Financial forecasts are, quite simply, your forecast of how your business will perform financially over, say, the year ahead.
Preparing forecasts will help you to assess your likely sales income, costs, external financing needs and profitability. Financial forecasts are essential if you need to raise money from a third party, such as a bank. But they also provide you with the means to monitor performance on, say, a monthly basis and thereby exercise effective financial control - arguably the second most important management function in running a business.
Self-assessment allows you to complete your own income tax return. This simply means that you provide details of all taxable items for the financial year to HM Revenue and Customs. You don’t have to calculate the amount of tax that will be payable – HM Revenue and Customs will do this for you – but you can do so if you wish. Either way, it is advisable to seek the help of an accountant, who will ensure the financial information you provide is correct.
Sole traders and partnerships must pay income tax on the net profit that the business has generated during the tax year (6 April – 5 April). Limited companies pay corporation tax, which is a set rate.
VAT is tax paid on the value added at each stage of delivery of a product or service. It is a method whereby businesses act as tax collectors for the Government. If you are registered for VAT, by submitting a VAT return you can claim back what you have paid in VAT, and hand over what you have collected.
Some form of budgetary control is essential to all businesses. In essence, it is the process of controlling available resources to achieve pre-agreed targets - the operational plan. Budgeting should not be seen - or used - as simply a cost-cutting exercise, identifying areas where savings may be made. It is the management process that orders all areas of the business to work in harmony so that the over-arching objectives may be met.
Everyone in business plans to make a profit, but how do you know if you are making a profit? Do you wait until the end of the year and give a pile of invoices and receipts to your accountant? You also need to ensure that you have enough cash available to pay your debts as they fall due. How do you know whether you are in that position? Do you just keep your fingers crossed? Or do you address both of these issues by keeping track of your financial position on a regular basis?
Small business owners and start-ups need to be able to understand finance; leaving everything to an accountant is easy, but isn’t practical. The basics of finance are worth a bit of effort to learn and understand, as you can glean invaluable business information.
Effective control requires effective planning and target setting but it also requires an understanding of financial statements and an ability to interpret the figures. This section explains:
Corporation tax is only applicable to net profits generated by limited companies; sole traders and partnerships pay income tax. By law, a company not only has to file its corporation tax return with HM Revenue and Customs, it also has to work out how much it has to pay – HM Revenue and Customs will not work this out for you!