How do you know what you need to need to know about business and personal finance?

This is one of those topics that many business owners shy away from.

It’s not exciting or cool.

It’s not clamouring for your attention.

It’s easy to ignore.

That is, until you can’t ignore it any longer and then you wish you’d paid more attention sooner.

This is why we asked Andrew Hawkins to host an Ask the Expert session on “Everything you’ve ever wanted to know about business and personal finance but were afraid to ask” 

Following experience in banking and insurance in the City of London, Andrew has spent 25 years as a business consultant, offering practical solutions to business owners as MD of business strategy and funding specialists The Mercantile Group.

This is a compilation of a live Q&A in the Drive Facebook Group and there is a quick check list of other questions you may need to ask at the end!

Basic requirements for every business 

Rachel Extance What are the basics that every business owner needs to consider Andrew?

Andrew Hawkins The minimum requirements for any business are: Insurance of people, things and liabilities; banking; cashflow projection; business plan; good advice and a tax plan which, in simple terms, is a good estimate of likely tax liability.

Insurance needs to cover your office equipment and anything you need to run your business, possibly Public Liability to protect the business from claims of injury, Employers Liability – if you employ anyone this is a legal requirement, and is usually included with a basic policy – and perhaps Professional Indemnity if you are giving advice. Also check your car insurance to make sure you’re covered for business journeys, especially if you’re claiming motor expenses through your business.

Ideally your business needs to be a separate legal entity – so that means either a Limited Liability Partnership or a Limited Company. If you’re a sole trader at the very least you should have a separate bank account for your business.

You should also consider protecting I.P., trademarks and other ways in which your business might be vulnerable.

Insurance

Karen Arnott I have professional indemnity, equipment etc. insurance for my business and as a family we have life insurance which covers critical illness and accident. I don’t want to duplicate insure myself (especially when various places have loads of small print that means they often don’t pay out).

Andrew Hawkins This can be an issue Karen. A detailed review of a family’s insurance requirements in parallel with those of a business is complex – but essential. Probably needs a qualified Financial Planner.

You can get various sorts of Permanent Health and Personal Accident cover which will pay if one has a major accident – e.g. loss of a limb/eye – or suffer a long-term illness. “Normal” health cover provides for private treatment if the NHS cannot treat you quickly.

A lot of trade or membership organisations can provide this sort of cover, often at discounted rates.

Helen Lindop Are there financial planners that specialise in self-employment?

Andrew Hawkins Good question. Some will be more au fait with business matters generally but finding a good Financial Planner is a challenge. Personal recommendation can be useful but the circumstances of the person doing the recommending needs to be similar to yours for that to have any value.  If you can’t get a personal recommendation try asking your accountant, bank manager (good luck with getting to speak to one), solicitor or another advisor. It’s important to have a really strong personal relationship with a financial advisor/planner and to ensure that s/he really understands your full personal and business circumstances. The regulations should ensure that a qualified planner will delve into everything but it’s important that s/he understands the relationship between your personal and business finances.

Daljit Virdee This is a great reminder on the different insurances – thank you. I have PI as required for my Practising Licence, but should think about more (perhaps when I’m making a lot more 😀 )

Don’t mess up your taxes!

Louise Lee What are the things you see that most business owners trip up on?

Andrew Hawkins The most common thing is not setting aside enough money to cover the tax bill and not being covered for illness or accidents that prevent them from working and therefore, earning.

The things people really need to avoid messing up are VAT and HMRC payments (these officials can close your business at a stroke!) so these should always be set aside every month so that those obligations are met without any problems.

It’s worth mentioning here that if something does go wrong and you can’t meet any obligation, payment or debt, the earlier you talk to the people involved the better. Usually it’s possible to negotiate a payment plan if you are honest with them and don’t try to ignore the problem! If you aren’t happy negotiating with HMRC – ask around to find someone with a good track record of doing so successfully.

Karen Arnott I wince when I hear freelance friends who haven’t put enough aside for tax (and don’t know about the payment on account thing!)

