Accounting & Bookkeeping Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Understanding the benefits and drawbacks of Directors’ Accounts

tax and calculationsHistorically it was common practice for director/shareholders to borrow money from their company and clear the loan with dividends from the company’s profits.
One of the reasons for doing this was to avoid paying National Insurance and PAYE on the drawings, where directors and accountants understandably seek to minimise tax and improve cash flow by treating drawings as dividends.
HMRC are onto this and would prefer directors’ drawings to be accounted for as salary subject to PAYE, which they now monitor monthly through the Real Time Information (RTI) reporting of payroll payments.
It remains the case that directors may receive loans from their company, provided that it is not in financial difficulty and subject to adherence to the provisions of the company’s articles and the 2006 Companies Act. However, loans above £10,000 must have shareholder approval, and terms agreed and documented by the company’s board.

Changes to the tax regulations

Directors should also be aware of changes to the tax liability rules introduced in March 2013 to deter tax avoidance:
If a director’s loan is not repaid within nine months following the end of the company’s accounting period it is treated as an outstanding loan.  This can cause problems for the company because it then becomes liable to a Section 455 tax paid by the company. The director is also subject to income tax as a benefit on interest-free loans. The company, and director on his personal return, must also comply with reporting of all this.
Companies and directors are therefore advised to agree the treatment of loan accounts at the time that the loans are made and note this in a board minute at the time.
Additionally, since April 2016 changes to the rules mean the tax threshold on dividends is £5,000. Above this, directors now have to pay tax at 7.5% if they are basic rate payers and at 32.5% if they are in the higher rate tax band. Also the tax charge on outstanding loans to participators was increased to 32.5% for loans, advances and arrangements made on or after 6 April 2016.
All this may not stop the practice of directors borrowing against expected dividends since the only way HMRC know about a directors’ loan is if it is accounted for as an outstanding director’s loan in the company’s year-end accounts. While there are often directors’ loans at year end, they are normally cleared by declaration of a dividend where the accountants do their job and help companies avoid director loans being a problem.
This practice has been a fairly tax-efficient way for directors and shareholders to draw down money from their company.
However, dividends can only be declared if a company has distributable reserves, essentially retained profits.
The problem comes when the company does not have sufficient distributable reserves. In this case the director loans have to be included in the year-end accounts or in the statement of affairs if the company becomes insolvent.
Liquidators have a duty to recover the directors’ accounts from the directors. In the case of smaller businesses, insolvent companies often have very few assets that can realised so the liquidator is often looking to recover director loans to pay her/his fees.
In view of the personal liability for repaying loans, directors would be well advised to declare dividends on a monthly or at least quarterly basis if they want to avoid being in the position of having to repay a director’s account. If there are not sufficient retained profits, then drawings should be accounted for as salary through the payroll. If cash is tight then withholding payments to HMRC is not the solution. They are tightening the screw and directors should seek help from a turnaround or insolvency professional

Business Development & Marketing Finance General Rescue, Restructuring & Recovery

Keep calm and reassure your EU customers

keep calm and stay positiveWithin hours of the result of the UK’s EU referendum being announced on Friday, June 24, three of our clients trading in Europe had received very different reactions from their European customers.
In one case, our manufacturing client had an order worth £2.4 million cancelled by their European customer.
In a second case, an R&D client who had previously received an indicative offer from a European investment fund received an email pulling the offer.
In the third case, a service company customer took a call from a German customer who was calling to accept a tender and was calling to confirm our client would still do the work if they sent the order with prepayment. The German customer cited the reason as the exchange rate had overnight made a previously uncompetitive tender price very competitive.
It is impossible to say whether these were emotional or rational decisions, especially as in the first example the customer would have actually been better off given the exchange rate.
It is possible there will be a backlash from some European businesses wanting to “teach the UK a lesson”. Equally, the lower value of £Sterling against other currencies will offer opportunities to exporters.
There is no doubt the referendum outcome will result in winners and losers but those who rely on customers in Europe must reach out to them and reassure them.

What immediate steps should businesses trading with Europe take?

While there undoubtedly will be a medium and longer term impact on business, at this early stage business should continue as normal.
It is important to emphasise that business is not in crisis, not that anyone is entirely convinced by the UK Chancellor George Osborne who sought to reassure business in his early-morning speech on Monday. His outrageous predictions made before the referendum have meant that his claims can no longer be credible.
It would be sensible, however, for UK businesses trading in Europe to take steps to reassure their customers that they will be carrying on as normal.
The same goes for the supply chain although if they are buying from Europe costs are likely to rise, certainly in the short term.
More importantly, UK businesses should contact their European customers to confirm their existing order book and reinforce the message that there is now a price advantage for Europeans buying from them.
The fundamental message for our European customers is that UK business is keen to do business with them.
This message needs to be communicated so keep calm and reassure your European customers


Deadline looming for new system that replaces the Annual Return

ticking clock on bookFrom 30 June 2016 the requirement to file Annual Returns with Companies House is changing.
Following the introduction of the Small Business, Enterprise and Employment Act 2015, Companies and LLPs will need to submit a two-page Confirmation Statement, which replaces the old Annual Return.
The new Confirmation Statement contains the following elements:

  • Company number, company name and confirmation date;
  • A People with Significant Control (PSC) Register;
  • Shareholders;
  • Statement of Capital;
  • Trading status of shares;
  • A standard industrial classification or principal business activities.

