. Be clear and specific and ask for written confirmation in all areas of your cover.

Public liability. This covers injury and property damage caused by your personal negligence and/or business negligence.

Product liability. This relates to any products you provide, but specifically to food you serve, either bought-in or food cooked on the premises. Should a customer find a nail in a roll (yes, it happened to me), you are liable.

Manager liability. This covers you for staff looking after customers in the absence of the owner. Customers, when in sueing mood, will not only sue you and your business but also the staff representing you at the time.

CREDIT/DEBIT CARDS

If you set up a mail order business for your produce, or supply businesses on a regular basis, this will apply to you. In today’s market, card payment is the preferred method of payment; more than half of all adults regularly make debit card purchases. However, this is not the usual method of payment for the catering industry, especially the small end of the scale so it may not be applicable to you.

There are lots of benefits when customers pay by credit/debit card including:

• no cash restrictions can mean that customers spend more which means an increased turnover and profit;
• part of your banking becomes automated, making procedures simpler and faster.

Contact Visa or other credit or debit card companies to find out how to set up card payments. Negotiate charges with the card companies and renegotiate those charges a year after trading as they may see a good, profitable company in the making and wish to partake in your success long-term.