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A basic introduction to bookkeeping, bank accounts and allowable expenses

January 04, 2011 by Elaine Clark

Every business needs accounts. They may differ in format and complexity, but every self-employed person must produce accounts to complete their tax return, while limited companies must complete accounts according to the Companies Act. Here are the answers to a few frequently asked questions about start up account keeping.

Do I need a separate business bank account?

Some small businesses don't like to open a separate bank account because of the charges, but if you don't have a dedicated bank account for your business, there is much more risk of confusion and your bookkeeping will take longer because there will be more transactions to account for – many of which will be irrelevant to your business.

Banks often give you a good deal when you start up, change banks or keep a minimum balance in the account. Even if there is a cost, this has to be set against the fact it will make your bookkeeping much easier, quicker and cheaper.

If HM Revenue & Customs investigates your business, you will be giving them access to your personal as well as your business income when they look at the bank statements if you mix everything up in a private account. It also means that whoever is preparing your accounts and tax returns will see details of your personal/private spending, of course.

If you operate as a limited company – although there is no specific legal requirement – you are strongly advised to open a separate bank account for the company.

I’ve put both business and private expenses through my business bank account?

Don't mix private and business expenditure. Your bookkeeping will be quicker and easier if you only put business transactions through your business account.

You will need to take money out for yourself – drawings for a sole trader or partnership; normally salary, dividends and expenses for a limited company – but once a month should be enough.

Paying private costs out of the business can create serious tax problems for a limited company, but even for a sole trader/partnership, you’ll only have to pay your bookkeeper or accountant to work their way through your private transactions. And – you may not want them to see how much you spend or what you buy.

Don't be tempted to pay for non-business things out of the business just because that is where the money is and it is convenient.

I have paid for some expenses privately. Can I still put these through the accounts?

If you pay business expenses personally you are, of course, entitled to reclaim them back from the business. Try to avoid this as much as possible by using a debit card on your business account or using a petty cash tin so all payments are made directly.

Where it is unavoidable – and this will particularly apply to limited companies claiming mileage in lieu of motor expenses – take the same approach as if you were claiming expenses from an employer.

Detail the claim on a sheet of paper; don't forget to attach supporting receipts (and the mileage log if relevant); and file it in the purchase invoice file in the month in which it is paid.

Finally, try to do it at least once every month so you don't forget any costs or lose receipts and so miss out on claiming a legitimate expense against tax.

What if I’ve used my personal credit card for business expenses?

It is often easier to use a debit card linked to your business account because you should not be using a credit card as a source of finance. If you are using a credit card for business expenses, try and use it exclusively for the business (don't put private expenditure on it) and pay it off in full at the end of every month.

You will need to analyse the amounts spent on the credit card across the business expense items (eg VAT, travel, motor expenses, etc), because credit card transactions will often fall into different categories.

Sometimes credit card companies will summarise expenditure into different categories, but this is not usually very helpful as their analysis is not the same as the one suitable for the business.

Some of my costs are part business, part Private. What should I do?

This often causes confusion, but you can simply look at it as your private expenditure and make an expense claim for the business part in the way described above. If you run your own business as a limited company this may be the best way, because paying private costs from the company can cause tax problems.

You will need to have a sensible method of assessing how much the “business part” is. A common example is the cost of running your business from home. You will need to calculate how much your house costs in total and then make a reasonable estimate of the proportion of property used for the business and apply that proportion to the total costs.

It is important to realise that this is just a method of finding out what the business cost is, and if necessary being able to explain why it is 10 per cent or 20 per cent of the total rather than, say 5 per cent.

For which costs can I claim?

To be allowable, costs must be incurred for the “sole purpose of the business”. You cannot claim for personal expenses (eg suits or general clothing). Obviously, you can claim for the cost of the goods you have acquired to make your sales. For example, taxi drivers, minicab drivers, etc and those in the road haulage industry should enter fuel costs in this box rather than elsewhere unless they are claiming mileage rate; hairdressers should enter shampoo and hair product costs here.

At the end of the year you will need to make an adjustment for the stock you have left. So the value for cost of sales will be: the value of opening stock brought forward from last year, plus purchases made during the year; less value of closing stock at the end of the year.

Other direct costs might include: discounts; commissions; carriage; and research costs. For permanent, temporary and casual employees you should include: salaries/wages; bonuses; pension contributions; benefits; employer's NICs (National Insurance contributions); canteen expenses; any recruitment agency fees; any subcontract labour costs.