Essentially the new form is intended to simplify the process of submitting annual returns. The new system requires companies to only confirm that there have been no changes to the constitution of the company i.e. that all changes have previously been reported.
The new system also abolishes the fixed date for filing annual returns. Instead companies can submit a Confirmation Statement at any time they wish so long as they file one at least every 12 months. This means that the filing of any changes can be used as an opportunity to file a new Confirmation Statement.
The PSC Register
The additional requirement, however, is for a PSC Register, about which we reminded businesses in an earlier blog.
Briefly, the PSC Register identifies and records the details of anyone who has significant control over a company, and this includes people who meet one or more of the following conditions.  Persons who:

  • directly or indirectly own more than 25% of shares in the company
  • directly or indirectly hold more than 25% of the voting rights in the company
  • directly or indirectly have the power to appoint or remove the majority of the board of directors of the company
  • otherwise have the right to exercise or actually exercises significant influence or control over the company
  • have the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which in turn satisfies any of the first four conditions over the company.

Companies should already have compiled since the deadline of 1 April this year. The second deadline of 30 June relates to submitting the register to Companies House.
A fee is payable for filing Confirmation Statements but as yet Companies House has not published details.  However, companies will not have to pay more than once every 12-months so there will be no charge for updates within that period.
(Image courtesy of FrameAngel at

Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Blogging for your business

blogging for businessSmall business owners often ask why they need a blog on their website, especially when their business is in a specific niche and the majority of its customers or clients are long term or come via recommendation.
We would argue that there is no room for complacency in any business. It is unlikely that there is a business anywhere in the world that has absolutely no competition. This means that even when business turnover and profits are performing in line with the business plan, the business should be paying attention to its customers, its marketing and promotion.
A blog can be a useful way of keeping the business website at the top of the search engine rankings, such as Google.  Search engines rate websites on the basis of them being updated regularly and the relevance of content. No longer to they promote business websites that are effectively an online brochure listing products or services which do not change regularly.
A blog/news section can deal with this effectively, provided it is updated regularly. It will also help keep the business focused on its content marketing strategy. Blogging needs a schedule to continuously deliver relevant and meaningful content.
Blogging is a very cost-effective investment since blogs remain on a website and over time become long-term assets.

What is a blog and what is its purpose?

A blog is a short article that can either be used to announce a new development, an award the business has won, to explain more about products or services or to give customers additional and related information that might be of interest.
Blogging for your business helps to build brand awareness, keeping the business name in the public eye.  It can be used to promote your expertise, products and services.
A blog creates a place to talk about new products or services, comment on timely news topics or market trends relevant to the business and to give a business “personality”.

How do I find the time?

There is no doubt that the need to produce a regular blog can be relentless.  Having started and begun to build awareness and expectation among readers it has to be kept going.
It can be challenging and many people are not confident about their ability to write effectively and engagingly.
This is easily solved by working in collaboration with a marketing content writer.  The business owner knows about their business but often having the perspective of an outsider can generate more and better ideas.
However, this can only work well if the business owner is committed to regular “brainstorming” meetings or calls and equally to reading through and approving drafts before they are uploaded as a blog.
Regular blogging for your business is like other marketing initiatives; it is a way of demonstrating your commitment to clients which is necessary if you are to retain them.

Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

When and why do you communicate with your customers?

communicating with customersRegular communication with customers and clients is something that businesses often do without having any clear strategy or purpose.
This is short-sighted when you consider that 80% of a company’s profits comes from just 20% of their customers.
This does not mean that a business should bombard its customers with a barrage of sales messages using every means at its disposal from emails to telephone calls to social media.
There is plenty of data available about customer contact and their pet hates including unhelpful service agents, inability to get help when problems arise, too frequent emails, making unsubscribing difficult, and many others.
Building effective relationships with customers should be much more nuanced and not always about selling them something.
It depends on having an effective Customer Relationship Management (CRM) system that is frequently updated and provides more than just a record of orders placed, but also of follow-up communication, and some personal information.

