Your accountant directly impacts how much you earn. Invest the time upfront to find the right accountant and reap the rewards
For small business owners and freelancers who have just started out, staying on top of your business finances and documents can be daunting. Here’s where our article comes in, so you can quickly get a grip on the basics.
A balance sheet provides a snapshot of the financial condition of a company, showing how much it owns (assets), owes (liabilities) and the amount that is left over for its owners (owners’ equity) at a specific point in time.
The balance sheet is typically completed at the end of a month or a financial year. It is comprised of three main elements:
The balance sheet is divided into two sections: the left side shows the assets of the company, while the right side shows the liabilities and shareholders’ equity.
Assets are listed in order of liquidity. For example, cash or inventory are listed above less liquid assets like property or equipment.
Liabilities are listed in order of maturity; current liabilities, which will come due within a year are listed above long-term liabilities. The latter refers to liabilities that will remain outstanding for longer than one year.
The total sum of all assets, less a business’ total liabilities is equivalent to the owners’ equity. This represents the amount that would be available for a business owner to draw out.
The balance sheet lets a business owner and investors see what the company owns and owes, and to understand its net worth. It also indicates the financial health of a business.
For example, a balance sheet that shows a negative balance in owners’ equity indicates that liabilities exceed assets. This can be a warning sign that the company is in a bad financial situation, and should prompt business owners to dive deeper, and uncover the causes for the negative balance.
A balance sheet can also be used to calculate important financial ratios. One example would be the working capital ratio, which is obtained by dividing the current assets by current liabilities. This ratio measures a business’ efficiency, and shows how well it is able to meet its short-term obligations.
And for small business owners seeking external financing, the balance sheet —along with financial statements like your cash flow and P&L—are required documents when you apply for a bank loan.
The profit and loss account (P&L) is a financial report that shows the revenue, expenses and profit or loss of your company over a specific accounting period.
This period can be a month, a quarter or a year. A P&L is also commonly referred to by other terms, such as the income statement, statement of operations, financial results statement and earnings statement.
A P&L is comprised of the following key elements:
The P&L is a key financial statement in a business plan, as it quickly shows how much money your business has made or lost.
What’s important is to compare your P&L across different accounting periods. In doing so, you’ll be able to identify business cycles and trends—such as the peak and trough periods that occur across the year, or aspects of your business that generate the most profit or costs.
You may also identify changes that are not immediately apparent, such as periods where your expenses are growing at a faster rate compared to your revenue. With these insights, you’ll be better-positioned to make improved business and financial decisions.
And lastly, information from your P&L can also be used to calculate metrics that are important indicators of your company’s financial health. These include the operating ratio, gross profit margin and net profit margin.
If you have a company, or are starting one, then you will need an accountant. Though you could do all your accounts yourself, in practice few business owners have the time.
An accountant also checks that you are doing everything correctly, and is a useful reference for both HMRC and financial institutions should you ever need to apply for a loan.
The trouble is that finding the accountant who is right for you is never easy. You do not want to pay more than you have to, but are low-cost, self-service, internet-based accountancy packages really the best fit for your business needs?
In this article we shall break down that option and its alternatives for you as we answer the 3 questions that are occupying your mind right now:
The purpose of this article is to give you the context and background you need to ask the right questions, especially when you may not yet know what those questions are.
The simple answer is that there is no legal obligation to hire an accountant if you are a sole trader or a limited company.
However, when you combine the time you have available with your other responsibilities as a business owner, this question normally answers itself.
Consider these questions for yourself:
For the vast majority of people it is probably a better use of your time to focus on growing your business and not spend hours doing (and likely second guessing) your accounting. Accountants can bring two primary benefits:
In addition to the above, there are other benefits that might apply including:
Then you are yourself an accountant or have a lot of experience.
With the quality of freelancer-focused accounting software (e.g. FreeAgent, Quickbooks, Pandle) it is certainly possible to go it on your own and get some help along the way. However I would strongly recommend only doing this if you have an accounting background or have many years under your belt running a limited company.
There are a few different factors to look out for when choosing an accountant.
Broadly speaking there are three types of accounting firms:
These firms generally use as much technology as possible to streamline the accounting process.
You input your income and upload your expenses to their site, and their software does the rest. In theory at least. In practice many people experience difficulties, especially when it comes to more complicated operations like part payments when you need to do your bank reconciliation.
These difficulties are often mainly due to underdeveloped or inelegant and obscure software and other glitches, rather than the inexperience of the individual using the service.
Whilst these services naturally tend to be lower cost, you do lose out on tailored advice. Also, you will normally have to solve every problem yourself, which often means reading your way through the relevant help articles.
