What Am I Doing Wrong?

This is the most common complaint from small business owners, and it is nearly always caused by one or more of the following:

• Profit and cash are not the same thing. A business can be profitable on paper but cash-poor in practice. If you invoice customers but they take 60 or 90 days to pay, your profit has not yet become cash.
• Growing too quickly without sufficient working capital. More sales create more costs before the income arrives.
• Poor debtor management. Allowing customers to pay late without consequence.
• Seasonal patterns. Many businesses have periods of high expenditure followed by periods of income, creating a regular cash gap.
• Tax liabilities building up. Corporation Tax, VAT and PAYE accumulate and can create sudden large outflows if not planned for.
• Over-investment in stock or assets. Buying more than is needed ties up cash that could otherwise fund operations.

The solution begins with a cash flow forecast. Until you know when money is due in and when it is due out, you cannot manage the gap. If you do not currently produce one, speak to your accountant about setting one up.

This is one of the most frequently asked questions in accounting, and the answer is that profit and cash are measured differently.

Your profit and loss account records income when it is earned and expenses when they are incurred, regardless of when cash actually moves. Your bank account records cash when it physically arrives or leaves.

Common reasons for the gap include:

• Outstanding invoices. You have recognised income but the customer has not yet paid.
• You have paid for something in advance (such as insurance or rent) which appears as an asset, not an expense.
• An accounting adjustment that reduces profit but involves no cash movement.
• Loan repayments. Capital repayments reduce your cash but do not appear as a profit and loss expense.
• Tax payments. Corporation Tax, VAT and PAYE reduce your bank balance but may not all appear in your profit figure in the way you expect.

Understanding this difference is fundamental to managing a business. If your accountant has not explained it to you, ask them to walk through a reconciliation between your profit and your bank balance.

Increasing sales does not automatically increase cash. In fact, growing too quickly is one of the most common causes of a cash crisis.

When sales grow, so do the costs that support them, wages, stock, materials, marketing. Those costs are often paid before the income from the new sales arrives. The result is a temporary cash shortfall even as the business appears to be doing well.

Other reasons include:

• You are selling at margins that are too thin. More volume at low margin generates very little additional cash.
• Your payment terms are too generous. Customers take longer to pay as the business grows.
• You are reinvesting profits back into the business without realising it, buying equipment, building stock or hiring ahead of revenue.

If your sales are rising but your cash is falling, produce a margin analysis by product or service line. Identify where the profit is genuinely being made and whether the growth is actually profitable once all costs are accounted for.

Late payment is a structural problem in UK business, and it is entirely within your power to reduce it.

The most common reasons businesses wait too long to be paid:

• No clearly stated payment terms on invoices.
• Terms stated but never enforced.
• Invoices sent late, sometimes weeks after the work is completed.
• No system for chasing overdue invoices.
• Fear of damaging the client relationship by asking for payment.

Practical steps that make a difference:

• State payment terms clearly on every invoice (14 or 30 days, not ‘upon receipt’).
• Invoice promptly, ideally the same day or the day after completion.
• Send a statement of account to all clients monthly.
• Chase overdue invoices systematically, a polite reminder at 7 days, a firmer one at 14 days, a phone call at 21 days.
• Consider requiring deposits for new clients or large projects.
• Use credit checking for new clients where appropriate.

Late payment costs businesses far more than they realise, not just in cash flow but in time spent chasing. Treating it as a priority management task, not an awkward afterthought, makes a measurable difference.

Tax is often experienced as a surprise because it arrives as a lump sum rather than being felt gradually throughout the year. But the real question is usually not ‘why am I paying so much?’ but ‘am I paying more than I need to?’

Common reasons businesses pay more tax than necessary:

• No active tax planning. Waiting until the year end to think about tax leaves very little room to act.
• Not using all available allowances. Capital allowances, pension contributions, research and development relief, and other legitimate reliefs go unclaimed.
• Wrong business structure. Some businesses are still operating as sole traders when a limited company would be more efficient, or vice versa.
• Salary and dividend mix not reviewed. Taking too much salary or taking dividends in the wrong tax year can increase the overall burden unnecessarily.
• No review of expenses. Allowable expenses that are not claimed increase taxable profit.

Tax planning is not about avoidance. It is about understanding what reliefs and structures are available to you and using them. Most small businesses have more options than they realise.

If your accountant has never proactively discussed tax planning with you, it is worth raising the conversation directly.

There are several common reasons:

• Profits were higher than anticipated, perhaps because sales were stronger or costs were lower than expected.
• A large expense that was expected to fall in this period did not materialise, increasing taxable profit.
• A tax relief you assumed would apply did not, for example, a capital purchase that was expected to qualify for the Annual Investment Allowance but did not.
• Your payment on account (an advance payment against next year’s Self Assessment liability) increased, making the total payment due higher.
• A prior year adjustment was made during the accounts preparation.

The best way to avoid unexpected tax bills is to receive regular management accounts throughout the year, ideally quarterly, and to ask your accountant to include a running tax estimate. Surprises at year end almost always reflect a lack of in-year information.

