Free up your time with professional, strategic support.

Many professional services firms – including accountants – employ a ‘practice manager’ to oversee and co-ordinate their work. Plenty of companies in other sectors could benefit from exactly the same kind of approach.

An increasing number of accountancy and legal firms now employ a Practice Manager to look after the day-to-day running of their business. It’s a recognition that it’s very difficult to focus on the priorities of clients and to deliver a seamless service, unless you have someone working behind the scenes to make sure that everything is running efficiently. 

In simple terms, the Practice or Operations Manager makes sure that whatever the business and its clients need, the structures and processes are in place to make it happen. This could involve anything from recruitment of staff through to creation of a robust IT infrastructure, management of front-of-house reception and the preparation of disaster recovery plans.

The sheer importance and variety of the role makes it highly strategic. How do we respond to regulatory requirements, for instance? What is our tolerance level for risk? And how can we make sure we manage our finance, insurance and facilities in the most effective way possible?

If you’re choosing a manager to oversee operations in your own business, my recommendation would be that they are an inquisitive person. Someone who looks at numbers and is able to see the underlying trends behind them. The chances are that they may come from an accountancy background and will have real attention to detail, along with an almost instinctive ability to spot opportunities to reduce costs.

Remember, if you’re working too much in the business, you’re not working enough on the business. It’s a scenario which is repeated across many growing firms. Eventually, this is likely to translate into poor profitability and low cashflow. That’s why an investment in an operations manager can make sense for any expanding company.

Is there a magic threshold or size at which you decide to act? Not necessarily. One company with a £2m turnover might be very different from another. I would make your judgement on the basis of the complexity of your business. Once the demands of running the firm efficiently are starting to undermine your ability to focus on your core role, then it might be the ideal moment to find someone who can take a lot of the burden off your hands.

Start planning for the future with your accountant

Accountants do a lot more than simply crunch numbers. They can be trusted partners who’ll help you draw up a compelling business plan.

In the past, business planning was not an essential part of life. The small businesses we dealt with didn’t recognise the importance of looking forward and planning for the development of their company. 

Times have changed and, today, business planning is very much an essential part of corporate life. Why the transition? Well, the most common reason to prepare a plan is to explain your business priorities, capabilities and ambitions to an external lender, such as a bank. In an era of reduced access to finance and the application of rigorous lending criteria, a professional approach is absolutely essential. 

A business plan is, however, important at other levels too. It is an essential business management tool which provides a structure and guidelines for the running of your business.

From our point of view as professional advisors, assisting clients with the preparation of their plans is an ideal way of developing a close relationship with them and their staff.

The preparation of a business plan naturally involves financial information, but it also enables us as accountants to show that we are business advisors with commercial awareness, rather than simply number crunchers. A well-written plan will get behind the numbers. It will include comments on the aims and objectives of the business, as well as the personal ambitions of the owners. We will make reference to the key people in the organisation, the state of the company’s assets and planned capital expenditure.

A good plan will include observations on marketing strategies and risk management – the latter being an essential part of today’s business life. Working with clients to produce a business plan is therefore a highly rewarding and fulfilling exercise. It is also an excellent way to demonstrate how chartered accountants are trusted business partners for their clients.

Why trusts are giving way to Family Investment Companies

For people with significant wealth, Family Investment Companies are now a more fashionable way of planning for the future.

Trusts have for many years been an option when looking at tax-efficient ways of planning for the future and helping children and grandchildren. Recent changes, however, have limited what you’re able to put into trust – in most cases to £325,000 in a seven-year period. This is one of the reasons we’re seeing more and more interest in Family Investment Companies (FICs) today, despite the fact that the concept has actually been around for many years.

To start with, just think of a FIC as a company, into which you can build different shares, rights and restrictions. It doesn’t have to trade. It can just hold different assets as an investment and it might be possible to transfer an existing portfolio of investments into your FIC, depending on whether this creates any tax charges.

So why bother? Well, assets can grow and income then becomes taxable within the company at 20% rather than at the higher rate of income tax. With certain investments – dividends from most other companies, for instance – no tax is payable at all within the FIC. You can choose then whether you want to take some income from the FIC, which shares dividends are declared upon, or perhaps you simply “draw down” some of the loan you used to set it up.

There are, of course, some downsides. You have the costs and administration associated with setting up a limited company and, in theory, your accounts are a matter of public record, which anyone is free to inspect. It could be that in the longer term, if the company pays tax on gains and you then take that out as a dividend, that you could pay more tax overall, and obviously tax rules can change in future.

