The New Year is traditionally a time for fresh starts and adopting new good habits. If you are a small business looking to turn over a new leaf in 2025 in relation to your finances, we would like to suggest that you improve the demarcation between your business and private transactions. At JRMA, we specialise in bookkeeping and VAT for small businesses, and we find that the blurring of business and personal transactions is a confusing and costly activity.
This blurring can fall into 3 different areas.
For a new business, who does not yet have an established customer base, it can seem like an attractive and obvious choice to sell to your friends. The danger of this is 3-fold. Firstly, there are “Mates Rates” i.e. the assumption that you should give your friends a discount, which will immediately reduce your profit and cashflow.
Secondly, it is not particularly easy to obtain objective feedback from friends as to the quality of the product / service. Thirdly, a flurry of early orders from interested friends can unrealistically inflate expectations of future demand. We urge you to tread cautiously when selling to friends and ideally keep those transactions to a minimum.
In an ideal world, all small businesses would have a business bank account, and every single business transaction would be paid into or out of it or be paid for on the business credit card. However, when we are doing the bookkeeping for small businesses, we often receive purchase invoices or receipts, without a corresponding payment out of the business bank account.
On delving deeper, we usually find that the owner has paid the bill from their private bank account. And on the flip side, we might see transactions out of the business bank account, and on hunting for the related paperwork, we find that the owner has inadvertently used the wrong bank card and paid for private goods from the business account.
The drawback of this approach is that it blurs the understanding of the business cashflow and profitability with the need for adjustments to cover the transactions originating in the wrong place. It also leads to a drawn-out process with back-and-forth queries between the business and the bookkeeper, which is costly for the owner in terms of their time wasted and costly in bookkeeping and accountancy fees.
So, we urge all businesses to be disciplined in their payments and adopt the good practice of always utilising their dedicated business bank account correctly.
A common occurrence in owner-managed businesses is for the owner to be paid a relatively small salary and then take extra remuneration in the form of dividends if the year has been a profitable one. This is a prudent approach particularly in the early days of the business. However, there is a danger that the full market wage of the owner (and sometimes family members who also help) is not fully costed into the product / service of the business.
The full market-rate of the owner-manager needs to be included in product costing regardless of whether they are actually paid that rate or not, for the business to be sufficiently profitable to pay dividends. If the business is not profitable, the owner-manager is subsidising the business with their unpaid time.
There are a great many owner-managers who work a great many hours, because they love their business and because they want to look after their customers. The non-financial benefits are often as important as the financial ones, with satisfaction arising from a job well done, pride in a productive team and delighted customers.
It is arguable whether working long hours in the pursuit of job satisfaction and ensuring business longevity is subsidising the business. However, it is certainly a consideration for product costing. If the owner was taken ill, and someone else had to step in, would they work the same number of hours, or would two people be needed to cover the workload.
With this in mind, at JRMA, we encourage you to think carefully about all inputs and their true market rate, for product / service costing, and to avoid inadvertently subsidizing the business.
If you need help with your accounts, and find that there's a transaction you're unsure about, give us a call to arrange a consult on 01905 796512 or email us at info@jrma.co.uk
