This chapter deals with the areas most companies and businesses have problems with. They are mainly things over which you have little control because you are dependent on others, but you must try to overcome them because they can be critical in your success. Points covered include:

• paying your taxman
• dealing with your creditors
• getting your money in
• insuring your problems
• training for your business.

PAYING YOUR TAXMAN

How often have you heard the cries ‘I hate paying tax’ or ‘Why do I pay so much tax?’ Well, the fact remains that all businesses have to pay tax and it is only when it is paid that differs. The main problem most businesses suffer, however, is having the money available to pay the tax when it is due.

Income tax

To recap, tax is, in theory, paid both by the company and its employees. Remember that directors are employees so the tax on all salaries and wages is payable under the PAYE (pay as you earn) system which is collected by you. The PAYE system gives you a code number which reflects the tax allowances to which you as an employee are entitled. Tables are provided by the Inland Revenue to convert the code into tax payable or repayable if you have paid too much. The income tax year starts on 5 April and both income tax and national insurance must be paid over to the Inland Revenue once a month. This tax is due to be paid by the 19th of the month and should include all deductions made during the previous month. The last date for sending payments for the year that ended on 5 April is 19 April and interest is chargeable on any payments made after this date.

When the tax year is over a return has to be sent to the Inland Revenue by 19 May showing the total amount deducted, the total amount paid and an explanation of any differences. This is called a P35. You are also required to send a form P14 for each employee showing his individual position. Finally by 6 June forms P9D and P11D must be submitted showing details of expenses and benefits.

You will see from the above that the taxman has a very foolproof method of collecting the taxes due from your company and if you are thinking about taking on employees you must be sure to have the wages and salaries system working properly. It sounds onerous but it is fairly simple and the starter pack issued by the Inland Revenue and the Department of Social Security explains exactly how to do it.

Corporation tax

Once you have ensured that your taxes in respect of employees are dealt with properly you have to deal with the tax bill on the company profits which is corporation tax. This was mentioned in Chapter 4.

The first thing to say here is that the Inspector of Taxes cannot know how to charge you corporation tax if it is not known what your profit is. The Inspector does, however, have a very effective way of ensuring that you pay it. In the past a letter was sent containing the assessment of your profit, either based on evidence of your profits in the form of your accounts or estimated. Since June 1999 it has been up to you to assess your own profits.

Don’t panic. You must, however, deal with this promptly. It will be as well to learn how the system works. You will probably have appointed an accountant to deal with these matters, but that does not stop the taxman writing to you because you are responsible. Let your accountant deal with the taxman and don’t get into the position where both you and the accountant do some of it. You can imagine the mess that will ensue if you both do something without the other knowing. Wires get crossed and the taxman has as much difficulty sorting it out as you do.

The important thing is to get your accounts done on time as the Revenue are imposing more and more penalties for late accounts.

Keep your book-keeping up to date

Firstly your book-keeping must be kept up to date. At the end of your financial year balance your books and seek the assistance of your professional accountant to prepare figures in a proper way which the Inspector will be used to. Profits are calculated for accounting periods which will coincide with your company’s financial year end. You will be required to add back charges for depreciation and substitute capital allowances instead. You must also add back any business expenses which are not allowable (eg entertaining) and deduct any which are. If you should make a loss you have a choice of what to do with it. You can:

• deduct the loss from other current profits
• carry back the loss and deduct it from profits of earlier accounting periods
• carry it forward to deduct from future profits
• deduct it from investment income.

How much tax do you pay?

Once your profits for the accounting period have been determined you can calculate the tax to be paid. Rates of corporation tax are fixed for each fiscal year (6 April to 5 April). The tax is payable nine months after the company’s year end under what is known as the pay and file system. At that point you are required to pay what you think you owe. Only when the Inspector and you agree the figures will a formal demand be made which will be after you have sent (filed) a corporation tax return. Again there are penalties for sending this in late. If the final demand differs from the amount you originally paid either there will be further payments to be made or there will be a refund. Both of these carry interest.

Finally if you are trying to minimise your tax bill you must pay yourself the amount at which the tax rate on your salary is equal to or lower than the corporation tax rate on the company’s profits. After that the rate on your salary rises to higher rate tax. Don’t forget that national insurance is also payable by your company on your salary.

The complexity of the taxation system in this country can only be touched on in a chapter like this so be guided by your professional adviser.

