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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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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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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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Are you giving out the wrong message for your business?

I recently saw a leaflet for something I could be have been interested in. At the point of taking the next step I looked for an email address to email to arrange a meeting to discuss their offering. My impression of this business suddenly did a nose dive on the professionability scale. They had a hotmail email account. Was this a part time business? Another person involved in this business had an email address sexysuzy@……. For the cost of a domain running at around £6 for 2 years, why had they not grabbed it?

I then saw that they had a website with the business domain so why were they not using the domain with an associated email address? This person had a good website so I proceeded to email.

Not getting a reply I telephoned the number on the website but it went to the home phone answerphone. Had I got the wrong number?

It took three weeks for an email reply which was full of apology. Was this person taking their business seriously? Could they cope with the work I was proposing to give them?

We met up and he gave me his business card. Oh dear! I think it was a DIY job from Staples and was completely mismatched to the website. It was poorly thought out, poorly printed and was misaligned. It gave incomplete information and contained spelling mistakes.

This business was giving out all the wrong messages before we had had the opportunity to work together.

The meeting went well but the jury is still out as to whether to use him. I have my doubts.

What is the point of all this? This person could have made a much stronger impact with so little effort.

Had he had a consistent brand image – domain, logo, standard of presentation, my impression would have been very different.

Had the telephone been answered by a human or by a professional answerphone, my impression would have been very different.

Had the initial response been earlier and the final proposal sooner after the meeting, my impression would have been very different

By the time we got to the end of the sale process, I had lost confidence in this person which is such a shame. Time will tell if I made the right decision.

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Manual book-keeping or Electronic book-keeping

We are often asked for our opinion on book-keeping packages.  Our view is you need to use it 52 weeks of the year so choose what suits you.  However, as companies grow, it can be beneficial to use proper software for the job.  This can save a lot of headaches at the end of the year.

Cloud or Local is the next question.  Many software companies now offer cloud software where you can access it any time from anywhere to suit you.  This can be useful but many are not happy with this feeling that their data is not safe.

Harmonea have recently reviewed 10 book-keeping software packages which are a mix of local and cloud software offerings.  If you would like a copy, please ask.

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What is a registered office and do I need one?

What is a registered office address?

A registered office address is a legal requirement of all Limited Companies and Limited Liability Partnerships (LLPs) incorporated in the UK. Its purpose is to provide Companies House and HMRC with an official address for delivering statutory mail and legal notices. It must be a full, physical postal address in the same part of the UK where your company is registered i.e. England and Wales, Scotland or Northern Ireland. Both residential and non-residential addresses are permitted but many people prefer to keep their homes private.

Your registered office does not have to be in the same part of the country where your main trading activities are carried out, nor do you ever have to visit it. It is simply for receiving official mail and storing statutory records for inspection purposes.

 

Why do I need a registered office for a limited company?

  • Legally required under UK company law
  • Official mailing address for statutory correspondence.
  • Details are placed on public record to create corporate transparency.
  • Statutory records and registers must be kept and made available for inspection at the registered office.

You can change your registered office at any time after company formation as long as it stays in the same UK country.

 

Can I use my home as a registered office?

You may use your home for this purpose but it is not mandatory, nor is it the best choice. Ideally, you should use a non-residential address for reasons of privacy and professionalism.

The benefits of a non-residential registered office are:

  • Due to the public disclosure of corporate information, the use of a residential address could result in unwanted visitors and unsolicited mail at your home.
  • More likely to be perceived as an established, credible business if you have a professional registered office address.
  • Draws a clear line between work life and home life.

 

If you would like Harmonea to be your Registered Office address, please contact us.

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Are you owed money?

Are you owed money by an individual or a company?

Have you chased your invoice over and over again to no avail?

Do you want to take it further but don’t know how?

Contact Harmonea and they can help.

We can walk you through the steps on how to submit a claim through Money Claim online or submit the claim on your behalf.

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Construction Industry Scheme

CIS (Construction Industry Scheme)

You must tell HM Revenue and Customs each month about payments you’ve made to subcontractors through your monthly return.

You need to send your monthly returns or submit them online to HM Revenue and Customs by the 19th of every month following the last tax month.

You must pay HM Revenue and Customs every month by the 22nd (or the 19th if you’re paying by post). You may be charged interest and penalties if you pay late.

Pay CIS deductions to HMRC in the same way as PAYE and National Insurance payments.

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When do I need to submit my VAT return?

You usually submit a VAT Return to HM Revenue and Customs every 3 months.

Action                                                                         Deadline

Submit Paper VAT return                                            last day of the month following the end of the return period – standard deadline

Submit Online VAT return                                          7 calendar days after the standard deadline – extended deadline

Payment Online                                                           7 calendar days after the standard deadline – extended deadline

Payment by DDM                                                        3 bank working days after the extended deadline

For example:

Return period                 Paper return         Online return       Pay online                        Pay by DDM

30 April                31 May                   7 June                    7 June                    10 June

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