Showing posts with label Expenses. Show all posts
Showing posts with label Expenses. Show all posts

Monday 27 July 2015

The Huge Pitfalls Of Reducing Your Price & What To Do Instead!

As the economy struggles to recover, and competition gets more and more fierce, we thought it was important to bring to your attention the problems you encounter by reducing your prices in the hope that this will bring you more sales.

One of the most common and most costly traps business owners fall into has to do with the perception that the quickest way to increase cash flow when sales are down is to have a ‘sale’.


On the surface, the concept itself seems to make sense. We need more sales, so we lower our prices.
Lower prices will attract more buyers who will purchase more of our products at the reduced prices. And we’ll make up for the money we’ll lose with the lower prices by the increased number of sales.

But the reality is, rarely is this strategy a success.

Having a sale, reducing prices in order to attract more customers, can often be the kiss of death for businesses unaware of the bigger picture.

In reality, there is rarely a good reason to reduce your prices. No matter what you think, most people do
NOT buy on price and price alone. In fact, research over the last 6 recessions has shown that only between 5% and 20% of people buy on price. Most people think it’s the other way around! So let’s take a look at the effects of reducing your prices...

Let’s assume, for illustration purposes, that your business operates on a 30% margin and you want to reduce the price to increase sales. If you lower the price just 10%, you’ll need to increase the number    of sales you make, or the number of customers you sell to, by 50% just to maintain the original profit.

Don’t believe it? Let’s walk through the numbers…

Let’s say that you sell an item for £100, and that your total costs to acquire that product and get it out the door comes to £70. That leaves you with a net profit of £30 on that item.

Now, let’s say that you reduce your price by 10%. You now sell that item for £90.

You didn’t do anything to reduce your product costs or your expenses. All you did is reduce the amount you charged your customers.

If you subtract your £70 costs from the £90 sale price, you net £20.

Now, if you subtract this £20 from your previous profits of £30, you end up with a £10 difference. Divide the £10 by £20, and you get 50%.

So to get back to the same profit level that you were enjoying before you lowered your prices, you’ll have to sell more items  or the same number of items to 50% more customers.  Now, here’s another problem most businesses fail to take into account. No one knows you’re having a sale unless you tell them about it.

So you need to advertise or send something out to let everyone know you’re  having a sale.

And if you expect to attract more customers and sell more goods, you may need to beef up staff, salespeople, delivery, packaging, money processing, accounting, stocking, signage and any number of additional things that you may not initially consider and all of which further increases your costs.

So when you look closely and carefully at having a sale, you may have to sell considerably more than the 50% to even come close to breaking even.

IMPORTANT
REDUCING PRICES IS THEREFORE SOMETHING YOU NEED TO THINK VERY CAREFULLY ABOUT. REMEMBER, VALUE AND PRICE ARE LINKED – SO PROVIDE MORE VALUE AND YOU’LL STILL GET THE SALES!

The Value Of Increasing Prices


In our estimation, we believe that 90% of ALL businesses charge too little for their products and services.

Often people are scared to increase their prices, and business owners rarely test different price points (do you?). 

But having carefully targeted your prospects and customers (like we always advise you do), you are in a position to charge premium prices because you are seen by the market as THE go-to company for their specific requirements.

And there is no quicker way of increasing your profits and the success of your business than by increasing your prices. Let’s take a look...
Using the same 30% margin as in our previous example, instead of decreasing prices by 10%, you raise them by 10%.

The result?

You can now maintain the same profit margin with a 25% reduction in sales volume… either in the number of items sold, or in the number of customers sold to.

You could actually lose one out of every four customers and still make the same money.

Now, let’s compare two identical businesses which sell exactly the same products. Business A lowers prices by 10% and Business B increases prices by 10%.

As was pointed out, Business A has to sell 50% more, and Business B can sell 25% less, and they’ll both make the same profits as before.

While the owner of Business A is working his/her tail off just to break even, Business B owner is cruising along without all the stress, worry and other problems, and yet is making the same net profits.

Furthermore, what is often surprising to business owners is that when they do increase their prices, the opposite of what they expect actually occurs. Instead of losing customers, they actually gain more customers.                                   

Why?