DEALING WITH YOUR CREDITORS

Your creditors are the people you owe money to at any time. You have seen how the taxman gets his money on time. Your bank may have a charge over assets of yours or a personal guarantee to force you to keep your debt to them under control. But the rest of your creditors have no such fallback position. They are in your hands as to when you pay them. They can, of course, withhold supplies to you, whether it is supplying no more goods or materials or cutting off your supply of electricity. However, the goods or services you have already consumed and not paid for are different.

You can manipulate your cash flow by planning the payment of your suppliers. If you hold up payment you increase your cash and if you pay too early you reduce your cash. Holding up payment too long may upset your supplier and make them reluctant to deal with you. Like most things it is a matter of confidence in one another.

Looking at your credit arrangements

Firstly you should check all the credit arrangements you have with suppliers. Can the terms be extended? Or are they, like you, trying to get their money in as soon as possible? If you say you will pay a bill next week, or worse say the cheque is in the post when it isn’t, you may cause your creditor to panic and either stop supplies or more drastically issue a writ.

You see there is a fine balance to cope with and you may have to seek more permanent finance to give you the elbow room to deal with your creditors properly. If you have cash problems paying your creditors late is a short term way of dealing with it, but it is a very hazardous journey if you cannot contain it.

It is possible for a creditor to investigate your status as a company through one of the credit agencies set up for this purpose. They may initially ask you to pay in cash until you have a track record. Or they may ask for one or two trade references from other suppliers of yours. If your order is very large you may get asked for a set of accounts or even a personal guarantee like the bank does. All these measures are designed to safeguard their money as much as they can.

You will help yourself by having records which keep you informed of:

• the name of your creditor
• how much you owe
• how long you have owed it
• your record of business with them.

Then establish a pattern of paying your bills, say, once a month. This creates a continuity which gives your supplier confidence and gives you the excuse that you only pay your bills at the end of the month.

Above all be honest with yourself and make your plans accordingly.

GETTING YOUR MONEY IN

Roughly the same things apply to getting your money in as to paying your creditors. The big difference is that you will invariably be told by a supplier if you have not paid. The same cannot be said for everyone who owes you money.

The people whom you supply, your customers, are known as debtors and it is as well to formulate a system early on to keep track of what you are owed and keep it coming in. The following might be a plan of attack:

• 1.Make sure your customer knows your terms of credit.
• 2.Call or write, politely, as soon as he has gone past the date.
• 3.After seven days follow up with a fax or written letter making sure all the facts are correct.
• 4.After another seven days telephone to find out the problem. Are there queries on the account? Find out when they make their payments normally.
• 5.Keep ringing until you get a promise of payment.
• 6.If they will not speak to you try being someone else until you get the person you want. Pick your times carefully.
• 7.If they say the cheque is in the post, ask when it was sent, for how much and the cheque number.
• 8.Go and get the cheque yourself.
• 9.When you get the cheque bank it immediately, checking the details are correct.
• 10.If all this fails get on to your solicitor to start recovery proceedings. Take his advice with any further action.

You see the procedure to be adopted is one of continual pressure until you can establish an understanding with your customer which is acceptable to you both. The alternative is to stop supplying them.

Case study: Dean plans to get his sales money in

Dean has always relied on his knowledge of his business and particularly his customers when it comes to getting his money in. But as the business has grown he finds he can’t remember the details. It is no good seeing a customer and saying to them ‘How much do you owe me?’ He decides that he must glean more from his sales ledger. He carries a list of monies owing to him wherever he goes and takes every opportunity to remind his customers what they owe. He institutes in his office a regular monthly statement to each customer showing their outstanding balance and when it is payable. He spends a morning each month telephoning his bad payers and ensuring that he finds out from them when the bill will be paid. He warns them that he will stop supplies if they do not respond. His cash flow increases.

Factoring

There is one other way of getting in your money. That is to sell your debts to raise cash. This is known as factoring. The factor takes over your records and collects your debts. He passes the money to you after having deducted his fee. This is only really a feasible method where your debts are considerable, say over £100,000.

INSURING YOUR PROBLEMS

Insurance is a necessary evil. Paying premiums to insurance companies to cover risks you hope will not happen anyway is not the most exciting job you have to do. But it is an important aspect of any company and should be taken seriously.

What risks should you cover?

