Written by Drew Coles, member of the chartered institute of Management Accountants.
There is no distinction between your money and the money of the business. To summarise if your business is in debt you are personally in debt too. This is different for a limited company whereby the company’s funds and the owners are separate from each other.
You will need to register for VAT if your annual turnover exceeds the VAT threshold which is £85,000. You must register for VAT straight away if you believe your turnover will exceed this amount in near future. After registration you will need to keep VAT transaction details, add VAT to all your invoices and record purchase VAT. This is easiest to record using Bookkeeping software such as Sage which will also allow you to submit your VAT through the government gateway.
It is prudent to plan for the tax payable in January each year. A general rule would be to deduct 20% of your earnings each month and put them into a savings account for the tax payable. A good accountant will be able to forecast the tax payable at year end considering forecasted sales to enable you to get a good idea of the amount you will need to pay.
You will need to keep good records of business transactions and take care of the bookkeeping. This is the recording and allocation of business transactions for tax purposes to keep a record of revenues, expenses and profits and is required by law. You will need to keep all supporting information such as invoices, receipts, bank statements. There are several ways to do this including:
· Recording the figures, yourself on an Excel spreadsheet. This method is cheap but time consuming and you still need to consider the cost of an office 365 subscription.
· Using an Accountant to do the bookkeeping for you. This is the easiest method but probably the most expensive. It will reduce the amount of time you need to spend on your accounts and let you concentrate on earning more money. Have a look at our bookkeeping packages here.
· Using Accounting software to do the bookkeeping yourself. This method is a sensible one. It will take less time to complete your bookkeeping on accounting software as opposed to excel. You will also be able to take advantage of accountants support if you choose one of these packages.
It is worth noting that you need to keep all accounting records and supporting information for six years plus the current year for tax purposes
Cashflow is one of, or the most important aspects of the business. Most businesses fail because of poor cashflow even profitable organisations. Why is cashflow so important? Because purchases need to be made before items or services can be sold and while you are waiting for the customer overheads need to be paid and this is before offering business credit terms which will delay cash inflow even further. Therefore, it needs to be carefully managed and a healthy bank balance is imperative to start your new business. The easiest way to manage your cashflow would be to use a cashflow spreadsheet created on Excel to track your outgoings and incomings over a future period. We can do this for you by using our financial management services here. The next best way to achieve this is to use Sage accounting software which automatically generates a cash flow forecast for you by tracking your previous transactions.
Is it worth producing a business budget if you’re a sole trader. My answer is yes because of the following reasons:
· A budget can be simple and use only a few material figures to compare to actual results
· It gives you a comparison to how well the business is performing
· It gives you a target to aim for and helps motivate you.
· It helps you investigate if expenses and costs are higher than expected at the beginning of the period
If you need help producing these budgets we have a dedicated finance management service available here
Being a Sole trader can be tough not only do you need to carry out the work you also need to market your business, advertise as well as track your cash flow and record all transactions as above. Lastly it might be worth outsourcing some of these aspects to specialists such as the marketing using Google AdWords specialists for example, the more time you can spend working on your business and not get distracted the more money you can generate.