So setting up a FIC isn’t necessarily an obvious and straightforward decision. I recommend doing the due diligence beforehand, and sitting down not only with your accountant, but also a financial adviser and a lawyer. There may, for instance, be implications for your will and you do need to decide when setting the FIC up who you want to be shareholders, and what benefits you want each person to get in future. By and large, however, savings in income tax will often outweigh the potential risks, and there can be longer-term inheritance tax savings too.

Here are some frequently asked questions:

How do I fund an FIC?

If you create a large director’s loan account, the company founder should be able to withdraw funds in later years with no tax implications. You may want to partly fund by loan and partly fund by share capital.

How does the tax position compare between assets I hold myself and in an FIC?

Corporation tax is currently 20% (income tax up to 45%) and there’s no tax on UK dividends received in a FIC. There are some other benefits that companies can take advantage of, as well as the differing tax rates.

How is an FIC structured?

A lot depends on what you want to achieve – one of the great aspects of FICs is they are so flexible. You may have a founder shareholder, for example, who keeps tight control over the FIC, and then different classes of shares for each family member, allowing flexibility over dividends and future asset growth. 

You could also still use a family trust – many FICs have trusts as shareholders. As noted earlier, there is a great deal of choice when setting a FIC up.

Prepare to share

Before May’s election, many businesses were uncertain about whether they would pursue shareholder status for key employees. Since then, there has been a definite flurry of interest.

One initiative of the Coalition government back in 2013 was the introduction of ‘employee shareholder status’ or ESS. With Labour signalling that it was likely to scrap the provision – which allows staff to trade employment rights for equity – there was relatively little take-up. But with the election of a majority Conservative government in May 2015, companies now have a reasonable degree of certainty that the policy is here to stay.

The essential idea is that a business owner may want to tie in employees by giving them shares. The new regime allows employers to do this in a tax advantageous manner.

For example, you might want to reward a particularly impressive Finance Director and ensure that she stays for the long term. You issue new shares to her and she pays nothing for them, as the ‘consideration’ in legal terms is created by giving up certain employment rights (see below).

These shares must be worth a minimum of £2,000. If that’s all you choose to offer, no income tax is payable by the recipient, although if you offer more, tax is due straight away on the amount above the £2,000 threshold. (While this charge obviously belongs to the individual, it’s perfectly legitimate to offer a bonus that would help to compensate the employee for the upfront bill.)

If the amount you offer is worth more than £50,000, there are restrictions on the tax advantages. There is no tax on sale at exit up to this cap, but if the shares were worth, say, £100k when they were first offered, only half would be tax free on disposal.

Although valuation is obviously a very difficult issue in many businesses, it is possible to agree figures with HMRC up front to avoid any potential dispute. It’s important to work closely with your accountants, who will be able to make the calculations – there is a prescriptive process to go through with HMRC in order to get this agreed. 

A tax-free exit can seem very appealing and the owner may be looking to part with fewer shares than they would otherwise have to. It’s worth bearing in mind that entrepreneurs’ relief only applies if someone has 5% of the company, whereas under ESS they can have a smaller % and pay 0% on an exit, not 10% under entrepreneurs’ relief.

What rights does an employee give up as ‘consideration’ for shares?

• Unfair dismissal rights (unless the dismissal is related to discrimination or health and safety)
• Statutory redundancy pay
• The statutory right to request flexible working (with the exception of the two weeks after return from parental leave)
• Certain statutory rights to request time off to train

Other rights, including statutory sick pay, paid annual leave and maternity/paternity leave, remain in place.

So it’s not for everyone, and clearly as an employer you are giving away equity if you do this, but one advantage of ESS is that it is very flexible and there are not the restrictions over which type of company can do this, which there are with a number of other tax favoured schemes such as the enterprise management incentive scheme.

A holding company? There may be no reason to hold back.

If you thought the formation of a corporate group structure was just for big multinationals, it’s time to think again. It’s a serious option for much smaller businesses too. 

When a limited company has built up a significant amount of wealth on its balance sheet – perhaps three quarters of a million pounds or more – and it has a large value of fixed assets, the option of creating a holding company becomes something worth exploring.

Although the formation of a ‘group’ is something you’d more normally associate with large, blue-chip corporations, there’s certainly no reason in principle why smaller companies can’t take advantage of the structure too.