Because the higher prices are met with the perception  that your products or services are worth more and therefore this perception of ‘added value’ gives the business a welcome influx of sales it would previously never have received.

We have numerous examples of this. For instance, a photographer was charging just £450 per day for his wedding service.

With very little change to the way he carried out the service, he increased his prices to over £3,000 in three months.

A restaurant owner increased her prices by 20% and saw an immediate increase in bookings .

A jewellery store increased prices 15%, resulting in an increase of £25,000 a month in sales.

These are not isolated incidents. If you get your target market right and you deliver a good-quality product or service, increasing your prices and increasing your sales is NOT a pipe dream.

So what if you’re selling a commodity-type product or service, whereby people can easily shop for the best price? Well, it’s no different. What you have to do, though, is create a level of service that is unmatched by any of your competitors.

This includes offering superior delivery times, quicker service or using a powerful guarantee which no other competitor offers and creating ‘premium’ products or services that customers will be happy to pay more for.

So even if you’re reluctant to increase your prices, concentrate on giving more value and you’ll still get many more sales.

As long as you create a gulf of value between you and the competition you’ll be able to increase your prices.

Believe us no matter what you sell, increasing your prices is something you should look at doing now.

Of course, don’t just make a wholesale increase right across the business. Increasing your prices is a tactic that should be approached like all your other tactics. Test small and then roll out when you have sufficient evidence that it works.

Friday 27 June 2014

What should I do if my contract is caught within IR 35?

Accounting Tips for Contractors:


We often get asked about the best way to extract money from a limited company if contract is caught by IR 35.

First and foremost, the only way to be sure whether your contract falls inside or outside IR35 is to have it review by professional accountant firm who are specialised in Contractor Accountancy services.
Note : At APJ Accountancy, we offer this free within our standard package service

And by the way, it works on a contract by contract basis. So, for one contract you may fall under IR35 but for some others you may be outside.

Be aware that every contractors need to be evaluated on their own merits and every contract can be different.

If you aren't sure, you can take the 10 minute Contractor IR35 Test to see if you are likely to be working under IR35 from HMRC website yourself. Click this link to know more information that you need to know about IR35 -  http://www.hmrc.gov.uk/ir35/guidance.pdf

What is the best method to pay yourself?


How to Pay Yourself inside and outside IR35?

Going back to your question the best method to pay yourself, in simple terms

  • For Income from all contracts that fall outside scope of IR 35 – you can pay yourself combination of small salary and big dividend to maximise your tax savings.
  • For income related to contracts that fall inside scope of IR 35 – You may need to pay some additional PAYE and National Insurance on the taxable income from these contracts at the end of the financial year.

So your company will continue you pay you as usual throughout the year deducting PAYE and NICs as applicable.

At the end of the tax year you will need to check you have paid the right amount of tax and NI by calculating the deemed employment payment due on the IR35 contract(s) undertaken.

If you don’t know much about deemed payment then a step-by-step guide for and related NICs can be found on the HMRC website.

HMRC also have a IR35 ‘deemed salary’ calculation spreadsheet which can be downloaded. Click link to download the spreadsheet. www.hmrc.gov.uk/ir35/ir35.xlt 

Alternatively, contact us to discuss how we can be of help in calculating your IR35 contract(s) ‘deemed salary’ and NIC liabilities.

Visit www.apjaccountancy.com/contractor-accountant.html for more information.

Are you a contractor working under IR35 ? Let us know how you do the salary payment. Feel free to post your thoughts as comments below and share it with your friends.

Sunday 22 June 2014

What expenses can you claim for in your limited company?

The main rule is “an allowable expense should be wholly, exclusively and necessarily incurred in the performance of your day to day business.” Any direct expense incurred running your business should be claimed, there are some expenses that you might think meet the criteria but are unfortunately not allowable, such as entertainment and professional attire.

However, if you are operating as a limited company you can pay for these expenses through the business, but you won’t be able to claim relief against corporation tax. Be careful that you do not trigger a benefit in kind from the company if you are claiming chargeable items.

We have briefly detailed below common expenses that most business suffer:
Limited Company Expenses

Wages/ Directors Remuneration


It is tax efficient to pay yourself, as a director, a salary to utilise your personal allowance.  You could also consider paying your partner a salary, only if they work in the business and have some personal allowance available.  Current rates can be found on HMRC’s website http://www.hmrc.gov.uk/rates/it.htm.