Louise Lee  My accountant tells me how much I need to set aside each month for corporation tax but I always set aside more than this to my tax savings account. I consider this untouchable and it gives me a good buffer in case anything goes wrong.

Andrew Hawkins  The ‘buffer’ arrangement is a great habit to get into.

If you’re self-employed you’ll be asked to complete a tax Self Assessment form each year for the tax year, 6 April – 5 April.

If you file a paper return, it’s due by 31 October. If you make an on-line return, it’s due on 31 January the following year. The tax due is also payable by 31 January. This is why it’s not a good idea to leave it to the last minute! There are penalties for late returns and late payments starting at £100. Where necessary you’ll be asked to make an ‘on account’ payment in July and this can catch people out if you haven’t been setting aside monthly installments in a tax or savings account.

Pension Provisions

Karen Arnott What about investing for the future? My company pension plan with Prudential has been dormant for 14 years, since going self-employed. I don’t know whether to resurrect that, as it already has a bit of a (small) pot. Or continue to haphazardly put money in ISAs. Or both? What about new things like PensionBee where they’ll merge your pensions (I also have a tiny amount in another one!) Investing in a pension is also deductible, isn’t it?

Andrew Hawkins Pension management requires specialist advice and yes – contributions can be tax deductible. The regulations change quite often so check that whoever you consult is up to date with the right information.

This is something a lot of people put off but with life expecatncy increasing all the time, its a really good idea to get this sorted as soon as possible.  

Mortgage requirements

Helen Lindop Something else that worries a lot of self-employed people is that it may be harder to get a mortgage than if you’re employed. Any advice?

Andrew Hawkins As an employee of your own limited company it’s fairly simple to prove your income but if self-employed the mortgage providers know it’s a more complicated calculation and often require independent proof over a number of years from an accountant for example.

Karen Arnott Personally, I haven’t had a problem but I’ve been self-employed for a while! You generally need to prove your income over 3 years. With one re-mortgage, I did need to get my accounts certified by an accountant who was ACA qualified. It wasn’t my accountant I just used them for that purpose. My accounts had been set up by a bookkeeper using QuickBooks, so it was fairly easy for the independent accountant to verify everything.

Helen Lindop So someone who wants a re-mortgage but hasn’t had an accountant up until now shouldn’t be put off?

Andrew Hawkins Each case is different and depends on the mortgage provider, the type of business, length of trading etc. Again if you’re using a qualified financial planner they should help with the documentation.

Bookkeeping and Accountancy

Andrew Hawkins People often confuse bookkeeping and accountancy. Good bookkeeping – whether by the business owner or a contractor – is an essential day-to-day business activity and can help with cash flow, profitability, decision making and many other things, whereas if you just get your accounts made up once a year, this means that your accountant is mainly dealing with history.

Daljit Virdee Accounting (for Limited Companies) is not rocket science but it is extremely complicated…. It’s concerned with Legislation for Companies, Tax Legislation, relevant Accounting Standards, case law, and often “de-coding” the bookkeeping.

Both S(&)ME, accounts *should* be straight forward. However, that needs adequate bookkeeping, and if people favour doing it themselves, rather than paying for the expertise of a qualified bookkeeper then the risk is that the accountant gets unsuitable records, and… well… “crap in = crap out”… A qualified accountant needs to highlight Directors’ responsibilities in this respect and the fact that not fulfilling them is technically a criminal offence!

 In the event of illness or death …

Karen Arnott What about in the event of my death? (Cheery, I know). But I’m concerned if I go under a bus my poor husband will need to untangle all my business financial affairs. Is there such a thing as a separate will for the business? And what kind of professional should be the one dealing with my business in the event of my death (speaking as just an owner-manager at the moment!)

Andrew Hawkins We should all give thought to this. If clients have paid a deposit and for any reason you can’t complete the work, do they get a refund from your business? Do they own any work / collateral you’ve already completed for them? Issues like this should be covered by your Ts & Cs and any contracts you enter into.

