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Month: October 2018

IR35

The IR35 legislation is aimed at what HMRC calls “disguised employees”. These are individuals who attempt to use an intermediary, usually their own limited company (a “personal service company”) to avoid paying tax.  Before the IR35 legislation closed the loophole in the law, people could set up a limited company and then hire out their services in that company’s name to do the same job as an employee.  Working through a company significantly reduced their tax bills, as well as the employer’s national insurance bill of the “client” who would otherwise have been their employer.

The IR35 legislation aims to prevent this form of tax avoidance by differentiating between individuals who operate as genuine contractors, and those who work as independent entities but with the working conditions of employees.  HMRC can launch IR35 enquiries and inspect contracts and arrangements, and if they decide that a self-employed contractor is “inside IR35” i.e. a “disguised employee”, they can require payment of backdated tax, national insurance, interest and possibly a penalty.  It’s therefore essential that self-employed contractors operating through limited companies are aware of this and check their contracts carefully to ensure compliance with the IR35 rules, or seek help to do this.

If you are concerned about IR35, you can talk to us.

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Payroll headache?

Outsourcing your payroll can save you time and money and will ensure you are compliant with all legislation

 

All data must now be submitted to HMRC before or on each payday and in real time. Failure to do so can result in fines. By outsourcing your payroll to Harmonea you can be sure that all your data is submitted to HMRC as and when required.

 

Our aim is to provide professional, accurate and timely payroll support. We tailor our product to match each client’s individual needs and ensure you will never miss a PAYE deadline again.

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What do your numbers tell you?

Ratios

To enable us to appraise the performance of a business there are a number of financial performance indicators that we can use. The key performance indicators (KPI’s) are sometimes referred to as ‘ratios’ and ratio analysis is an important part of how we can understand how well a business is doing. These KPI’s can be set as targets to help manage the performance of the business through the decisions made by management.

There are several categories of ratios that you can look at: profitability, revenue, cost and liquidity

Profitability Ratios:

Margins are a common way of measuring the profitability of a business by considering the profits earned compared to the sales revenue generated. They are sometimes referred to as measures of ‘return on sales’ for this reason.

Margin on Sales

There are two margins that can be calculated:

Gross Profit margin (%) = Gross Profit/ Sales x 100

Net Profit Margin (%) = Net Profit (profits before tax)/ Sales x 100

  • Falling margins may be due to increasing costs or reduced selling prices
  • Differences between the gross profit margin and the net profit margin allow you to establish whether changes in profitability are due to changes in cost of sales or caused by other operating costs
  • Useful for setting prices e.g. increasing your selling price relative to the direct costs will result in an increased gross profit margin.

Return on capital employed (ROCE)

Whilst margins look at profits in relation to sales revenue generated, ROCE looks at profits in relation to investment required to finance the business.

ROCE = Net Profit / Capital employed* x 100

*Capital Employed = Total Assets less Current Liabilities

  • It measures how much profit is generated for every £ of assets employed and indicates how efficiently the company uses its assets to generate profit
  • The only ration that compares profits to the overall size of the business and is sometimes viewed as the most important ratio for analysis purposes

Revenue Ratios:

Average Selling Price = Total Revenue / No of units sold

  • Average price charging for the units that we are selling
  • Can be compared to competitors prices to see how competitively priced your products are

Sales per employee = sales / No of employees

  • Measures the average value of sales generated per employee

Asset turnover = Sales/ Capital employed

  • Measures the value of turnover generated for every £1 of assets employed
  • Measures #efficiency’ of the use of assets that you have invested i.e. are the assets being used to generate adequate turnover

 

Cost Ratios:

It can be useful to measure how well a business is controlling its cost base as the level of trade grows.

Cost of sales as a % of turnover = Cost of sales/ Sales x 100

  • If increasing as sales increase it may indicate poor cost control and that that the company is growing to quickly
  • If falling as sales increase this may be due to ‘economies of scale’ as volumes rise e.g. bulk purchase discounts.

Liquidity Ratios:

Some ratios help us to consider the cash flow position of the business which is crucial for long term planning. Many profitable businesses become bankrupt due to poor cash flow management.

Current Ratio

This shows if the short-term liquid assets of the business (e.g. cash, trade debtors & inventory) are adequate to cover the short-term liabilities (e.g. Trade creditors Accruals & Tax).

Current ratio = current assets/ current liabilities

  • If it falls year on year it may indicate difficulties with cash flow and that we will have difficulty paying creditors when they demand payment which can lead to bankruptcy.

Average receivables collection periods (debtors days)

This shows how long it takes you on average to collect money from trade debtors. It is important that you collect money quickly as this helps with liquidity and cash flow in order to pay suppliers, staff etc.

Debtors days = trade debtors / Sales x 365

  • If increasing it indicates you are taking longer to collect debts. You may want to consider tightening up credit control or offering settlement discounts to encourage faster payment.

Average payables period (creditor’s days)

Shows how long you take to pay your suppliers

Creditors days = trade creditors / cost of sales x 365

  • By delaying payment to suppliers you can improve your cash flow. However, this can have a negative impact on your relationship with these suppliers.

A ratio figure on its own means very little, to make sense of ratios you need to compare them to something. This could involve comparison with budgets, against previous year figures, against industry averages or perhaps competitors.

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