Employers liability

Covers injury to an employee. A normal amount might be up to £2 million. A certificate must be displayed at the place of work.

Motor

Normally covers all vehicles for third party damage as well as damage to your own.

Machinery

Some equipment has to be covered by law for safety reasons, but it is as well to cover all equipment and machinery. This includes computers and other office equipment.

Fire

Covers buildings and contents against fire.

Theft

Covers burglaries and theft from your premises.

Loss of money

Where you handle significant amounts of cash, cover is available.

Goods in transit

When you deliver goods either in your own vehicles or by other carrier.

Credit

Against customers failing to pay. A good record of collecting your debts is essential to get this cover.

Public liability

Covers your liability to visitors or members of the public if you cause them injury or damage their property.

Professional indemnity

If your business entails giving expert advice you will be covered against claims by your clients for damages caused by negligence.

Keyman

If your business relies heavily on one or more individuals a life assurance policy will cover the death of one of them.

Personal

Make sure you are personally insured properly to provide for your family in the event of unforseen circumstances. This includes health and pensions.

Get yourself a good firm of insurance brokers and go through all these with them. You may find the cost of covering for all of them prohibitive but the broker will advise you on priorities in your company.

Case study: Hannah and Usha check their insurance

Diamond Designs had a break-in and although the intruders were disturbed they got away with some made up jewellery. Hannah checked the insurance. Their broker sent her a claim form as they were covered for theft, but she took the opportunity to check out the other insurance cover they had. As some people paid in cash would this be covered if it was stolen? They had no ‘loss of money’ insurance but this meant the installation of a safe. This would be useful anyway to keep finished jewellery in. The directors decided to have an adequate safe concreted in and to extend the cover to all items in the safe. The cost of this insurance was not prohibitive as they now have taken proper precautions to look after their property.

TRAINING FOR YOUR BUSINESS

You are never too old to learn, the saying goes, and that is as true of business as any other field. Training for business and knowledge of running a company can come in many ways. Some of these are:

• your friends in business
• professional advisers
• newspapers, books, television and radio, magazines
• exhibitions
• local business organisations (eg chamber of commerce)
• trade associations
• Business Links, TECs and Local Enterprise Agencies
• university and management training courses.
• the internet.

The list is endless. But where do you find the time? After all you might say ‘I’ve got a business to run’. Like most other things you must set your priorities and plan to carry them out. Training should be one of them.

Anyone starting a business should go on some sort of management training course. No one is expert in everything and if you are good at your chosen trade you may not be good at book-keeping, for example. Some courses are general, giving the rudiments of a subject, and others are specialised, going into depth. Choose the one that suits you best.

Business Link

A network of Business Links has been established throughout the country designed to give information and advice to small businesses. There you will be able to get advice on courses. They will give you lists of courses available, whether they are on-the-job or classroom based, whether there are any training allowances available and the cost if any. There may be grants available or arrangements for business start-up. They will also provide facilities for business health checks, project management support and access to technology and design services. There is, therefore, together with the TECs and Local Enterprise Agencies (Trusts in Scotland), a wide range of information available to the small business and any budding entrepreneur would do well to consult with them and find out the many ways that they are able to help.

Case study: Harry arranges training

Harry was anxious to pass the running of the management company over to someone competent to do it. Most of the tenants had no idea how to run a company and he decided to contact the local Business Link to see what training was available. There he found a simple management training course for people starting in business and persuaded one of his tenants to take the course with a view to taking over the day to day operation of the company. He agreed to pay the fees and the tenant agreed to take the course. The course lasted six weekly evenings and Harry was able to hand over at the end of it.

Remember

• Seek help and assistance, much of it is free.
• Choose your courses carefully.
• Join a business club if there is one.
• Read avidly both trade and general literature.

ACTION POINTS AND REMINDERS

• 1.Save money regularly so that you can pay your tax when it is due.
• 2.If you have employees learn how the PAYE system works.
• 3.Get a supply of all the necessary forms from the Inland Revenue.
• 4.Make arrangements with your accountant to have your accounts prepared soon after your year end.
• 5.Check your own salary entitlement to the best tax advantage.
• 6.Make sure you have a suitable book-keeping system for paying the money you owe.
• 7.Make sure your money comes in regularly.
• 8.Check your insurance annually to see that all eventualities are covered.
• 9.Do you need any training?
• 10.Telephone the local Business Link for advice.