Beyond the accounts. Tips to ensure your limited company supports your lifestyle needs.

13 November 2022

Chris James - Director of Accountancy Services

Chris James

Director of Accountancy Services

When you work for yourself, you must manage your income with extra care, but the big question is: what’s it all for?

Being vague about your financial priorities makes it difficult to know how much you need now and in the future, and this can lead to unnecessary anxiety. Conversely, when you have clear short and long-term lifestyle goals it’s easier to make good financial decisions today that take you in the right direction. Clarity helps you define how much you need to earn, how much you need to save/invest and, of course, how much you can afford to spend.

Earlier this month Chris James, Director of Accountancy Services, hosted a webinar exploring these issues as part of IPSE’s My Money month. The webinar looked at:

  • How to get clarity around your current & future financial priorities
  • What you can do today to build the future you envisage for you & your family
  • How your accountant can help you achieve your financial goals

 

The compliance cycle & its limitations

The UK tax and legal framework requires the filing of accounts and tax returns – these documents are designed to comply with company law and tax law, they are not optimised to help business owners plan or run their companies more effectively.

PSC contractors, as directors of limited companies, are likely to be familiar with two documents – the Profit and Loss account and the Balance Sheet. Both are important yet have limitations in helping a business owner see what their wider priorities might be.

The Profit and Loss account tells us how much profit our trade has generated in a period whilst the Balance Sheet gives us a snapshot of the business at a specific point in time.

These documents are historic and infrequent so are of limited value. What business owners really need:

  • Accounts that are up-to-date or ideally live.
    So check-in on a regular basis with your accountant (if we look after your accounts your named accountant will proactively contact you but you can always call whenever you need to speak. You can also track your accounts in real time via FreeAgent which is included in all our accountancy packages).
  • Benchmarks for pricing.
    Benchmarking can help you maximise the income your business receives, without being unrealistic. Don’t be tempted to discount too much to win new work – it will be harder to increase prices later. Also, don’t leave your prices unchanged just because it avoids a tough conversation – your services are worth paying for! Small increases in price are very valuable over time as our tables below show.
  • Budget documents and a budget mindset
    So you can measure your income/expenditure against a budget and test various scenarios, via forecasting.

 

Setting financial priorities

One of the best ways to optimise your income is to prioritise managing your business costs by getting into the habit of checking if they are necessary and good value. We all know that cheapest isn’t always the best route, but you can save £££s by reviewing simple things like your phone and broadband contracts.

It can be interesting to ask yourself:

If you had to make 10% more profit, what costs would you cut? Could you increase prices if you had to? Could you do both? Be aware of and challenge the obstacles you put in your own way! The table below shows the impact of a one-off 10% rise over a five-year period.

 

The table below shows the impact of a 5% annual increase in fees instead, over the same period:

 

If you aren’t able to cut costs or raise prices, at least you will have reviewed your position today, ready to think about it again in future. Get into the habit of doing a regular review and don’t forget to enlist the support of a trusted colleague or your Workwell accountant.

As well as reviewing your income and costs, you should review your balance sheet to check if you’ve got too much money locked up in customer debt or work in progress. Conversely, is your business cash-rich? If you’ve got money sitting in the bank, there may be tax-efficient options for you to consider to put it to good use.

Additionally, although it’s boring, don’t overlook insurance. Make sure you’ve got sufficient cover for debt as well as public liability, professional indemnity and so on. Check your needs with your insurer – when is the last time you checked your cover?

Tax planning

It can be helpful to think about your finances in terms of pots. You can create separate pots for your business, your household, your savings and your investments and/or pension. If you have additional businesses, consider them as separate pots. (Note that transfers between pots can create tax bills so do take advice if you’re planning on moving money from one pot to another. Loans between pots are sometimes more appropriate and can delay some tax implications).

Then think about which pots your money needs to reach and when to cover your costs and tax bills. Get into the habit of setting aside the money before you consider it as income.

Tax is an important consideration, but our advice is not to let the tax tail wag the dog. Invest time with your accountant so your tax planning is tailored – taxes change, as do your priorities. If your way of working has changed, then the received wisdom may not be optimal for you. There may be alternative approaches to reduce your tax liabilities ie. expenses such as protection may not necessarily need to come from your household pot, it could be a cost your limited company can incur.

In time, it’s worth remembering there are indirect tax impacts such as inheritance tax on undrawn pension pots or investments your company has made.

Setting future priorities

Conversations with your accountant shouldn’t only be about numbers. It’s a good idea for you to think about questions such as; what keeps you awake at night? What lifestyle do you want to enjoy now and in the future? What life events might you want to plan (with a cost in terms of finances or time commitment)? What does success look like for you and your business? This exercise can help you prioritise, break down the action steps and align the numbers.

We often talk to clients who want to take time out to expand their skill set; increase their income; plan retirement; sell a business; pay school fees or meet other family commitments; or take a sabbatical. Whatever it is you have in mind, the approach is the same – forecast cashflow and estimate income and costs.

Calculating the cost of your future

A forecast enables you to map out a few different ‘what if’ scenarios. For example, what if you added a new customer? What if you took time off for a few months? What if you planned your retirement date?

When forecasting, we must accept that we are working on part science, part art. A perfect forecast shouldn’t be at the cost of a good one that gives you the answers you need, remember it’s all about building the lifestyle you want to enjoy.

Whilst it should be an enjoyable and motivating exercise, try not to be over-optimistic – it’s a good idea to map out several scenarios in case things don’t go to plan. And don’t forget to include things like balloon payments for a business lease, renewing the household boiler if you’re modelling your whole household and other costs that arise from time to time.

Don’t forget to use your Workwell accountant to get good estimates of items like tax bills. And expand your business forecast to a lifestyle forecast by including household costs and other sources of income such as your partner’s salary or rental income.

This exercise should help you to see what’s possible and also be aware of any additional finance you might need if times are tough or your income cannot meet your future needs.

Putting YOU first

When you work for yourself, it’s not easy to take time off, but we all need to switch off every now and again.

Wellbeing isn’t a buzzword, take it seriously! Simple things like eating well, exercising and socialising will help you maintain balance. Working for yourself can at times be an isolating experience so get out and meet new people regularly, whether, by networking or other means, they can provide real camaraderie and valuable learnings.

Business success can all too often come at a cost to other areas of your life such as relationships. And remember, if you value a luxury, you don’t have to cut every cost but you do need to think about how you’re going to fund it so that it’s enjoyable rather than worrisome.

In summary

  • Basic financial statements do little to help you think about the future.
  • You should regularly review, with your Workwell accountant, your long-term aims.
  • Forecasting enables you to consider different scenarios for you and your business.
  • The right experts at the right time can support you in putting your plans into action
  • You shouldn’t lose sight of either your value to your business or the priority you need to give to protect yourself and that value – you and your business are more than just transactions.
  • It’s never too late to start planning and taking care of yourself. If we are your accountants, you will be in a regular cycle of contact but do remember you can get in touch at any time to discuss any aspect of your accounts.

 

Need help?

Your Workwell accountant is here to provide ongoing support and advice on any aspect of your business finances. We can also signpost you to other professionals who may be able to support you such as mortgage brokers, insurers and legal experts for issues such as wills.

Find out more about our limited company contractor accountancy packages, find out how to switch to Workwell or get in touch to discuss how we can help you.

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