December 9, 2019

How Can you afford it ?

Do you sometimes find yourself wanting something for the business, but thinking you can’t afford it? Like any purchase, you should first ask yourself the questions ‘why do I want it? What benefit will I get once I have purchased it?’

miniDepending on the answer to these two questions, you can then decide whether to even think about how to fund it. A very simple and small example was a purchase I made at the weekend. I am a latecomer to iPhone’s and have historically logged my mileage in my diary so I could make a claim at the end of each month. Sounds good as I always have my diary with me so can easily enter the mileage. Trouble is, you run out of space against the day; although I keep my diaries, it would be hassle for the taxman to go through and agree my monthly claims even though I do circle the numbers for easy reading. However, one of my clients has been using FYI Mileage and sending me the sheets each month. I splashed out £1.99. I can now tell you I have done 12 trips amounting to 143 miles since 1st July. By recording 27 more miles than I would otherwise have remembered to claim for, I have covered the cost by the reduction in Corporation Tax I will have to pay. I am sure I will manage this by the end of July. So, return on investment one month maximum.

 I know this is a minute example, but I also placed an order for a stand at The Business Show at Olympia. This is costing nearer £3,000. Same rules apply. What do I need to ‘sell’ at the show to recover the cost and cover my, and my staff’s, attendance and travel and accommodation? I have done the maths and happy that we will bring in revenue that will exceed the costs.

 So the next question is cash flow. How do I pay for the show before I get the money from the sales? The answer is I agree a payment plan to spread the payments. The salesperson was amused that when I had said that my business is training clients in the area of understanding their finances, that I was demonstrating exactly the same to him regarding my own. Justifying why I was not prepared to pay it all today, or even all within 30 days when the show was not until November. That I could use much of the cash not paid up front to generate the income that would allow me to pay the balance prior to the show. A mutually beneficial timing was agreed with the condition that I would be included in all marketing even if they had not received full payment. I have got caught out by that one before. So watch out for Wellington Consulting links in The Business Show marketing. I also hope to see you at stand 160!

So what have you bought recently that you first thought you could not afford until you worked out the benefits? How did you finance it? Please share your ideas so that others can enjoy accounts and grow their business.

How much are your customers worth to you ?

This may be a question that a marketing person asks you, but do you know how to calculate it?

The first element will be how much does a ‘typical’ client add to your turnover in a year? This then begs the question, what is typical? So, you might wish to group them and do a calculation for each type. That’s fine as you are already identifying that not all clients are the same.

Tax return sooner rather than laterHaving decided contribution to turnover, the next element is contribution to profit. You may have some clients where there is only a small contribution, but it is regular and there are no hassles involved in these types of clients/customers. They do what they are told, give you plenty of notice and always pay on time. You may also have a group who seem to apply the 80/20 rule. They use 80% of your time for 20% of the rewards. If you are accurately measuring profit, have you included enough follow up and administration time to answer all their queries and spend days on the phone and writing trying to collect payment.

The next element is how many purchases do they make from you? Have they driven you down on price, purely to move on next time to the next special deal they can find. Do they value consistency and may even be prepared to pay more for the knowledge that you will charge them a fair price and offer a quality service rather than skimping to keep within budget?

The final element, which is what made me choose this topic, this week, is how much marketing do they do on your behalf? Sometime this may be a direct referral, sometime it may be that several of your clients/customer have spoken positively about their experience of your service/product, or it may be that you have signage on your car/van and others have seen you in the area and built up a certain trust. If you had not been in the area for a particular customer, others would not have seen you.

So, I have not given you a precise formula for how to work out the answer, but hopefully food for thought.

How many hours do you work ?

As part of the new regime that HMRC are bringing in for payroll know as RTI (Real Time Information) you will need to declare whether each employee does under 16 hours, 16 – 30 or over 30 per week or is an occasional worker. As a business owner, you may well do over 30, but how many do you get paid for?

 

At minimum wage (currently £6.19 per hour) you would need to be taking a salary of £9,657 to meet this hourly rate on 30 hours per week. If you are a director of a company, it may be that your company recognises your efforts by paying you a dividend depending on the profitability of the company. Even if it does not have the cash to pay you at the time, it may reserve the funds by adding it to the amount the company owes you. This is not uncommon. Dividends do not attract National Insurance whereas salary does.

 

So, is this a ploy by HMRC to ensure that company directors are getting a fair wage or will they start chasing those companies that primarily pay their directors by way of dividends on their shareholdings?

 

The good news is there is another box to tick which says the hours are unspecified. As a director you may choose how many or how few you work so this sounds like a more accurate answer.

 

If you employ your children during the school holidays to create PowerPoint slides, help with your web site, proof read the book or reports you have written, they would be counted as ‘occasional’ workers so must go on the payroll, but you don’t have to pay them every month. Remember this is an allowable expense of the business and will reduce the tax bill whether you are a sole trader or a limited company unless – of course – you pay them a huge salary. The minimum wage for under 18s is £3.68 per hour.

Are you charging enough ?

 

What is enough for you? This leads from the question ‘why are you in business?’ This week I had a client who greeted me with the comment: “Every year when I drive over with my books, I tell myself I really ought to put my prices up”.

She provides her services mainly to the elderly in care homes with limited incomes. Her children have both left home and the second one is now going through university. Her main reason for working was to pay for their education, but she also enjoys her work. Do you think she should put her prices up?

Pricing is not all about making the greatest profit you can, it is about understanding the figures so you can decide what is appropriate. Do you want to price yourself out of the market, or just appeal to a small niche? Someone I worked with a couple of weeks ago had just taken an order for a dining table at £35,000. That is not a typo. I can confirm that I will not be placing a similar order.

In order to ensure you make a profit, you do need to understand what costs are involved, both in the delivery of that particular sales and in the running of the business. If you don’t have precise figures available, just jot down what your overheads are in a year divide, by twelve and realise how much you need to make in a month before you even consider the costs involved in a sale. This is why you cannot afford to work for free. By all means give a sample or taster away, but make sure your customer knows this is not the norm.

If you feel that you need to talk through your pricing structure please get in touch