Allowable premises costs include rent; business rates; water rates; light; heat, power; property insurance; security; use of home as office; as well as repairs and renewals and general maintenance of premises and maintenance of machinery.

You can also claim for general admin expenses, such as telephone; broadband; postage/courier; stationery; printing costs; professional journals and subscriptions; insurance (eg public liability, etc). Travel and subsistence costs are also allowable, including vehicle insurance; servicing; repairs; vehicle licence; fuel (or mileage claimed at approved rates); rail/air tickets; taxi fares; hotel accommodation; subsistence/similar costs.

Advertising, marketing and promotional costs can be classed as expenses, as can fees you pay to an accountant, solicitor, surveyor, architect, stock taker, etc. You can also claim back interest and alternative finance payments on bank and other loans (including overdrafts) and alternative finance arrangements, as well as bank/credit card charges and interest charges on hire purchase agreements.

Elaine Clark, www.cheapaccounting.co.uk

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“And so this is Christmas… What have we done?”

December 23, 2010 by Mark Williams

Christmas crackerIt’s been a fabulous second year for the Donut. We’ve been steadily building things and now, each month, tens of thousands of UK businesses visit our websites for advice, free resources and offers. So what have been our other key achievements?

In August, following 12 months’ development, we launched the IT Donut, which has since become a popular destination for small firms in need of advice on a range of hardware and software issues. We were delighted to welcome Microsoft and Sage onboard as founding sponsors (a big thank you to all our other sponsors, while we’re at it). Amazingly, the IT Donut blog beat off stiff opposition to be named Computer Weekly’s small company IT blog of the year – a superb achievement by any standards.

Crucially, we’ve created almost 100 syndicated versions of Donut websites for Enterprise Agencies, Chambers of Commerce and law firms across the UK. We’re extremely proud of this fact. We welcome the involvement of all of our syndicator partners and look forward to welcoming many more next year.

Our Donut writers and editors have been very busy. This year they’ve produced more than 400 stories on a range of issues that matter to small firms new and more established.

We’ve also produced 12 editions of our information and offer-packed e-newsletter MyDonut, which is distributed to tens of thousands of registered site users each month. We’ve got big plans to make MyDonut even better in 2011, so sign up if you haven’t already (don’t worry, there’s no charge), and keep an eye on your inbox…

None of the Donut sites would be possible without the involvement of our small business experts – a network that has grown to almost 250 leading professionals across our four Donut sites.

We’ve also built our combined Donut Twitter following to almost 24,000 followers – 5,250 on the Start Up Donut Twitter page alone.

And as well as interviewing some of the biggest names in UK enterprise – more importantly – we’ve shared the highs, lows, views and comments of hundreds of small-business owners.

We’re proud of our successes this year, but it wouldn’t have been possible without the enthusiastic support of you, the reader. We truly appreciate your input on our forums and the kind comments and messages of support you’ve sent us throughout the year.

What does 2011 hold? Well, you can expect fresh Donuts - and an even stronger local flavour. And, of course, we’ll continue to champion the cause of small-business owners. Watch this space.

Have a great Christmas and New Year. We’ll be back on 4 January. All the very best…

Mark

Does your graphic designer give you what you need?

December 23, 2010 by Fiona Humberstone

I was talking to a potential client today who is tearing her hair out because she’s had a new website designed which she knows isn’t quite hitting the mark, but she can’t quite put her finger on why.

After a brief conversation we identified the issues: insipid stock photography; clunky use of fonts; and a less than inspiring layout.

“To be fair to the designer,” she said, “I wasn’t really quite sure what I was looking for, so I probably haven’t given him a very good brief.”

“That’s not your job!” I wanted to scream.

This poor lady was beating herself up because she’d failed to choose the right stock photos and failed to tell her designer exactly what she wanted. As a result, the design work was less than impressive.

Your job as a client is to give your designer the answers to the questions they ask you. I sincerely believe it’s not your job to tell them what you want and where, just get them to “construct” your vision. If you do that, you’ll get back, at best, what you wanted. You probably won’t get what your business needs.

So what do you really need?

When I meet with a client on any project we don’t discuss colours, fonts or layouts. I ask the client about their objectives, business and clients. We talk about goals for this piece of marketing literature and we get to grips with the messages they want to communicate. We might also talk about brand identity (if they have one) and about the impression they want to create.

At no point do I expect the client to tell me how they want the piece of design to look. And I actively discourage any client from creating a mockup.

