Crunchers Accountants

Crunchers Accountants

Budget Report 2012 – the Sole Traders Perspective

Archive for March, 2012

Budget Report 2012 – the Sole Traders Perspective

We have picked out the areas with particular relevance to sole traders and generally taken together we feel the picture is mildly favourable.  The stand out features of the budget are as follows:

Economic outlook: The Treasury predicts growth of 0.8% in 2012, 2% in 2013 and 2.7% in 2014.  Inflation is predicted to fall from 2.8% this year to 1.9% next.  I suspect that for most sole traders fears of a double dip recession are now fading.

Income Tax:  For sole traders the Chancellor had excellent news.  From April 2013 the personal allowance (the rate of income at which no income tax is charged) goes up from £7,475 (2011-12 rate) to £9,205.  That leaves most of us £346 better off straight away.  Not many sole traders fall into the highest rate tax earner bracket of personal income (over £150k), but for those that do, there was the good news of a reduction of the rate from 50% to 45%.

Simplification of accounts for small businesses: From April 2013 unincorporated businesses (ie sole traders) with turnover of less than £77k will be able to file accounts based on cash accounting.  The present invoice accounting system is more complex and requires you to take into account unpaid invoices, prepayments and resources you have received without receiving a bill.  The announcement should reduce admin somewhat.

VAT threshold: The threshold for registration increases from £73k to £77k from Apr 2012.  For some small businesses on the edge of needing to register this is an important figure to know.

Child Benefit: The previous threshold which proved so controversial has been changed.  Now as long as no individual of the household earns more than £50k, the full child benefit can be claimed.  For those earning over £50k child benefit reduces by 1% for every £100 earned above that £50k.  This means that at £60k child benefit reduces to £0.

Tax investigations: The Chancellor reminded us that the number of HMRC inspectors opening investigations has double recently and are specifically targeting artificial tax avoidance schemes.  This is not necessarily bad news for sole traders. See my previous blog on this topic.  However it does mean that we are more likely to get investigated at some point.  At Crunchers we see it as our job to give you the best chance to avoid a penalty if the tax man comes to call.  If you have any doubts about being at risk on this score, pick up the phone.

The changes that were made are generally favorable but some what would really help sole traders most in terms of tax was unchanged: Class 4 National Insurance.  This one tax affects sole traders more disproportionately more than any other.  A change on this really would be worth celebrating.

Understanding the Numbers Seminar Report

On Monday 27th Feb, seven enthusiastic small business owners met to explore the practice of using a set of accounts as a management tool.

Way back in the mists of time, accounts were prepared not to fill in tax returns but as a management tool.  They were designed to tell the business owner what was going well and badly in the business, what the threats and opportunities were.  When the tax man decided to base taxation on the numbers and they started being published (in the case of Ltd Companies), accountants started to put them in a form that did not necessarily give too much away.  This seminar was designed to bring accounts back to their original purpose.

We established a number of principles in reading accounts:
  • Look for trends
  • Eliminate one-off events like the sale of a property
  • Use ratios rather than absolute figures to compare years
  • Look at what is driving the numbers
We also focused on three specific areas to look out for in the health of a business: profit, cash flow and return on investment.  We identified that managing profit could only be done by managing sales and costs, looking at gross profit margin, av sale per £1 employee and a variety of ways of keeping track of sales effectively.  We looked at the significant indicators of healthy cash flow – the current and quick ratios and debtor days.  We explored return on investment as an indicator.

As ever the seminar was rated highly by attendees 8/10 for overall value.

I encourage as many as possible to attend next month’s where we will be exploring the mindset of an entrepreneur through the real life story and insights of an Australian Entrepreneur.  26th March, East Dulwich Tavern, 7pm.


Return on Investment – should it bother me?

Business analyists looking at the financial health of a business will look at three areas – profit, cash flow and return on investment.  To the average sole trader or small business owner that last one, return on investment, is a hazy concept at best.  Profit is another story –  most of us understand the focus on profit. After all profit is what gives us an income.  Some get the importance of cash flow – being able to meet pay our bills as they fall due is clearly important.  Only a few see the importance of return on investment.

Return on Investment or ROI is simply defined as the profit gained from an investment divided by the cost of that investment.  ROI is very widely used by investors looking to see whether a business is worth investing in. Given that most of us are not trying to get others to invest in our business, is it worth bothering with at all?

My answer to that question is an emphatic – yes!  The reason is that we are the investors in our business.  We are the ones putting in our time and money.  The time we invest most is right at the start of the business.  In this time of start up most business owners have no thought about the return.  We are full of hope and possibilty for the business.  No amount of effort is too much.  Most of us aren’t that money orientated anyway, we love our independence, our service and our quality of life more.  The trouble is that businesses require periodic and consistent investment.  Giving to the business without thinking about what you get back might be okay once, but how many times are you going to want to put in extra time, energy or money in without a real reward?

The sadest thing for me to see is people’s passion and energy for their project dwindle.  If we want to keep on giving we need it to give us something back and a business can be a voratious monster if you let it.  Conversely if the business gives us a return, then putting more into it becomes natural, exciting and energising.

At the simplest level ROI starts to answer the question ‘Is it worth it?’  Making sure that you have a healthy ROI is really about making sure that the answer to that question keeps being a ‘yes’.