Super-quick answers to important small business finance questions

It’s easy to make critical mistakes with your finances – even if you think you know enough. Accountant Paul Donno offers simple answers to key questions

Do you understand the difference between contribution and profit? Have you accounted for the depreciation of your website in your cashflow forecast? And how do you set aside cash to pay your VAT bills?

These are all key questions you need answers to keep on top of finances as you grow your business. That’s why we asked Paul Donno, managing director of 1 Accounts Online, which specialises in accountancy services for small businesses, to provide some quick and easy answers.

What’s the difference between ‘contribution’ and ‘net profit’?

The net profit is determined by taking the direct costs and overheads away from the sales and this gives the net profit of the business. It’s one of the key performance indicators that businesses should use.

Calculating the net profit percentage and gross profit percentage is always useful when managing your business. Working out the contribution takes a specific item and looks at the contribution that item makes to the profitability of the business. This is key in manufacturing.

Why should I include depreciation of assets as a cost in my forecast?

When preparing a profit and loss forecast for your business it is essential that the assets purchased are written off in the forecast over their useful lives and this is called depreciation.

The asset should contribute to the success of the business and the cost of using that asset is referred to as depreciation.

How much ‘bad debt’ should I budget for as a start-up?

I find this question nearly as strange as believing it is OK to make a loss in the first year? Why is it? When starting a business you need to understand that ‘cash is king’ and it is essential to have terms agreed upfront and a mechanism for collecting cash.

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As a business we use direct debit via Go Gardless. It costs us just 1% to collect monies from our clients but we don’t have any problems collecting our cash. If a customer treats you like a bank you can always say ‘No’ and don’t supply them anymore.

What are the key numbers I need to know to keep on top of cashflow?

Keeping ahead of cashflow is essential. A business owner needs to know the monies due in and monies due out and hopefully after that there is a surplus to invest in the business and pay themselves.

Having a robust system, such as SageOne, to give you a list of debtors and creditors is essential.

What does a typical cashflow cycle look like?

When looking at cashflow there are certain times that the cashflow is strained, normally every quarter when VAT is due and tax payable. We recommend that the business owner tries to smooth out the peaks and troughs of cashflow by using a deposit account to transfer the funds monthly for VAT, tax and possibly quarterly PAYE.

Registering for cash accounting for VAT will help cashflow if you give credit to customers. And if you don’t buy much that has VAT included, seriously consider the flat rate scheme for VAT as you could make a profit from VAT!

How do assets and liabilities affect my business’ cashflow?

Assets, especially current assets, should be convertible to cash within 12 months, hence being current. If the business carries a lot of stock it is essential to know how many times this will turnover in a 12 month period.

Old slow moving stock needs in most cases selling and converting into cash as soon as possible.  Understanding how long it takes to get paid is also essential, if your terms are seven days and you are being paid in 90 days you have an issue with credit control. My tip here is that the business owner should not be the credit controller and you are not a bank.

Equally your current liabilities are payable within a year and knowing who you owe money to is essential. We recommend you pay your creditors on time if not before as this will gain you more loyalty from your suppliers.

The level of debt that you carry needs reviewing regularly and if it is becoming unmanageable speak to your accountant as they may be able to restructure for you. Using an online accountant will help this process by recognising problems in real time.

How much cash do I need to set aside for corporation tax?

Corporation tax is 20% of the net profits. We recommend that you run your profit and loss account from your software monthly and set aside 20% of the net profit. As an online accountant we review this quarterly for our clients so that they understand what to set aside and what dividends they can vote to pay.

This article was produced in association with Sage One. For more business insight and tips to keep on top of cashflow and small business tax visit the Sage business blog

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