Lee Murphy, founder of Pandle, offers financial advice for electrical contractors ahead of the financial year’s end in April.
For the many electrical contractors trading as limited companies, the end of the financial year is an opportune time to take stock of the company finances and make strategic decisions about the year ahead.
With Brexit potentially coming just days before the April 5th year-end date, as well as the introduction of HM Revenue & Customs’ Making Tax Digital (MTD) scheme affecting the majority of businesses, the pressure is on to be prepared.
It’s a particularly good time to think about how you (or maybe your bookkeeper and accountant) can make things not just faster and cheaper, but also how you can get better financial information to help you run your business more effectively.
It may be that you need to call in an accountant to help finalise books, but there is much that you can do to lay the groundwork and cut costs. But if it is you doing most of the admin work, the good news is there are plenty of online bookkeeping tools available to support you in your efforts, many of which come free of charge.
Here’s some advice to help you get started.
Get up-to-date
As you prepare for the next financial year, it is worth noting the current debate around late payments and payment retention.
The Federation of Small Businesses (FSB) continues to bang the drum about the damage late payers are doing to small business. FSB research found that a third of small businesses say that 25% of their invoices are paid late. The government must introduce measures to end a culture of late payments and supply chain bullying, the FSB demands, and it is not wrong. Late payments are a danger to many small contractors.
Remember, being organised can help get many customers to pay on time: always be clear about your payments policy and get it agreed up front; issue your invoice promptly with correct details, PO numbers and to the right person; and start chasing for payment before it is due – not once it is already late.
Payment retention is another hot topic that could directly affect your business. Payment retention of between 5-10% is not unusual for most electrical contractors. The money is held on account and is meant to be returned within 12 months of completion.
What happens when the main contractor has spent the money or simply forgets to pay? Delays are common, with some subcontractors waiting up to three years for payment, something that hits cashflow hard. This situation is untenable for many contractors.
Hopefully the government will legislate to put in safeguards for contractors, so they always get their money. In the meantime, remember, there are at least some steps you can do to make sure you receive that final payment. Importantly, be organised about chasing down debtors ahead of any retention coming due, and don’t wait for them to come to you.
Get ready for the taxman
If you have not already done so, pull together all the paperwork your accountant will need to submit your company accounts.
Of course, most will have kept diligent records over the last year, but if you are finding paperwork a challenge, there is plenty of support online. If you use bookkeeping software, you will already have this information ready.
The checklist includes:
- Bank statements, including personal, savings and referrals accounts.
- Loan Statements. Any details of loans taken during the year.
- Business Credit Card, with details of any interest earned.
- Finance Agreements. Interest on any new hire purchase during the year will be a tax-deductible expense.
- Payroll Records. Include national insurance details, as simply providing payslips is not enough.
- Sales Income. Whether you’ve been paid for a completed job or not, you need to include details of income.
- Petty Cash Receipts. Include a note of the petty cash balance at the year end.
- Stock Value. Make a clear estimate of any stock material.
- Purchases and expenses details. If you are going to claim tax deductions, you will need receipts as proof of purchase.
If you don’t currently use software making use of bookkeeping software, even free software will help you save time by being be organised. For instance, most modern bookkeeping software can now import information automatically from your bank and match with your expenses and invoices, making it much easier to see that the right money is coming in and out.
Making tax digital, and what it means for you
From April, all businesses above the VAT threshold of £85,000 will be required to submit their VAT returns via an electronic upload using accounting software that will need to be aligned with the HMRC system.
The aim is to make the entire process much easier, and possibly cheaper too. For some businesses, the move to MTD will come with minor costs. If your existing software will not provide the link, you will need to switch to one that does.
HMRC will also be providing a personalised digital tax account from HMRC for you to log in to see how much tax is owed. This may be a sobering experience, but at least it means you won’t be landed with an unexpected tax bill – something that has caused many business owners serious financial problems.
If you are one of the businesses that still uses Excel or even paper, the switchover to software will have its benefits – not least cutting the amount of time you spend on paperwork. Also, as most systems come with apps, you could even chase late payments or issue invoices while on site.
If you continue to use paper and Excel after Making Tax Digital, it could be an expensive and time-consuming activity. It will simply mean that you or your accountant will have to re-enter the data using HMRC approved software every three months. The result will be a lot of extra effort, but with none of the benefits that online software has.
Payroll year end
Once you have submitted your return to HMRC, you will need to issue all employees who were working on the final day of the tax year (April 5) with P60s. This document summarises their pay and deductions for the year. Remember, your employees need to receive them by May 31.
Taking the time and care to put your finances in order will make life easier for the next year, showing you how much money you have to invest and grow your business. Now is the time to get started.
Lee Murphy is the founder of Pandle (www.pandle.com) the cloud bookkeeping software specifically for small businesses and the self-employed.