Naturally staffing costs are an expense to your business, along with the employers national insurance contributions.


Pension Contributions


Pensions are a good tax planning tool, they help you extract funds from your company and are also an allowable expense for corporation tax, only if you have an employer’s contribution scheme.


Telephone, Mobile and Broadband


If you use these for your business then you should claim the expense. Ideally the expense should be paid directly by the company , remember if the expense is paid personally and not wholly for the business, then only the business element should be claimed. If you claim the whole amount you would trigger a benefit in kind if there is personal use.


Hotels and accommodation


If you are travelling around the country/globe visiting clients then the cost of your hotels are an expense to your business. If you are travelling for business and pleasure, the pleasure amount must be incidental to the trip for it to be an allowable expense.

If you are working abroad for a long period of time there are circumstances when you can claim the costs of your partner coming out to visit you.

Depending on the circumstances you can claim a flat rate (without a receipt) of between £5 and £20 per night, depending on where in the world you have travelled to for work, as incidental expenses to cover food etc. However, with the rising costs of food you might be better off claiming the actual costs rather than the flat rate allowance.


Living accommodation


If you (a director), or one of your employees stays away from home during the week, because your client is based too far away to travel each day, then the hotel cost is also allowable. However, if for convenience you stay there for the weekend, you should only claim the expense for when you are there working.

You can also, if it is cheaper, rent a property rather than paying hotel charges. Again, if you are staying there 7 nights, but only working 5 days, then the 2 days should not be claimed as a business expense. Also, if you are renting for more than two years then the area you are staying in is then deemed your home and becomes a non-allowable expense.


Mileage Claim


It is normally more tax effective to claim mileage rather than buying a car through the company, mainly due to fuel rate charges and benefit in kind issues. You can claim 45p per mile for the first 10,000 miles and 25p thereafter. Remember you need to keep a mileage log showing all of your business miles.

The 2 year rule also applies here, if you travel to the same clients address, more than circa 60% of your time, then after 2 years HMRC deem this as commuting and is a disallowable expense.


Motorbikes and cycle bikes


As with a car you can also claim mileage for a motor bike, which is 24p per mile and 20p per mile for a cycle bike. Don’t forget to log your miles, even cycling to the bank for business is allowable.


Other travel expenses


Train, bus and taxis are all allowable expenses if you use these to visit clients, or for other business trips such as seeing your accountant or bank manager. Car hire and parking changes can be also claimed.
If an employee receives a parking ticket whilst working, then this fine can be paid by the company and claimed as a tax deductible expense. Note that parking tickets are only an allowable expense for employees, not a sole trader.


Subsistence


Although we all have to eat, there are a few circumstances where you can claim your daily meal as an expense in the UK.  If you are staying away from your home overnight then a reasonable evening meal is allowable also you can claim if your business journey is outside your normal pattern of work such as leaving before 7am. Alternatively, you can claim a flat rate of £5 per night depending on your circumstances and reasons for working away.


Accountancy fees


Of course our fees are a tax deductible expense, but only the business element. If your personal tax return is included then a benefit in kind is triggered unless an adjustment is made in your director’s loan account when the annual accounts are prepared.


Entertainment


NOT ALLOWABLE, but remember that if you are entertaining clients you can claim the expense back but the company cannot claim the tax relief. This is a useful tax planning tool if you personally are a higher rate tax payer.

Don’t forget that the company is allowed to spend £150 per employee, per year, for a festive party. If the cost is more than £150 then the whole amount becomes disallowable. If the party is going to cost more than £150, it is recommended that the directors pay the difference personally so that the £150 is still available as an expense.


Training and development


The rule here is that you can claim for maintaining/enhancing your skills required in the business but not the acquisition of new skills. For example an IT contractor going on a computer course is allowable, but learning to become an aeroplane pilot would not be allowable.


Advertising


If you are advertising and marketing your business these expenses are allowable. Examples would include yellow pages and Google ad words. Don’t forget to claim any costs involved in social media and networking.


Companies House fees


Paying your annual filing fee is an allowable expense.  Some accountants include this fee in their fixed priced
accountancy packages.


