Richard Hallsworth - making the numbers come alive. . .

Prepare for 2009, important action points

2009-01-02T18:15:31.4680000-00:00

The passing of one of the most volatile economic years for 50 years and perhaps since 1929 was celebrated as usual with fireworks and partygoers rejoicing and singing auld lang syne. And it seemed that for a short while the economic trials and tribulations of 2008 had been forgotten.

But then as quickly as the New Year festivities had approached they passed and we woke in 2009 to the same woes and economic uncertainty that we thought we had left behind. It would seem though, that the only certainty for 2009 is that it’s going to be a tough year.

So as we enter 2009 what actions should we be taking to prepare our businesses and ourselves for the year ahead?

1. Write a business plan

One of the most important actions should be to take time out to review your business and write a business plan for the year ahead. 2009 will not be a time for economic gambling and the business plan should ensure that the basics of your business are reviewed and that risks are identified and provisions to manage them are developed.

The plan should also spell out a number of scenarios that address the “what ifs” so that you are as fully prepared as possible for all that 2009 offers.

2. Forecast cash flow

Another important action should be to either update or create a cash flow forecast for the year ahead. Cash is the number one reason for business failure and therefore understanding the cash flows, both in and out, and their impact on the business is vital for survival.

A cash flow forecast should only be prepared for up to 12 months as it is almost impossible, under the current economic conditions to predict with any degree of certainty the cash flows more than a year ahead. The latter months of the forecast will be less accurate for this reason but it will act as an estimate of the cash flows.

In addition to an annualised forecast it is also a good idea to prepare a cash flow forecast on a much shorter basis that actually forecasts cash payments and receipts. This is both good from a planning perspective but also provides a schedule to work to and from which actions and tasks can be created from.

Once the forecast has been finalised it should then be possible to identify key indicators of performance that you can track and monitor as 2009 progresses.

Of these indicators gross profit and breakeven are two of the most important business health indicators for a business owner to understand.

3. Prepare up to date accounts

Whilst it is important to look to the future it is also important that you know where you are right now. Therefore bringing book keeping records up to date and preparing management accounts that can be compared to the future forecast is a vital task for the dark cold January nights.

Regular monthly management information can be an early warning system to a businesses health and should therefore be a priority on the January task list.

It is also important to ensure that the financial system is capable of making available information to enable you to review key performance indicators alongside the accounts and forecasts.

4. Review tax payments

Tax payments; Income and Corporation tax, PAYE and VAT can cause significant cash flow spikes that can seriously deplete cash reserves. The cash flow forecast will highlight the timing of these spikes allowing you the time to talk to HMRC to discuss the possibility of spreading the payment of liabilities.

It may also be possible to reduce income tax, first payments on account for the year to 5 April 2009 if current management accounts show reduced profits and you don’t expect future changes in performance.

2009 doesn’t have to be a year of doom and gloom. Whilst it is likely to be a very tough year for most businesses and their owners early planning to identify risks, cash flows spikes, deficiencies and problems will allow sufficient time to action remedies.

Pre Budget Report - a mini budget

2008-11-24T09:22:16.2340000-00:00

The chancellor has announced his pre budget report. The main tax changes and how they will affect individuals and businesses are outlined below:-

VAT
The standard rate of VAT is reduced from 17.5% to 15% on 1 December 2008. This is a temporary reduction until 1 January 2010 when the rate will revert to 17.5%.

This should reduce the price of VATable goods and services that you buy. However this will only happen if the businesses who sell these goods and services pass on the 2.5% saving.

If the savings are passed on, it will reduce the cash cost (inc VAT) of a £50 VATable purchase to £48.94.

Personal Tax changes

Personal Allowance 2009-10
From the 6 April 2009 the income tax personal and age related allowances are increased to:

Age under 65 - £6,475
Age 65 to 74 - £9,490
Age 75 and over - £9,640

The income limit for aged related allowances (over 65's) is increased to £22,900.

Blind person's allowance increased to £1,890.

Personal Allowance 2010-11
The personal allowance will be reduced for individuals with gross incomes, before personal allowances, above £100,000 and further reduced for gross income above £140,000. This measure will progressively reduce the personal allowance available to these high income groups. It will also produce a marginal rate of tax of 60%.

Income Tax Rates 2009-10, taxable bands
Starting savings rate 10%* - £0 to £2,440

Basic rate 20% - £0 to £37,400

Higher rate 40% - Over £37,400

* There is a 10p starting rate for savings only. If an individual’s non savings taxable income exceeds the starting rate limit, the 10p starting rate for savings will not be available for savings income.

Income Tax Rates 2011-12
A new tax rate of 45% is to be introduced on income over £150,000.

A new 37.5% rate of tax will apply to taxable dividend income above £150,000

National Insurance changes 2009-2010
Class 1 contributions: Lower earnings limit increased to £95 per week, the primary threshold increased to £110 per week, and the upper earnings limit increased to £844 per week. No change to NIC rates.

Class 2 contributions: Increase in weekly rate to £2.40; small earnings income exemption increased to £5,075

Class 3 rate: Increased to £12.05 per week.

Class 4 rates: Rates unchanged; lower profits limit increased to £5,715 per year; upper profits limit increased to £43,875 per year.

Note: The number of qualifying years required to receive a full State Pension falls from 44 for a man and 39 for a woman to 30 for both men and women from 6 April 2010.

National Insurance changes 2011-2012
Class 1 and Class 4 NIC's to be increased by 0.5%. Both employers and employees rates will be affected.

