Tag: paye

Why two bank accounts are better than one

Your main bank account will certainly look to be short of money. But that’s partly the point!

Running two bank accounts puts a massive focus on cashflow and making more money.

It’s not always easy.

But it shines an objective light on profit improvement and should mean you always have the money put to one side to make those chunky payments such as VAT, rent, PAYE, corporation tax, bonuses and dividends.

More money in the bank and less stress. What’s not to like?

Where to start with two bank accounts?

Every week set aside in the new bank account as much money as you need in order to make tax payments.

It’s simple – VAT is at 20% and Corporation Tax is between 19% – 25%, so if you put aside 40% of all the money that comes in from customers during the week then you’ll always have enough money to pay these taxes when they fall due.

Of course, you reclaim VAT on purchases and you pay Corporation Tax on profits, not on sales, so maybe 40% is a little high.

Perhaps 25 – 30% of the money collected from customers is a better starting point. Set up a weekly automated transfer or, if you use Starling Bank, you can set up “savings spaces”.

Over time the second bank account gradually builds up a decent balance and each quarter when you come to pay VAT and nine months after your year-end when you have to pay Corporation Tax, there’s no panic, you know the money is there.

Ideally there will still be money left over.

But isn’t the main account short of money?

Your main bank account will certainly have less money in it. But that’s partly the point!

The second very powerful benefit coming from the exercise is that your main bank account should have a lower balance and this should act as a trigger to do something about it.

The target you’re aiming for is that you can comfortably pay your staff, suppliers and the monthly PAYE / NI payment without needing to bring money back in from the second account.

Of course the second account is there as a safety net but you don’t really want to be using it for routine monthly payments.

Actions to improve cashflow

You can boost the balance of your main bank account through a combination of three things:

  • Increase your margins and profitability
  • Improve credit control
  • Ask your clients to pay by direct debit
  • Reduce spending until you can afford to spend more – including your own drawings from the business

If you succeed with these measures then you’re on the way to a really sound, profitable, cash-generative business.

And isn’t that what you’re after?

Can Blue Dot Consulting help you with cashflow?

There are several ways we help businesses with cashflow.

  • Encourage them to have two bank accounts and help them hold their nerve along the way
  • Build and maintain a cashflow model that looks backwards as well as forwards so it’s anchored in the real world and shows the road ahead
  • Make sure their bookkeeping is complete, accurate and up to date. None of this works well without good bookkeeping
  • Profit improvement

Can we help you?

Call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk and let’s arrange a free, confidential meeting to discuss your business and the steps you could take to get on top of cashflow.

Michael

How do I get started?

In your online banking simply programme a weekly payment of, say, £500 to get started. Over time you can adjust the value of the weekly payment.

Can I bring the money back if I need to?

Yes you can. But try not to. Two bank accounts really is a no-pain-no-gain initiative but the gains are so worthwhile.

How easy is it to implement some of the other cashflow improvement ideas?

There may be some tough conversations with customers and suppliers but provided you’re able to make changes you’ll soon start to see improvements in your financial performance and hopefully stress levels will reduce.

Related links:

Cashflow

Cashflow and upfront payments – don’t think you’re richer than you are

Don’t bank on your bank for cashflow

Part Time CFO – if this is the solution, what’s the problem?

The interim or part-time Finance Director option works well because it is quick to implement and it recognises that once the problems are solved you can go back to a lower-cost level of resource which will consistently get the right job done in the future.

There’s no such thing as a full-time FD role in most small or medium businesses. But if this is true then what can a small or medium-sized business do when it needs some experienced, practical financial input? A part time CFO might be the answer.

The first challenge for the management team is to recognise that they have some problems that can’t be dealt with by the existing finance staff.

This may be tough to do because you don’t know what you don’t know. However, some common indicators that all is not well with your business financials may include:

  • slow payment of your sales invoices
  • cashflow problems
  • inaccurate or late or no management accounts
  • losses
  • unpaid suppliers calling too frequently
  • HMRC not being paid PAYE and VAT
  • surprises in the numbers after the event

If you’re concerned about some or all of these symptoms then what can you do?