What’s the point? You work with a creative, insightful and intuitive designer to add value to your business. You shouldn’t be expected to provide a steer on the design – that’s what you’re paying us for. Sure you need to give a decent brief – but it’s down to the designer (or account manager in my company) to ask insightful questions and draw the right information out of you.

You know what results your business needs. And if you can relay that information to a graphic designer you trust, they will be able to provide you with the collateral you need to achieve that result.

Now I appreciate that this level of design doesn’t come cheap. But it’s worth investing in for peace of mind, the value it’ll add to your business and the fact that you can get on with doing what you do best and leave the design work to the experts.

So next time you brief a designer, listen carefully to the questions they ask you. Do they reassure you that they really understand your needs and really care about the result you’re looking for or are they just trying to please you by giving you what you want?

Fiona Humberstone, Flourish design & marketing

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Six good reasons not to feed your Tweets to Facebook and LinkedIn

December 22, 2010 by Alex Astell

It’s come to my attention over the past few months that more and more people are merging their Tweets with their Facebook and LinkedIn status updates.

I’ve also noticed that sometimes my Facebook and LinkedIn news streams are totally clogged with meaningless Tweets that have no relevance to me whatsoever.

So I thought I’d put together a few reasons why, as busy as you are, you shouldn’t feed every single Tweet to other social and business networking websites.

1 Absence doesn’t always make the heart grow fonder

When a Tweet’s been fed into my news stream I know that the person who’s written it hasn’t written it from the website I’m using. It feels impersonal and can convey a lack of interest in what their Facebook or LinkedIn contacts are up to.

2 Twitter has its own language

Twitter is the only social networking site that has its own language to either tag a subject (#), reply to a Tweet (@) or Retweet (RT@).

These make absolutely no sense on other platforms (although Facebook now has a tagging feature that uses @) and can make your update look as though you're speaking in tongues.

3 The scrolling and frequency factor

This mainly applies to LinkedIn in my case. Several of my contacts appear to be feeding every single of their Tweets to LinkedIn. Bearing in mind that some people might Tweet 20 or 30 times a day, this equals a heck of a lot of RSI-inducing scrolling to find even one update that might interest me.

And talking of interest…

4 Why did I need to know that?

Facebook is generally for your friends to keep up with what you’ve been up to or for businesses to promote themselves. Therefore, the fact you’ve replied to a hilarious tweet (@DippyGirl lmao and rofl!!) won’t really have any relevance whatsoever.

LinkedIn is for business people to share knowledge, help each other and network. The fact that the roast chicken you cooked with your nearest and dearest last Sunday was delicious really doesn’t matter.

5 The walls have ears

Can you remember every single person you’re friends with on Facebook or connected to on LinkedIn? If not, be very careful to check your Tweets before feeding them to the other sites. If your boss is connected to you on LinkedIn he/she probably won’t appreciate knowing that you’ve just pulled a ‘sickie’ and sounded realistically croaky on the phone.

6 It’s not the size that counts – it’s what you do with it

With an extremely restrictive 140-character limit on Twitter and a more generous 420 characters for status updates, it would make sense to post to these two websites separately. You can be far more personal and descriptive on Facebook, so why not make the most of your update?

If you still feel the need to merge your tweets with other social and business networking sites, please remember to be selective.

Alex Astell of Manage My Website

Read more about social media on the Marketing Donut:

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Protecting your printer warranty

December 21, 2010 by Matt Bird

Hardware warranties play a massive role in minimising early start-up expenditure. They provide not just after-sales value, but also security against future unexpected costs.

A 2009 survey conducted by Lexmark (State of Printing) suggested that 78 per cent of customers expected to have to replace their printer within five years. Printer manufacturers have attempted to assuage these consumer fears by providing guarantees lasting up to five years for most popular printers (excluding budget sub-£50 machines).

It stands to reason that you are going to want to protect this, so you’ll need to know how the terms of your warranty are affected.

Your warranty will typically be void if:

  • damage is caused by you attempting to repair a hardware fault yourself
  • modification of the hardware
  • use of the product in unsuitable environment (eg very hot, sub-zero or dusty conditions)
  • acts of God or nature
  • unreasonable print volumes for the printer in question.

Although it is slightly annoying to know my Oki isn’t covered for lightning bolts or flash floods, these are nonetheless reasonable terms. However, there is one area of huge controversy that can affect your warranty – using third party printer consumables

Third party cartridges, as feared by the vast majority of customers, can have implications for your warranty, wholly dependent on the stage of the warranty you are in.