Child Benefits
Increases due from April 2009 have been brought forward to 5th January 2009. The new rates are:

Eldest or only child £20 per week

Other children £13.20 per week

Pensions tax relief 2009-10
Annual allowance increased to £245,000

Lifetime Allowance increased to £1.75m

Fuel Duty
From 1 December 2008 the main fuel duty will increase by 2 pence per litre. The reduction in the standard rate of VAT to 15% should compensate for this increase.

Business Tax changes

VAT
We have set out below a few of the advantages and disadvantages for businesses as a direct result of the reduction in the standard rate of VAT to 15% on 1 December 2008.

- If you have not yet registered your business for VAT the reduction today should marginally improve your profitability; as long as your suppliers pass on the VAT decrease.

- If you are registered for VAT you will not see any improvement in your profitability unless you decide to retain part or all of the VAT rate reduction, by minimising any price reduction to your customers.

- For many years now the VAT fraction, the amount you would multiply a VAT inclusive figure by to calculate the 17.5% VAT amount was 7/47. The new fraction to calculate the 15% VAT included in a VAT inclusive figure is 3/23.

- Don't forget to change the standard rate of VAT in your accounts software to 15% for transactions dated after 1 December 2008!

Other VAT issues - effective from 1 April 2009

1. Businesses with annual retail sales of up to £130m will be able to apply to use one of the five retail schemes. Presently these schemes are limited to businesses with retail sales up to £100m.

2. The entry and exit rules for the flat rate scheme are simplified. The rates applied to the scheme are revised from 1 December 2008 to reflect the change in the standard rate on the same date.

Corporation Tax
The planned increase in the small companies’ rate of corporation tax from 21% to 22 % from 1 April 2009 has been deferred until 1 April 2010.

Income Shifting
The unpopular proposal to introduce legislation on 6 April 2009 to counter income shifting, has been deferred.

Extension of carry back of loss relief
This extension to loss relief's already available will enable both incorporated and unincorporated to carry back current losses, that were previously restricted to set off against the preceding year's profits only, to the previous 3 years profits. The following bullet points summarise the main points:

- The relief is available for one year only. For limited companies, trading losses in an accounting period ending between 24 November 2008 to 23 November 2009. For unincorporated business losses agreed for a trading period that forms the basis period for 2008-09.

- HMRC will make repayments occasioned by claims for the new relief on or after Budget Day 2009.

- The amount of the loss that can be carried back is limited to £50,000.

- Losses will be applied to the latest of the three years first.

- As this is an extension to existing loss relief legislation, the current relief's are still available.

Capital Allowances and Cars
The Government is pressing ahead with changes to the way in which businesses can claim tax relief for the purchase of cars.

The new rules will have effect from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses.

Essentially allowances will be given from the April 2009 dates according to the CO2 rating of the vehicle. Cars with emissions over 160g/km will be limited to a 10% writing down allowance. All other vehicles will attract higher tax allowances depending on their CO2 emissions. It will still be necessary to adjust claims where there is an element of private use.

Business Payment Support Service
From 24 November 2008 HMRC are introducing a new Business Payment Support Service. The telephone number is 0845 302 1435.

The declared aim of the new service is to "... meet the needs of businesses affected by the current economic conditions.".

On the face of it this would seem to be a step in the right direction. So if you have genuine cash flow problems and are going to find it difficult to meet any payment due to HM Revenue & Customs, PAYE/NIC, or other business taxes, give them a call.

Apparently if you reach agreement for extended payment terms you will not be charged late payment surcharges, but you will be charged interest.

This new service should not be contacted if you have an existing arrangement in place that you wish to change - call the department that you originally contacted.

Don't wait for court action to be taken - the sooner you get in touch the more likely you are to achieving an agreement to pay your dues by instalments .

Credit Crunch Survival Guide

2008-10-10T08:31:14.1960000+01:00

Last night I presented at a Business Link seminar titled "Beat the Crunch". Following the presentation it was clear from the questions asked that there is some concern in amongst SME owners as to how they may be effected by the current economic climate. I was also surprised that some of the business owners were activley looking to grow and were seeking financing for their expansion plans.

To help your business survive the credit crunch there are a few things that you can do. Over the next few weeks I will be posting ideas to that may help.

Review the businesses health and identify risks

One of the main reasons for business failure is lack of cash and general liquidity (the ability to raise cash for working capital purposes). At times where credit, from banks, is in short supply it is vital that business owners plan both the use of available cash within their business and the future cash requirement.

A good cash flow forecast will ensure that cash requirements are planned and that there should be no unexpected surprises. A cash forecast will also highlight any future cash requirements for new or replacement assets.

Credit control is also vital, ensuring that customers pay you when they are supposed to. This provides two benefits in that it makes cash available to you and also helps to avoid non payment because of business failure.

Business risk can arise when a business is too reliant on one customer or supplier. Trying to spread business out amongst suppliers or having a standby option will help to reduce supplier risk.

Customer risk can be reduced by finding new products to sell to existing customers, by selling existing products to new customers or finding new uses for existing products (new markets and customers).

Another business risk that needs to be reviewed is a drain of cash by overheads that are not being used / fully used within the business due to the drop in levels of activity. Overheads and staffing and employment costs should be reviewed on a periodic basis to ensure that they are being used. (Before taking any action to reduce staffing costs professional advice should be sought in terms of redundancy and the process.)

Check back soon to read my next post!