When you create a holding company, you can move spare cash and fixed assets into it from your trading company. The holding business can then rent the fixed assets back to the original company, buying any new assets itself. 

Each year, dividends can be paid to the holding company, which is allowed to set up its own directors’ payroll scheme and pay your executives, while charging the trading company for its services. 

There are a number of potential benefits to this approach. 

First of all, the business owner’s wealth, which has been built up over the years, is protected from a potential disaster such as losses from under-insurance. Creditors can generally only come after the trading company. You may also be able to maintain greater privacy over directors’ remuneration and possibly qualify for a less arduous audit regime. 

It’s worth noting too that the creation of the new holding company gives you an opportunity to bring in new shareholders and buy existing ones out. 

But do watch out. The new company structure will involve an increased admin burden in relation to year-end accounts, VAT, insurance and so on. And if you end up reducing your trading company’s balance sheet, there may be a short to medium-term hit on your credit rating. But, if you do have spare cash and are paying your creditors on time, this might not be such a big deal.

As you can see, there are likely to be pros and cons of the new arrangement, so the best thing is to talk the options through with your professional advisers. They will be able to look at your specific circumstances and give you appropriate guidance.

Banking on the right decision

You need heavy-hitters on your side when you approach a bank with a view to getting finance for investment.

When a client needs to persuade a bank to make a substantial investment in their business, we always recommend that they get their professional advisers involved at the earliest possible stage. Unless you have your accountant on board and get some support in presenting your case, there’s a danger you may end up shooting yourself in the foot.

Banks can be notoriously difficult to impress and can fall back on a tick-box mentality when it comes to deciding on finance. They’ll look at the recent figures and overheads, but can fail to take into account the bigger picture and the great opportunities that can come with investment.

Even with our involvement, the process of convincing the bank isn’t always easy. Different potential funders often ask for information in varying formats. Sometimes banks – despite the preparation of a detailed business case – seem as if they don’t quite ‘get’ it. 

As well as a paper analysis of where the business is heading, you may need to support your pitch in other ways – video that demonstrates the advantages of technology, for instance, and tours of the current facilities. 

It’s also important to set out your stall right at the beginning. Ask the bank’s local representatives whether they are actually able to make a decision. If you know the green light will have to come from someone further up the hierarchy, politely request that they come down to your client’s site and have a face-to-face meeting. 

At the end of the day, a successful request for funding is going to come from a partnership. On the one hand, there’s your expertise and knowledge about your business and market place. On the other, there’s the guidance and advice of your accountants and other advisers, who know from experience the best strategies to employ during the negotiations.

Five ways to measure business health

Keep on top of how well your business is performing by monitoring five key indicators.

There’s an old adage in accountancy: turnover is vanity, profit is sanity and cash-flow is reality. It’s a way of saying that there are numerous measures you can apply when measuring the financial health of your business, but it’s often good to have a rounded picture.

Too often, in a lot of smaller businesses, owners see the annual accounts process as a necessity to satisfy HMRC and possibly their bank. For that reason, it can be left to the last minute. In effect, this can often be nine months after the end of a particular accounting period. So by the time they get an insight into how well their company is doing, the information is no longer up to date.

My advice is to talk to your accountant about receiving management accounts on a monthly or quarterly basis. Then, you need to start looking at the following key indicators:

CASH-FLOW

Everyone talks about it, but how many people really understand its importance? The balance of the money flowing in and out of the business needs to be positive and you can only achieve this with accurate, up-to-date forecasting. You can then start to analyse the reasons for any discrepancies between the projections and your real figures. 

TURNOVER 

Again, here you should be interested in any differences between your projected turnover and the actual figures. If there are variances, it’s worth having a discussion with your accountant and talking through the implications.

GROSS PROFIT

In a nutshell, your gross profit margin is your income, less cost of goods sold. If this figure isn’t high enough, you won’t be able to cover your overheads and make yourself a profit.

OPERATING PROFIT 

Your operating profit figure is your gross profit less your overheads, but will exclude tax and interest. If this figure is too low and you haven’t yet taken money out of the business, you may have nothing to show for your endeavours.

NET PROFIT

This is your total income, less all expenses including interest and tax.

With cloud accounting now becoming increasingly common, it’s actually possible to monitor all these critical indicators in real time. This means you can make comparisons to the same period last year and see whether any improvements you’ve made to your business practices have achieved results. Contact us now to find out of a switch to the cloud would benefit your business.