Bank Charges and loan interest


If you are charged bank fees, then these can be claimed, along with the interest charged on borrowings in the company name, including loans and overdraft facilities. Factoring charges are allowable and any bank management fees or arrangement fees can be claimed.


Professional Subscriptions


If you are a member of a professional body, which relates to the trade, your annual subscription is allowable, along with any continuing professional development to maintain the membership.


Reference books and Journals


If you need reference books or journals to support your trade or part of your training, then you should pay for and claim these in the company.


Eyesight tests


This is a tax deductible expense for limited companies.  You can claim for the eye test and normally the lenses, but not the frames.


Office stationery and postage


All your paper clips, pens and paper can be claimed, not forgetting the huge cost of postage. Luckily emails are free! Couriers can be claimed, along with other sundry office costs such as cleaning, loo roll and tea and coffee supplies.


Computer Equipment


As computers rarely last more than 2 years, any PC’s, laptops and ipads used for business can be claimed. Currently you can use your annual investment allowance to claim the whole expense in the year of purchase.

Computer software, depending on its life span, can be either claimed as an expense or capitalised and included in the annual investment allowance claim. However, as software is normally upgraded yearly these items can normally be expensed.


Use of home as an office


If you maintain an office/storage facility at home, then HMRC allows you to claim £3 per week without any proof of expenses. Alternatively you can calculate a percentage and time in use, this proportion of the total household expenses can be claimed. For example if you use a spare room and you have a 3 bedroom house plus a lounge and kitchen, you can claim 20% of your household bills to include, mortgage interest, buildings insurance, gas, electricity, council tax and any other expense incurred in running your home. However when claiming use of home as an office, if this proportion of the home is permanently used as an office then it is not eligible for principle private residence relief and subject to capital gains tax if you sell your property and make a gain.


Office furniture and any machinery


Your office chair, desk and cupboards can be expensed in the same way as computer equipment, the same is true of any machinery used in the production of goods.


Legal and professional fees


If you require the help of a solicitor and if their service is related to the trade of the business then the expense is allowable. If it relates to capital items, then the costs need to be capitalised along with the capital expenditure. If you are paying for legal work to raise capital or drawing up shareholder agreements, then these costs are also disallowable.

Professional fees such as business coaches/consultants etc are also allowable.


Repairs and renewals


General maintenance of your property is allowable, such as light bulbs, fixing broken equipment etc. However improvements/renovations should be capitalised and added to the base cost of the property.


Leasing of equipment


Lease or buy is sometimes a difficult decision, leasing is an allowable expense for corporation tax and is very useful for cash flow. If you have used your annual investment allowance for the year it will take you some years to benefit from the capital investment of new equipment, thereby leasing an asset gives you tax relief sooner.


Clothing


Business clothing is not allowable, as there is the possibility of dual purpose, without boring you with case law about a lawyer not being able to claim their black robes, the only clothing that is allowable is protective clothing, such as steel toe cap boots and high visibility jackets.


Insurances


All of you insurance products are allowable expenses, such as professional indemnity and public liability insurance. You can also claim key man insurance and certain types of life insurances. The general rule is if the pay out of a claim is taxable then then premium will be tax deductible.


Business gifts


Food and drink are not allowable, however a gift of under £50, with your corporate branding on, can be claimed. A nice corporate umbrella or pen will be fine.


Company Formation fees


The initial cost of forming a company can be paid by the business, or reimbursed to the director, but this expense is not allowable for corporation tax.


Franchise Fees


If you are purchasing a franchise fee over a period of time, then you need to check whether the initial fee can be claimed in the first year or amortised over its useful life, i.e. the franchise period.


Goodwill


Purchased goodwill can be amortised over its useful life and is normally a tax deductible expense, however there are situations where this is not possible, normally when there is a related party individual. You can also claim the goodwill created on incorporating your sole trader business or partnership into a limited company. Please contact us for more details on how this would work. This is only possible for trades started after April 2004.

This list is intended only as a guide for individuals running a limited company. The list of expenses is not exhaustive as each company will different circumstances, so we recommend you seek professional advise to compliment this. If you have any questions on whether you can claim a specific expense, please contact one of our accountants

If you have more questions on Small Business Accounting, Contract Tax planning or more, feel free to contact us