HMRC communicates by letter, and the volume of letters can feel alarming even when most are routine. Common reasons for receiving letters include:

• Reminders about filing deadlines, annual accounts, tax returns, VAT returns, confirmation statements.
• Payment reminders for Corporation Tax, PAYE or VAT.
• Coding notices for PAYE.
• Requests for information or clarification on a return.
• Notice of an enquiry into a tax return.
• Penalty notices for late filing or late payment.

Not all HMRC letters are equally serious. A payment reminder is very different from a notice of enquiry. However, all letters should be read carefully and responded to within the stated timeframe. If you are unsure what a letter means, send it to your accountant immediately. Ignoring HMRC correspondence is one of the most reliable ways to turn a minor issue into a significant one.

This usually happens for one of the following reasons:

• A filing deadline was missed by a small margin. HMRC’s systems are automated and a penalty can be generated the day after a deadline passes, regardless of how small the delay.
• A payment was received by HMRC after the deadline, even if it left your bank account in time. HMRC requires cleared funds by the deadline, not a payment instruction.
• A return was submitted but contained an error that HMRC subsequently corrected, generating a revised liability and, in some cases, a penalty.
• A registration obligation was missed, for example, a late VAT registration or a late employer registration.

Penalties can often be appealed if there is a reasonable excuse. Your accountant can advise on whether a penalty is worth challenging. However, the most effective approach is to ensure that all deadlines are tracked well in advance and that payments are made with sufficient time for clearance.

Your accountant needs records to prepare accurate accounts, tax returns and VAT returns. Without them, they are guessing, and guessing creates errors, which create risk.

The most commonly missing items are:

• Bank statements for all accounts, including savings accounts and credit card accounts used for business purposes.
• Receipts and invoices for business expenditure.
• Sales invoices and records of income.
• Mileage logs for business travel.
• Records of cash transactions.
• Payroll records if employees are engaged.

The frustration is mutual. Your accountant is not asking because they enjoy chasing. They are asking because without the records, they cannot do their job properly. The solution is a simple system maintained throughout the year, not a scramble at year end.

Many accountants now use cloud accounting software that makes record keeping straightforward throughout the year. If you are not already using one, ask your accountant to recommend a suitable platform.

HMRC requires you to keep sufficient records to support your tax returns. In practice, this means:

For a limited company:

• All sales invoices raised.
• All purchase invoices and receipts.
• Bank statements for all company accounts.
• Payroll records.
• VAT records (if VAT registered).
• Records of all assets purchased.
• Records of any loans to or from the company.
• Dividend vouchers and board minutes authorising dividends.

For a sole trader:

• Records of all income received.
• Receipts for all allowable business expenses.
• Bank statements.
• Mileage log if claiming vehicle expenses.

Records must generally be kept for six years. HMRC can go back further if they suspect fraud or deliberate errors. Keeping records in an organised digital format, using cloud accounting software or a well-structured folder system, makes retrieval straightforward if HMRC ever asks.

Because the work of the year end is done at the year end, rather than throughout the year. This is the root cause.

When records are maintained monthly, the year-end process is largely a matter of review and confirmation. When records are compiled from a year’s worth of receipts, bank statements and invoices in one sitting, it is stressful, error-prone and time-consuming.

Simple habits that make year end straightforward:

• Reconcile your bank account monthly against your accounting records.
• File receipts digitally as you receive them, most accounting software allows you to photograph and upload receipts on a phone.
• Issue sales invoices promptly and mark them as paid when settled.
• Keep a separate business bank account and use it exclusively for business transactions.
• Review your accounts quarterly with your accountant.

The businesses that dread year end are the ones that have twelve months of work to do in a week. The ones that find it straightforward have been maintaining their records all along.

This is one of the most demoralising experiences in business and it is more common than it should be. It usually reflects one or more of the following:

• Pricing has not kept up with costs. If your prices have stayed flat while wages, materials and overheads have risen, your margins are being eroded.
• The mix of work has shifted. You may be doing more low-margin work and less high-margin work without noticing.
• You are doing work that should be delegated. Time spent on administration, bookkeeping or low-value tasks is time not spent generating income.
• Growth has added complexity without adding proportionate profit. More staff, more premises and more clients do not always mean more net income for the owner.

The first step is a profitability analysis by service or product line. Identify where the money is actually being made and whether your time is being spent accordingly. In many cases the answer is not to work harder but to work differently.

Profitability is one factor in a lending decision, but it is not the only one. Lenders assess several things simultaneously:

• Cash flow. Profit does not repay a loan, cash does. Lenders want to see that the business generates sufficient cash to service the debt.
• Track record. Most lenders want to see at least two years of filed accounts. Newer businesses will find funding harder to access regardless of profitability.
• Lenders often require personal guarantees or asset security, particularly for unsecured borrowing.
• The purpose of the funding. A loan to buy a tangible asset is easier to justify than a loan to fund working capital.
• Director credit history. Particularly relevant for smaller businesses where the director and the business are closely linked.

If you have been declined for funding, ask the lender for the specific reason. Address it before applying again. Alternative funding routes, invoice financing, asset finance, government-backed schemes, may also be worth exploring. Your accountant can help you prepare a funding application and identify the most appropriate sources.