The expensive and slow answer is to recruit a senior financial person at Financial Controller or CFO level. A solution that’s quicker to implement and which will most likely turn out to be cheaper is to look for an interim or a part time finance director.

What can you expect from an interim or part time CFO?

Someone who knows what they are doing will have a meeting with you in which they should very quickly get to diagnose the financial issues in your business.  Once identified, these issues need to be prioritised and then resolved.

What you see next will probably include:

  • a cashflow model (this stands out on its own because it will quickly show whether there are very serious problems with the solvency and the future of the business which need to be addressed as a matter of urgency)
  • correct, meaningful management accounts being produced
  • a plan to improve profitability and lower the cost-base
  • changes to systems and processes and the introduction of new ones
  • a to-do list for non-financial staff to get on with to improve other parts of the business – particularly based around the profitability of products, services and customers
  • training of your existing finance staff to be a better job in a slightly different way
  • recruitment plan for the appropriate level of staff

All this can be done quickly, some of it may need to be!

The race is on to get the business working more profitably on “automatic pilot” and once this is in sight the input of the part time Finance Director can scale down and perhaps come to an end.

The interim or part time Finance Director option works well because it’s quick to implement and it recognises that once the problems are solved you can go back to a lower-cost level of resource which will consistently get the right job done in the future.

If a part time CFO could be just what you need

We may be part of the solution for you.

Because we do this work for clients on a regular basis.

If some of the problems described here are achingly familiar and you need some help, please give Michael Austin a call on 020 7125 0270 or email info@bluedotconsulting.co.uk.

Let’s meet, have a coffee and a good, long, confidential chat about your business.

Michael – @bluedotmichael

Related links:

Management information

Switching accountant – you can kiss a lot of frogs

Measure business performance and make more money

© Blue Dot Consulting Limited

Is my accounting any good?

Towards the end of this burst of activity the accounting processes should be working on “autopilot” and everyone can concentrate again on delivering the profit and achieving growth potential of the business.

Accounting is so important to your business that you literally can’t afford to be getting it wrong, particularly as you grow. But if you’re not an accountant, how would you know if your accounting is right?

The focus here is on the accounting that’s going on every day, week, month during your financial year. If this is accurate and up to date then year-end accounts and tax planning should be as easy as falling off a log (so make sure your accountant is not charging silly money when you’ve done most of the work!).

But if the day-to-day accounting work is not being done correctly you can be in trouble and not know about it until it’s too late.

Symptoms of your accounting work being done badly might include:

  • late / no / incorrect management accounts
  • persistent cashflow problems
  • PAYE / VAT not being paid
  • suppliers forever hassling to be paid
  • customers taking ages to pay and not being chased

Of course, these could also be the symptoms of a badly run business with a finance team that’s on a hiding to nothing!

But let’s assume that yours is a well-run, profitable business with good growth prospects. If you’re seeing these symptoms then it’s likely that you’re being let down by whoever is doing your accounting work.

And that is something you need to change – fast!

What does the world of better accounting look like?

When we work with MDs to improve the quality of their business accounting it’s amazing how much anxiety and stress disappears pretty quickly. Particularly by focusing on improving cashflow and gross profit.

Often this type of work involves a short but intensive period of:

  • bringing the bookkeeping and management accounts right up to date
  • getting credit management working right through the business
  • looking at “pricing for profit“
  • cost control
  • improving processes and systems

Towards the end of this burst of activity the accounting processes should be working on “autopilot” and everyone can concentrate again on delivering the profit and achieving growth potential of the business.

Sounds like a good place to be?

Thought so.

Michael – @bluedotmichael

Related links:

Bookkeeping for your business

Management accounts – are yours fit for purpose?

Set up an accounts calendar