For some, juggling the financial responsibilities alongside the day job works, but for others balancing the budget is one of the hardest parts of running their own business – forecasting what you will need for the year ahead before it has even finished.
With over 4.5 million people contracting at the end of Feb 2014, an increase of seven per cent year-on-year, getting the sums right is fundamental to ensuring your business’s success.
Here Claire Johnson, Managing Director of SJD Accountancy, specialist accountants for limited company contractors and freelancers,provides her top five tips on how to balance your budget. Claire writes:
1. Look at the best structure for your company
Working for yourself is a big decision, so making sure you run your business in the most tax efficient way possible could save you thousands in the long haul. Often it can be more tax efficient to set up as a limited company, where you can minimise the financial highs and lows of being a contractor by paying yourself through dividends and a monthly salary.
As a limited company you are eligible for VAT and NI savings as well as being able to claim certain expenses for your business. A brief summary of allowable expenses includes; company formation, accountancy fees, business travel, fuel, computer equipment and software to name just a few. You might also be able to participate in money saving Government schemes such as childcare vouchers, which can save parents a significant amount in tax each year on childcare costs for those with qualifying children.
Becoming a limited company is easier than most people think. If you already operate as self employed, a call to HMRC informing them of your change of status will stop your self-employed class 2 NI contributions.
Next, choose a name for the company and register it at Companies House. You will also need to set up a company bank account and decide whether or not to register for VAT and PAYE.
Remember your company bank account is a separate entity from your personal one and you should consider a number of things before deciding which one is right for your business, including their fees and charges, testimonials from other small businesses and what benefits they offer in the long term for your business.
2. Make sure you plan ahead
Outgoings such as your company taxes are due long after you have undertaken the work and received payment. Make sure you plan ahead and forecast your expenditure as well as your income. Keeping on top of deadlines for when you need to submit annual returns and other tax related documentation will prevent you becoming liable for fees and other penalties, which can accrue from £150 for a day late submission of annual accounts to a whopping £1,500 fine for a six month delay.
Obviously working for yourself means taking the risk of having the odd quiet week but negotiating competitive rates and budgeting this effectively will mean quiet months won’t leave you out of pocket.
Also be sure to take into account holidays. If you are working as a limited company pay yourself a monthly salary which accommodates holidays and sick days.
3. Look for ways to keep costs down
This sounds like a no brainer but it is amazing how many people invest in costly software, training and resources when setting up a business, only to realise they don’t need them later down the line.
Look at websites for free downloadable resources, see if you can negotiate contra-deals on services you might have to buy in and produce your own website on a site like Wordpress.
Once you are a little more established, ask customers to recommend you to friends and customers, maybe offering them a discount if you benefit from some work from someone they have recommended. Ask happy customers to like you on social media and ask for testimonials for your website. All of this can be free publicity for you and your company and can grow your business while keeping costs down.
4. Review and negotiate your rates regularly
When you first start out, finding the right rate to sell your services can be hard. Many of those new to contracting will undersell themselves to win contracts. Make sure you review the marketplace and know your worth. Look at the better paid contracts and focus on chasing those, rather than spending lots of time courting lesser paid jobs.
Likewise, look at strong industry sectors by keeping up to date with the financial pages. If the manufacturing or financial sectors are doing well, look for work with organisations that work within these industries.
Review your rates regularly and remember to negotiate with every job. Assess each piece of work against what needs to be done and the level of skills and time it will take and cost accordingly rather than quoting the same price for every job.
5. Appoint the right accountant
This may seem like an odd way to budget your finances successfully and in the early days when making the move from permanent to contracting you may think an accountant is an unnecessary business expense, however getting professional advice from an accountant who can recommend the most tax efficient way of dealing with your money is often money well spent.
They will be able to help you prepare your tax returns and advise on the most tax efficient way of working through your limited company. HM Revenue and Customs saw over 730,000 business owners submit their tax returns late in 2013, incurring a staggering £73 million in late payment penalties and to date an estimated 650,000 to 850,000 taxpayers are still yet to file their self assessment tax returns for the 2011-12 year. Using the services of an accountant means you can be reassured that the right forms will be completed, at the right time, in the right way.
A good accountant will also keep you up-to-date with the latest policy changes and tax thresholds like in the latest budget that saw personal tax allowance raised to £10,000, to be increased by a further £500 from 6th April 2015 creating £800 average savings.
An accountant will also be able to advise you on whether you should become VAT registered, and whether the flat rate VAT scheme would work for you, allowing you to charge VAT on your invoices (presently 20 per cent) while paying back to HM Revenue and Customs at a lower rate.
Bringing strong financial advice and guiding you on what you should and shouldn’t do with your budget, an accountant should help you shape the financial future of your business. Make sure your accountant is recommended for your area of expertise and is used to working with small businesses and limited companies, offers an inclusive package so you know the amount you are paying for up front and as no entry or exit fees in case you decide ever to go back to permanent employment.
Working for yourself can be a rewarding business venture. Making sure you balance your budget can ensure you are free to provide the service that your clients are paying for and the reason why you decided to work for yourself in the first place.
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Susie Hughes © Shout99 2014