Finance and Business Blog

Cashflow is often a problem for small businesses and Invoice Finance may represent a possible alternative and cheaper solution to the traditional bank overdraft.

For a fee, an Invoice Finance provider will make an initial payment to a small business based on a percentage of the value of an unpaid invoice. This may be as high as 90%. The outstanding amount of the invoice is paid to the small business when the customer settles the bill.

Businesses can choose one of two possible products. The first, ‘Factoring’, provides a credit control service as well as funding of the value of the invoice and is available for new aswell as established businesses. The second, ‘Discounting’, provides funding only.

Invoice Financing is a flexible borrowing solution for small and medium sized businesses, particularly those which suffer cashflow problems due to late or non payment of invoices.

Earnings Tracker can be used for contracts that are caught by IR35 and contracts that are not.

As contracts need to be assessed individually to see if they are caught by IR35, you can set your salary(ies) in Earnings Tracker to soak up the contracts that are caught. This will automatically set your dividend payments accordingly.

One of the many features being introduced in version 5 of Earnings Tracker, which is due for release in December 2008, is to allow up to eight individual invoice amounts to be entered. This will allow you to easily identify revenue amounts generated by different contracts.

It seems that a new banking crisis hits the news almost everyday at the moment. So, if you own a small business, how safe are the funds you have in your company’s bank account? Well, the first £35,000 is probably safe, which is good to know.

A UK based small business account is almost certainly covered to the same extent as the personal bank account guarantee which currently covers deposits of up to £35,000. This is because a business account is covered by the small business guarantee if the business qualifies for two of the following three criteria:

- Your annual turnover is below £6.5m
- Your balance sheet total is below £3.26m
- You have less than 50 employees 

If you have more than £35,000 in your business account,  you could spread the funds across separate accounts at different banks that are individually authorised by the FSA, because each will have the £35,000 protection. This way, you can spread the risk.

Earnings Tracker - FREE Accounting / Bookkeeping Software Tool for UK Contractors 

Gross Profit 

Gross profit is the difference between Sales and Cost of Sales.

For example:
Sales = £100,000
Cost of Sales = £30,000
Gross Profit = £70,000

Cost of Sales will include, for example, the cost of buying the raw product to be sold and the cost of any production labour.

Net Profit

Net profit remains after all expenses except for corporation tax have been charged to the gross profit. These may include staff salaries, rent, and rates.

For example:
Sales = £100,000
Cost of Sales (cost of buying raw product and manufacturing it) = £30,000
Gross Profit = £70,000
Expenses (salaries, rent, rates, etc) = £40,000
Net Profit = £30,000
Corporation Tax = 21% x £30,000 = £6300
Amount Available for Dividend Distribution to Shareholders = £23,500

Earnings Tracker - FREE Accounting & Bookkeeping Software Tool 

Many UK contractors have a single contract on the go at any one time. If this contract is caught by IR35, there isn’t really much scope for dividend payments to be made.

With contracts that fall within IR35, 95% of the revenue earned from that contract has to be taken in salary, which is subject to PAYE tax and national insurance. The remaining 5% is intended to cover expenses such as accountancy fees, which cannot be used as an expense to reduce tax and NI on the 95% taken as salary.

What you might find is that part of the 5% is still in the company bank account after you have paid your accountant, and this may be taken out of the company as a dividend payment.

If your company has multiple contracts, some of which are caught by IR35 and some that are not, then any profit (after corporation tax has been paid) generated by the contract(s) not caught by IR35 can be taken as a dividend payment, while 95% of the revenue generated by the contract(s) caught by IR35 can be taken as PAYE salary.

What is a dividend?

A dividend is the distribution (to shareholders) of a limited company’s ‘after tax profits’. ‘After tax profits’ are calculated by taking the total company revenue, and deducting expenses (salaries, etc) and corporation tax. Dividend payments can only be made if there are ‘after tax profits’.

Tax advantages of dividends

By combining a small salary with dividend payments, dividends provide a tax efficient way of earning income, as large amounts of National Insurance (NI) payments can be avoided.

Also, for higher rate tax payers, dividends are taxed less than the higher rate tax of PAYE tax (40%).

Dividend Tax Vouchers

A dividend tax voucher must be prepared for each shareholder to whom a dividend is paid.

This document shows the amount of the net dividend and the tax credit at the rate of 10% (equivalent to one ninth of the net dividend). 

How often can dividends be paid?

Dividends can be paid at any time and frequency as long as they are paid from company profits after corporation tax together with the correct preparation of documents.

Large companies tend to pay dividends once every quarter, but there is nothing in statute or tax law preventing a company from paying monthly dividends.

Bookkeeping is the process of systematically recording the financial transactions of a business, so as to show how the transactions relate to each other. Bookkeeping is largely a mechanical process and does not involve any analysis of the financial transactions, but rather the recording of them.

Accounting is the systematic recording, reporting, and analysis of financial transactions of a business. As bookkeeping involves making a financial record of business transactions, it is true to say that the role of bookkeeping is encompassed within the scope of accounting, and the bookkeeping system used by a business would form part of the accounting system.

Accounting also includes the preparation of statements concerning assets, liabilities and the operating results of a business.

In a small company, all the bookkeeping and accounting tasks may well be performed by a single person. In this situation, that person would normally be referred to as an accountant.

FREE Accounting / Bookkeeping Tool - Earnings Tracker

Hitchin, United Kingdom (PressExposure) August 01, 2008 — Earnings Tracker is a straightforward simple-to-use accounting package primarily aimed at UK-based contractors and other very small businesses (with typically less than five employees).

The software is written in PHP and MySQL, and is completely free to use and download. As it is written using open source technologies, it can be easily modified to suit individual needs.

Now at version 4, Earnings Tracker enables invoice amounts, salaries, income tax, employees and employers national insurance contributions, pension contributions and expenses to be recorded on a monthly basis. The software then calculates the amount of VAT and corporation tax owed, and calculates the maximum dividends that can be taken by shareholders. Figures are automatically carried from one year to the next.

The user interface has been designed with simplicity in mind, and is organized to suit the way most UK-based contractors record their company’s finances.

Version 4 introduces the ability to generate and maintain dividend tax vouchers, and also enables individual columns (within the main spreadsheet) to be shown or hidden. This allows users to, for example, hide columns that contain data that does not relate to their particular business.

Full details about Earnings Tracker can be obtained from the John Dixon Technology website.