A dedicated account manager is someone you can go to when you have questions about your accounts. However, he or she is likely handling communication with hundreds of accounts and has a team behind him/her doing the accounting, so there are some limitations.
This is the service I initially signed up with. If you are just starting out but have some experience, this is probably a much better option for you than a full self-service package.
Here you get a specific individual that knows your business inside and out and is someone that you build a relationship with over the course of months and years. While they will likely have a team behind them, they are much more involved in managing your accounts and can provide you with more in-depth and nuanced support and guidance.
This level of service generally comes at a slight premium but provides a much richer experience. I opted for this service after my first accountant made the big tax blunder and I have not looked back since.
It goes without saying that an accountant with more experience will, other things being equal, be better than someone with less.
Every accountant should be able to do the basics – complete monthly payroll, complete your tax filings etc. but someone with specific experience related to your business will understand your needs better.
I’d recommend going with an accountant that specializes in limited companies if you have a limited company, whilst if you are a contractor choose one that specializes in contractors.
It’s not easy to directly assess how competent a potential accountant is. I’d recommend assessing a few things:
To be considered a professionally qualified accountant in the UK, you need to have graduated from and be a member of one of the 5 professional bodies, namely:
Institute of Chartered Accountants in England and Wales (ICAEW)
Institute of Chartered Accountants of Scotland (ICAS)
Chartered Accountants Ireland (CAI)
Association of Chartered Certified Accountants (ACCA)
Association of International Accountants (AIA)
There are also some qualifications that are considered lower-tier, and members of such bodies, such as the Association of Accounting Technicians (AAT), are not considered professionally-qualified accountants.
Most companies will charge you a fixed monthly (or sometimes annual) fee. The fee will largely depend on what is included within your package, the reputation of the firm, the level of service and the effectiveness of its sales process.
Be sure to benchmark what is included in each package against each other. For example, some packages include an annual self-assessment, while others can charge anywhere from £95 to £300+ for a self-assessment depending on its complexity.
When doing your due diligence, look for signs of good communication, such as timely responses, clear and professional language and good rapport.
Good communication is critical to ensure things run smoothly and will give you peace of mind when questions and issues inevitably crop up.
Even if you are signing up to an online accounting service you can also assess the quality of communication by doing some tests. How long does it take to get a response to your emails?
At the end of the day, you have to be able to trust your accountant, given that they’ll be handling such a crucial and sensitive aspect of your business.
A good way to go about this is to get personal references where possible. Online reviews certainly help, but these days many are fake. Having said all of this, trust is a bit subjective, and you might need to go with your gut when trying to make a final decision.
While a good accountant is crucial for your business, the good news is that finding one can be simplified if you follow a structured process:
Step 1 Identify your needs.
Step 2 Scan the market and grade some accountants against the needs you’ve identified. Make initial phone or email enquiries.
Step 3 Create a shortlist of 3-4 accountants and have detailed calls with them to fill in any gaps in your understanding of the service they offer.
Step 4 Pick a firm that best suits your needs, and if possible negotiate to get the best value price.
Let’s break that process down into greater detail for you:
Making the right choice always depends on your own needs and priorities.
The two most important factors to think about are what cost you are comfortable with and whether you are comfortable going with an online service or want the attention of a dedicated named accountant.
If you are new to running a limited company, I’d recommend opting for a dedicated named accountant. You can always switch to a lower priced option once you become familiar with how everything works.
Now that you have a cost level in mind and know what kind of service you are looking for, scan the market to find 7-10 accountants that fit these criteria.
A few suggestions are:
Have a list of questions ready based on the priorities you set out before to make sure you’re covering all the important points.
You can even put the results into a spreadsheet to compare answers side-by-side if you want to be more methodical. Below are some suggested questions to get you started:
How much and how do they charge? What is included in the service and what is extra?
An hourly fee is more common amongst ‘mom and pop’ accountants and is also more likely to be offered by freelancers.
Pretty much all other accountants charge a fixed monthly or annual fee with a defined list of services. If you decide to go for such a package make sure to drill down and cover all the terms.
A firm might market packages with low prices but charge hefty additional fees for essential components such as a self-assessment (which every Limited Company director needs). Make sure you clarify these points so you’re comparing packages like for like.
Here are some questions which will help you to do this:
The last factor is much more likely to happen if you’re buying a fixed-fee package. Understand the costs that would be involved and try to negotiate them down or have them removed.
How big is the company and what are their response times like?
While you cannot expect a one-man accountant to always be available, you should still expect a reasonable response time from whoever you work with.