Your will(s) should include any shares and how they will be dealt with – obviously another good reason for NOT being self-employed. The company shareholders agreement should cover what happens and whether the inheritor of the shares will have any executive/management input in the business.

Similarly, if you have a shareholder or investor and they die, leaving their shares or investment to a family member, you may not want that person involved in your business. Similarly, if their role is to contribute to or work in the business and they fall ill so can’t fulfill their obligations, this should all be considered and agreed before issuing shares. We always recommend spending some time working on a Partnership Charter and/or a Shareholders Agreement if you are going into business with another person.

Karen Arnott What if I don’t have a person in mind to be the executive/manager? I can (at the moment) quite easily give the shares to my husband, but he won’t want to run the business. How does one go about finding someone who would either sell, run or dissolve the company if I die?

Andrew Hawkins Either you need someone in the business who can take over – usually set out in a continuity plan that some clients require – or you need appropriate legal and accountancy advice to set up how you wish things to work in those circumstances and you may need to consider a number of different scenarios.

Daljit Virdee  For our Practising Licence we have to have a “back-up” Accountant if we have more than 7 clients. It’s a pain, and hard to find someone one trusts, but good when it’s done.

Ann Hawkins Having seen the chaos caused by an accountant who just went off the radar due to illness, leaving his clients with fines from HMRC (and is now back in practice!) so I strongly recommend that anyone who engages someone in a position of trust like this investigates their continuity plans!

Rainy Day Funds

Emma James How many months income do you think people should set aside as a buffer / rainy day fund, both personally and for their business? I realise that there are lots of variables, but is there a general minimum that you suggest to people? For example, I’m a bit concerned about the best way to use resources as I don’t want to stop the business from growing (and me from doing things I want to do personally), but also want to reduce the risk of getting into financial difficulties.

Andrew Hawkins Two different things here Emma. A buffer or ‘rainy day fund’ is always worthwhile to protect against illness, bad debts etc. The amount you need will depend on what insurances you have in place and how quickly you can replace your income. If you have employees and payroll obligations, ideally you’d want to be secure for 6 months, but for a sole trader 2-3 months cushion should give enough room to avoid a disaster.

This also depends on how quickly you could re-establish a business if you had to close down. There are lots of cases of businesses closing one day and re-opening the next with a different name.

Emma James I definitely over estimate tax, and I’m always saving for it out of the year it’s incurred rather than the year it’s due. 6 months buffer isn’t a massive stretch from where I am at the minute, but I think I need to strike the right balance between putting the buffer in place and not holding back the business in order to do so.

Louise Lee Definitely strike the balance. 6 months buffer and I’m relaxed but if not spending money is holding back the business I’ll happily skim 2 months off.

The questions you may not know to ask

We’re aware that some people just don’t know what to ask on this topic so here’s a quick checklist of things that every business needs to consider:

  1. Basic Business Plan
  2. Business name registered and protected / trademarked
  3. Business bank account
  4. Accounting system
  5. Payments app/card machine
  6. Insurances
  7. Pension
  8. Enough money or support until profits become regular
  9. A rainy day fund or buffer of between 2 – 6 months
  10. Incorporate limited company/Limited Liability Partnership at Companies House
  11. Register domain name(s)
  12. Bookkeeper, accountant, lawyer, other advisors
  13. Website, email, internet security, and data protection support.
  14. Communications, phone systems, admin support.
  15. If employing people (or yourself) apply for an Employer Identification Number/register with PAYE.
  16. Register for VAT with HMRC if turnover will exceed £85,000 (currently) in first 12 months – or if you or your advisors feel registration will be advantageous. Investigate ‘cash’, ‘annual’ and ‘flat rate’ payment schemes.
  17. Working space
  18. Suppliers
  19. Networking / support group
  20. A mentor/advisor to help you work on your business not just in it.

If you have any specific questions or would like to discuss a growth strategy for you business, you can contact Andrew by email or through the Drive website.