Why Small Businesses Underperform

why small businesses failA recent report from a research study conducted by CIMA yielded some interesting findings.

Its conclusions were:

  • That the underperformance of small companies was due to the failure to use appropriate management accounting tools (such as cash management, pricing models, cost reduction and profit analysis)
  • That many small companies make decisions without any financial information or analysis
  • The most likely not to use any tools were those that were smaller, profitable and where their managers did not have any financial background. When their businesses grew in size and complexity they underperformed and in some cases failed thorough lack of decision support and adoption of tools that they didn’t feel appropriate when they were small and didn’t adopt as they grew

The reasons given was that many business owners make their decisions based on gut feel and this is a great survival technique and a viable strategy while the business is small. But gut feel is based on experience and historic data and by its nature backward looking, like driving your car by looking out the back window. As the business grows and the landscape changes new challenges present themselves, which are more complex and require more rigorous analysis than an immediate response.

As businesses grow to medium size they naturally use management accounting tools to manage their business as the adoption of financial analysis feeds into decisions on pricing, cost reduction, cash management and the assessment of risks. So there is a case that small companies that adopt financial analysis early would not only improve the probability of survival but also grow more quickly through the efficient use of resources and more effective decision making.

Webworks have been working with small business owners to overcome issues recognised in this report and in response have developed finance packages. These packages aim to offer small businesses the necessary insight and analysis they need to make their business grow at a cost that is a fraction of that from high street accountants. Moreover when these services are taken in combination with website services and SEO that aid exposure of your business to interested buyers then the results can be potent.

Choosing the best VAT option could actually make you money

VATThere are a number of options to consider when choosing a VAT scheme and it is worth giving this some consideration as the outcome could positively affect the company’s cashflow and in some circumstances add to the company’s income.

You must register for VAT when relevant turnover hits £82,000 however there may be a case to register voluntarily before you reach this limit. Reasons for voluntary registration may be that you have paid VAT on items that you have used to build your business and you could use the VAT paid in your bank rather than leaving the cash with the HMRC. Of course when you register for VAT you will have to charge VAT on your sales invoices and in effect increase your prices. But remember if your customers are also VAT registered they will be able to reclaim the VAT on their returns.

You can claim for VAT purchases before registration within the limits below:

  • The limit on goods are for those purchased up to 4 years before registration and assumes that the goods are still used in the business or were used to make goods you still have.
  • The limit for services is up to 6 months before registration.

The reclaim for pre registration purchases should be included your first VAT return.

Once you have decided that you should apply for VAT registration you will need to decide upon a VAT scheme. The VAT scheme chosen should reflect the terms of business that you offer your customers and are offered to you by your suppliers to ensure you do not suffer from a cash shortage from your unpaid role as a VAT collector.

For example if your customers are offered 30 days to pay from the invoice date but you have to pay your suppliers after 10 days then the cash basis makes sense. This is because the VAT is recognised when the cash hits or is paid from your bank account meaning you will not have to pay the sales VAT until it is paid by your customer.

However if your customer pays after 10 days and your suppliers offer you 30 days then it makes sense to opt for the accrual basis. Here the VAT is recognised when the invoice is raised to the customer or received by the supplier so you will receive the benefit of the purchase VAT before you have to pay the supplier.

Finally there is another scheme called the flat rate scheme. This is a simplified method offered to smaller businesses. Under this scheme you charge VAT at the normal rate and pay purchase VAT at a rate specified by the HMRC (dependent on the type of business you are) leaving you to keep the difference. If you have a home office with few VATable supplies then you may find that the fixed rate you apply is greater than the purchase VAT you would have reclaimed meaning that the HMRC has gifted you more income for nothing.

Rest assured that Webworks would review your method of working when you sign up for one of our packages and make a recommendation on the best VAT scheme for you to use.