Pretty much all accountants will tell you they will promptly respond, but the true test is the feeling you get from your various interactions with the accountant. How long does it take to get them on the phone, and how quickly do they respond to your emails?
If you have time-critical requirements, you should look for a firm with extended availability, which is generally one of the larger firms.
See if your accountant offers any tools or resources to help you, such as software to record transactions and issue invoices, spreadsheet and document templates or access to guides and knowledge databases.
These are more likely to be offered by larger firms, especially online firms that depend on a lot of automation to offer affordable packages.
The advantage of these tools is that they can reduce the amount of time you need to spend providing your accountant with what they need to carry out their service. Software can also give you a view of your earnings, payroll, and taxes in real-time, which is a nice bonus.
When dealing with large firms, check if you will have a dedicated account manager, as it can be frustrating trying to deal with a different person every time you need some support.
Ideally your dedicated point of contact will be your actual accountant as opposed to just a liaison, but this is generally only the case at smaller firms.
There are big advantages to using your business accountant for your personal finances since they will have an accurate picture of your financial situation and can help you make the right choices to avoid paying unnecessary taxes. Also, you may save on costs by bundling services with one provider.
If you also need some other services, such as company registration, a virtual office or payroll services, it might make sense to get them from the same company, so that you’re not managing multiple accounts. Make a note to see if these are available.
Do they have professional qualifications? It’s difficult to judge a potential accountant’s abilities yourself, which is why it’s a good idea to look for professional qualifications.
Do they have experience relevant to your specific industry/circumstances?
Every accountant should be able to file tax returns, complete legal documents correctly and so on, but someone with relevant experience will understand your needs and the finer details of relevant laws and regulations.
Definitely choose an accountant that specializes in Limited Companies and assess if they have experience in your industry. The more help you want with tax planning, the more relevant this is, as accountants with specific experience will know the intricacies of what can and cannot be expensed in different industries.
Once you’ve gone through 7-10 options and collected most of the information you need, stop and take a breath! You will probably be ready for a long nap or a strong whiskey – whatever your guilty pleasure is! At this point you will be unlikely to find any offerings that are wildly different to what you have seen already, so now focus on making a selection.
Keeping in mind the priorities you set at the start, use the information you’ve collected to create a shortlist of 3-4 options.
Now is the time to pick up the phone to fill in or clarify any missing information and more generally, get a better feel for the person/company you will be working with.
Do they seem excited to work with you? Are they responsive? Are they knowledgeable about your company, industry and specific situation?
At the very least, you should be able to get a better idea of the kind of responsiveness you can expect in the future. If something feels “off” at this stage, it’s usually a good idea to trust your instincts and go with someone else.
Congratulations – you’ve just done your due diligence to select a key partner for your journey running a limited company!
Once you have settled on someone, have a further conversation to decide on the specific arrangement/package. At this stage, it never hurts to try and negotiate for the best deal possible.
Make sure you’re both very clear on the terms and expectations from each other and seal the deal! And remember, you’re not obliged to keep the same accountant forever, so if it’s not working out down the line, you can simply switch to a better option.
At Forma we take the hassle out of running a business so you can focus on what matters.
We offer a range of high-quality and affordable accounting packages with dedicated, qualified accountants who know your business inside and out.
They aren't just your accountant, they are an advisor, enabling you to run your business as efficiently as possible. And we use technology in the background to lower our costs, which enables us to provide a premium, personalised service at a competitive price.
Check out our packages if you'd like to know more.
Dividends can only be paid on profits that a company has earned during the year, or from accumulated profits from previous years. On the other hand, salaries can be paid out even when a company has made a loss.
Companies pay Corporation Tax on its profits before dividends are distributed, so paying a dividend doesn’t affect your company’s corporation tax bill. On the other hand, salaries are considered as business expenses. These reduce your profit, and subsequently your Corporation Tax.
Does your company have working and non-working partners? Creating different classes of shares may be an option you might want to explore, so that both types of partners don’t wind up receiving the same dividend rate.
In general, companies distribute dividends every quarter or half year. There aren’t any hard and fast rules when it comes to how often dividends are paid out—and this is something your need to consider carefully. That’s because:
Receiving income as dividends (rather than a salary) can help reduce your tax load. Yet, it’s important to keep in mind that your personal pension will be affected, as getting a salary increases contributions that can be paid into your personal pension.
We recommend checking in with your accountant about minimum salary requirements that may be imposed if you want to make contributions to a personal or executive pension plan. You may also want to discuss whether setting up a company pension scheme is an option you should consider.