The art of nuanced customer communication

Here is where that old cliché “people buy from people” applies. It means knowing a bit about customers as individuals: what’s their current business challenge? how do they like to be contacted? do they have any pet hates? It may mean knowing milestone dates like their birthday, whether they have children, loved pets, even what their particular non-work interests are. All of this can be recorded in a good CRM system and some include automatic reminders when a significant date is coming up.
Customer communication is about building and sustaining long-term relationships and businesses can build on this information by identifying clear purposes to their customer communications.
The basics include ensuring that they remain aware of your business, informing them about new products or services, and monitoring the relationship by checking they are happy with your service, such as using a brief questionnaire at the end of a job or carrying out a customer satisfaction survey.
More nuanced contact might be thanking customers for their business and support, passing on leads, or sending them relevant articles or information about subjects that you know are close to their hearts.
Thanking customers for their support, sending greetings on milestone dates, sending them interesting articles or details of events and seminars on topics that you know are close to their hearts may not at first sight seem to have much to do with closing a sale or winning a repeat order.
However, relationships with customers are essentially all about valuing them and providing evidence to make them feel valued.

Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Revisiting the role of the manager

remote workingThere has been a massive reduction in middle management positions in recent years which raises questions about the role of the manager in 21stCentury businesses.
Is the management hierarchy giving way to greater employee empowerment?
Have we moved to a world where actually much routine management is no longer a discrete function but is now a part of doing a job as part of the value chain?
To what extent has initiative taking been devolved to members of staff, who no longer want to feel managed and want to get on with the job themselves?
Many of the historical management functions, such as decision making, organising, planning and administration, can be carried out by members of staff if they are suitably trained, empowered and experienced to take them on and there is some mechanism whereby they can be accountable for their actions.
Arguably a flatter organisation with fewer levels of hierarchy is more efficient and more competitive being less expensive due to the need for fewer staff and much quicker when decision making doesn’t require management.
If a business is known for empowering its employees it can also make it easier attract more highly-skilled people which in turn contributes to being more efficient and competitive.

Efficiency or stagnation?

In many ways when a business is stable and working efficiently there is no need for the traditional management role of overseeing the activity of others.
So while there is still a need for senior managers even in a business with a flatter hierarchy, their time is freed from overseeing the actions of others to focusing on the strategic, on management of specific issues and on one-off problems that are not part of the day to day course of business.  Trained, experienced and empowered staff can now deal with such things as customer complaints, refunds, advancing loans or monitoring processes for example.
Therefore, the core role of management is now more about mentoring and providing support for the empowered and capable staff and less about supervising them as with a historical command and control approach to business.
There is however another view: businesses that are going nowhere don’t need managers to administer genteel decline. A fear of risk and little appetite for growth among owners and investors has resulted in many businesses pursuing short-term profits. Those with ambition need managers to make decisions, to take risks and deal the challenges ahead if they want to be successful.

Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

Who makes purchasing decisions in your business?

escalating cash pileControlling expenditure should be a fundamental principle for any business and the business plan should contain details of the company’s purchasing policy and costs in relation to its gross margins and overheads.
Too often the ability to place orders is given to too many or insufficiently experienced people within a business without clear purchasing guidelines that define limits and protect margins.
It is important that there should be senior management oversight of purchasing and that those who place orders do so within the set parameters and budgets such that any additional expenditure needs management approval.
Any purchases that are higher than the set parameters such as above a % cost of sale will mean that goods are being sold to customers for less than the stated gross profit margins and sooner or later this may lead to serious financial problems for the business.
It may be that in some instances if directors consider a purchasing decision, for example if the price of raw materials has risen to the point where it reduces the potential profit margins too far on what seems at first to be a lucrative order from a customer, they would be wise to decline the order.
The two key questions therefore are firstly whether a business has a defined system in place for controlling purchasing expenditure and secondly who in the company is given the power to place purchase orders.

Tight control is key

Here’s a lesson from history to illustrate. Over a 40-year period as its managing director Arnold Weinstock built the General Electric Company (GEC) into a highly successful British owned global business.
He was notorious for maintaining tight control over expenditure and would meet managers annually to set the next year’s budget.  If they wanted to spend £500 more than the limit set they would have to get his approval and be able to make a good, detailed case for why it was necessary. Generally, they didn’t.
There is a lesson for smaller businesses about having robust purchasing systems with parameters such as setting the maximum % for variable costs and budgets for fixed costs.
In relation to overheads and investment in assets, these should be fixed in a budget to avoid over spending. All too often small items are overlooked like staff ordering stationery because they can’t find the stapler or pencil sharpener, when in actual fact there are usually several hidden in desk drawers. Even relatively small purchases can quickly mount up.
While a business will want everyone to be able to do their jobs without every single purchasing decision having to be approved by senior management it is important to both set the limits and then to monitor them.
It is also about being very careful about who in the company has the power to make purchases and how orders are placed. Ideally every order should be placed with a purchase order where a copy is matched up to the purchase invoice. Orders by telephone and email are difficult to monitor and can result in unpleasant surprises, especially when they exceed the budget. And, all too often the person concerned has left when a really big problem arises.

Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

How to identify new opportunities

SWOT analysis diagramIt is one thing to spot a new business opportunity but quite another and much harder to identify whether it is the right one to pursue.
Identifying and exploiting opportunities can depend on the culture within a business and one way to find out is to look at the suggestion box.  Having visited many businesses over the years as a turnaround and rescue advisor I have always made a point of inspecting them and never once have I found a suggestion in them which suggests that everyone has given up on initiatives or more likely no longer believe management will listen.
That is not to say that a business cannot or should not solicit ideas from staff.  But wherever new ideas are generated it is important that a business acknowledges them and has a process for considering and reviewing them.
The business’ SWOT analysis is often a useful reference point because it ought to identify opportunities via its identified strengths and, equally important, weaknesses so it knows what not to do.
The critical aspect of this process of review and assessment, however, is to be realistic about the ability of the business to act on the opportunity. What impact will executing the new opportunity have on the existing business? What are the investment resources that might be needed both financial and in staffing? Does it fit within the current business and how far does it challenge the current business model?
An example
A retailer with a chain of shops identifies an opportunity to sell a new range of goods to existing customers through its stores or perhaps identifies a new segment in the marketplace.
Boots the Chemist entered the DIY market in the late 1980s through its acquisitions of AG Stanley and Payless DIY. AG Stanley’s two high street retail DIY chains FADS and Homestyle were a complete disaster and after many years of losses Boots wrote off £180 million and paid Jon Moulton’s Alchemy millions to take them off its hands. Boots’ other venture Payless DIY was merged it into Do It All owned by WH Smith as a 50:50 joint venture. Within 10 years this became an even bigger disaster with Boots writing off £312 million when it sold Do It All to Focus DIY.
While the growth of home ownership in the 1980s and 90s offered an opportunity to exploit the growing DIY market, was it appropriate for Boots as a chain of chemists to enter the DIY market in terms of both its core market and its management capability?
This illustrates some of the strategic considerations that need to be looked at with each new opportunity.  It includes assessing the competition and whether the new product or service is being offered to existing customers or to a new market segment. Consideration needs realism about capabilities as well as the resources needed and the challenges ahead. It also needs an appreciation of the opportunity cost, that of diverting time and resources away from the existing business
Before a good idea becomes a financial disaster, there are a number of useful tools for assessing opportunities. Here are a few that might be worth using: Porter’s Five Forces was developed by Michael Porter as a framework for industry analysis of the five competitive forces that shape strategy.
Boston Matrix diagramThe Boston Matrix is a growth-market share model developed by Boston Consulting Group to help businesses analyse their portfolio of businesses and brands by categorising them into one of four areas based on market share and market growth to assess their potential.
The GE-McKinsey nine-box matrix was developed by McKinsey & Co to help prioritize investments in business units.

Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

SMART marketing goals – Specific, Measureable, Achievable, Realistic & Timely

marketing and its role in businessWhether a business is using traditional or digital marketing techniques the same principles apply to defining the goals of any activity.
While it may be tempting to have an overall goal it is actually much more effective to narrow it down to specific targets and milestones that can be measured and tested.
A business will need to monitor the spending in both money and time on the activities that are carried out to achieve its goals in order to have a clear picture of the effectiveness of the marketing strategy.

What to consider when setting marketing goals

Crucially, they must be related to commercial goals. For example, a marketing goal may be to generate 50 sales leads per month, but the question to ask is: are they the right leads and will they achieve the commercial goal, which could be to grow export revenue by 10%.
If the objective is lead generation, there are myriad ways of achieving this.
One might be to send emails to a database. Achieving the 50 leads should be broken down into other measurable goals such as how many on the database, how many emails, how many recipients you expect to respond, what is the desired response, how do you qualify the response, what is the next action, how do you convert the responses and many more. Essentially every component of the process should be defined and monitored. In this way components can be refined and improved.
It is not unusual for small businesses to set the wrong goals.  A good example is trying to generate “likes” for a business Facebook page.
Targeting a large number of “likes” can infer a greater level of awareness but what is the point unless they lead to the desired action from the viewer which can be a long way from there to being a sales lead, let alone an order or a sale?
This is where measuring the number and costs of marketing activity against a business’ commercial goals can be very effective.  If the amount of time and activity is disproportionate to the value of and the profit from any resulting order, then it may be time to refine the marketing strategy so that it contributes more cost-effectively to the sales funnel in which it plays a part.
(image courtesy of renjith krishnan at