Tag: bad debts

Cashflow and upfront payments – do not think you are richer than you are!

Having a second bank account inevitably means there’s less money in your main bank account and this is a great indicator of how profitable your business really is.

Cashflow and upfront payments should not be a problem.

But – in a business where you get paid upfront you have to be so careful to remember that costs and cash outflows will follow the cash inflows – so don’t spend all the money!

Surely upfront payments are cashflow paradise?

Ask the majority of businesses that sell on credit whether they would love to get paid upfront and of course they will all say yes.

Positive cashflow, less time and money spent on chasing debtors, very low risk of bad debts – what’s not to like?

But too many businesses fail to manage this position well enough and can fail as a result.

Do not think you are richer than you are

Let’s say you have a property refurbishment business and you insist on being paid steadily throughout the duration of a project. Obviously a sensible way to run your business.

But the danger is that you take too much of the money out of your business and forget that there will be costs from suppliers to be paid, VAT, tax on the profits etc.

Even worse, you might take your eye off the ball regarding costs and let them over-run. In this case your profit margin has gone and there is even more money due to leave your business. After you have already spent a lot of it!

It’s all too easy to think you are richer than you are and spend money that should be earmarked for other purposes.

What’s the answer?

There are two sensible things you can do:

  1. Ensure you recognise in your management accounts all of the costs related to the revenues you have invoiced
  2. Have a separate bank account where you keep money that you know has to be paid out – to suppliers, HMRC etc.

The second bank account is incredibly useful because inevitably it means there is less money in the main bank account and this is a great indicator of how profitable your business really is.

Cashflow is so important – we all know that.

But even where businesses get themselves into a very strong position through upfront payments from customers we still see too many fail to manage this position of strength and struggle when they should not.

Michael

Can we help your business with any aspect of bookkeeping, accounting and cashflow management? Please call us on 020 7125 0270 or email info@bluedotconsulting.co.uk

Related links:

Cashflow

Outsource your accounting and bookkeeping

Get paid quicker – 5 ways to avoid bad credit risks

www.bluedotconsulting.co.uk

Accountants aren’t always checking your accounts

Has your accountant made sure your annual accounts agree to your books?

Too often we see examples of companies where the published accounts at Companies House bear little resemblance to the numbers in the client’s accounting software.

They should be the same.

How could they be different?

And what is the impact?

How does it happen?

A company, it could be yours, does its own accounting in its accounting software and everything is seemingly working OK.

The company goes past its year-end and, in a cloud accounting world, the company’s accountant logs in to the software to prepare the annual accounts.

The accountant, in their accounts preparation software, makes some adjustments – typically to do with bad debts, accruals, corporation tax, dividends etc. – and produces the accounts to be submitted to Companies House.

So far, so good, but the accountant should then make very sure that all of the adjustments are properly reflected in the client’s own software. If not, the client’s own bookkeeping is simply wrong.

Management accounts will be wrong, possibly VAT returns will be wrong and if this goes on for a couple of years then the discrepancies just get bigger.

If your management accounts are wrong then, to put it bluntly, you don’t know how your business is performing.

HMRC turn up for an inspection of the adequacy of accounting records (something they’ll be doing more of with extra resources and AI) and find that the accounts they have received with the corporation tax return are different from the records they’re looking at and it’s not a good start to their inspection!

Couldn’t happen to you, could it?

It is one of the first things we check when companies  change to Blue Dot Consulting for their accounting work. Worryingly, more often than not there is a difference between the company’s books and the accounts at Companies House.

What can be done?

As more and more businesses adopt cloud accounting solutions we should see this problem less often.

But you should insist that your accountant either:

  • sends you the list of adjustments that need to be made to your books along with instructions for how to make them or
  • logs in to the accounting software and make them directly

Get your accountant to take responsibility for ensuring that your books agree to your published accounts. After all, it should be part of the service they have asked you to pay for.

It seems this is not always happening. Go and check yours now!

Michael

Related links:

Year-end accounts and tax

Milestone or millstone

Our year-end should take care of itself, shouldn’t it?