Standard warranty

Standard warranty typically covers the first year’s performance of your printer (or a high volume number of prints stated in the warranty conditions, whichever occurs first). It is illegal for a manufacturer to void this standard warranty because of third party cartridges. Rest assured, they’ll try to tell you they can, but you’re protected by this piece of legislation:

Magnuson-Moss Warranty Improvement Act Chapter 50 – Section 2302
(c) No warrantor of a consumer product may condition his written or implied warranty of such product on the consumer's using, in connection with such product, any article or service (other than article or service provided without charge under the terms of the warranty) which is identified by brand, trade or corporate name; except that the prohibition of this subsection be waived by the commission if:

  1. The warrantor satisfies the Commission that the warranted product will function properly only if the article or service so identified is used in connection with the warranted product, and
  2. the Commission finds that such a waiver is in the public interest.

Extended warranties

Typically requiring registration with the manufacturer to activate, it is hazy at present whether these optional, manufacturer-provided, warranty extensions are exempt from the aforementioned Act. Do not be surprised if legislation soon moves to block this common practice by making the Act clearer.

This is unavoidable and places even more importance on the retailers from whom you source consumables. Always check for evidence of quality testing, performance guarantees and testimonials on customer service before buying. You are paying money in a highly competitive environment; these should be provided as standard.

Ultimately, third-party cartridges should be perfectly reliable (it’s so rare I have only encountered it once in the past year) you just need to be careful shoppers.

Working towards better warranties

At my company, Stinkyink.com, we are in contact with manufacturers for explanation of how they can legally enforce this, and we will get back with their response if they ever do provide a straight answer.

Have you had a bad experience with a manufacturers terms and conditions? Post below and see if anyone else has not only gone through the same thing, but if they have suggestions to help.

Matt Bird of printer cartridge supplier, StinkyInk

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The Apprentice: the final

December 20, 2010 by Rachel Miller

Missed the final episode? Catch up here.

The task

Stella and Chris have made it to the final and they have one last task to complete — to create a new premium alcoholic drink brand, film a commercial and pitch it to industry bigwigs at a swanky do at the Hurlingham Club.

It’s a tough challenge. So it’s lucky, then, that Lord Sugar has invited back a few of the contestants to help them out.

Or is it? Stella is all smiles. “I’m so glad to have you all back,” she tells her team. Chris is not quite so welcoming — “I’m willing to work with you again,” he says as their first meeting kicks off.

So how do they fare?

Chris Bates

The proposition: A rum-based drink designed to appeal to young professionals that enjoy cocktails such as Mojitos.

The name: Prism

The strap: It reflects every side of you.

The branding: A dramatic three-sided pointy bottle that looks like an over-sized perfume bottle.

The taste: Three ingredients — rum, pomegranate and aromatic bitters.

The colour: Pink.

The advertisement: Three people walk into a bar. It sounds like a joke — sadly it is!

The pitch: Chris works hard to liven up his droning voice. Jamie coaches him and promises to give his delivery va va voom. It works.

Stella English

The proposition: A modern bourbon drink aimed at young professionals

The name: A last minute stroke of genius from Stella — Urbon

The strap: Urbon — the new way to drink Bourbon.

The branding: A tall, slim bottle redolent of a supermarket oil or vinegar bottle from the Christmas gift aisle. 

The taste: At the lab, Shibby gives an involuntary shudder after he tastes it but decides to go with it anyway. Lord Sugar calls it “pungent”. Stella admits that it is “over-spiced”.

The colour: Amber.

The advertisement: Two guys and two girls in a cool bar. The girls persuade the boys to try Urbon. To be honest, they don’t look convinced. Cheesy.

The pitch: Polished and with some surprising off-the-cuff humour. When one expert questions whether rural consumers will buy it, Stella says, “I’m hoping to move out to the country if this goes well” and gets a big laugh.

The verdict from the experts

Prism: Good name, clever concept, great bottle, hideous colour, poor ad.

Urbon: Great name, clever concept, dodgy bottle, horrible taste, poor ad.

But who cares about the drinks? It’s the people that count.

Stella: Meticulous, experienced, well-liked, a good leader, cool as a cucumber, impressive career progression.

Chris: Incredibly articulate, intelligent, calm under pressure, voice like a low-flying bomber, inexperienced.

The verdict?

Stella wins. But Lord Sugar predicts a bright future for Chris.

Quote of the week

“I didn’t come here to win the competition. I don’t care about that. I came to get the job and I think you’d be mad not to employ me.” Stella to Lord Sugar shortly before he hires her.

Missed this episode? Watch it on BBC iPlayer.

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