Thinking of outsourcing your business’ accounting? Let these five considerations help you find the right team of limited company accountants.
What Should You Look for in Limited Company Accountants?
No matter how big your business is, accounting remains a crucial part of operations. It’s essential to work with a professional who can maintain your books and dispense sound accounting advice. However, choosing a team of limited company accountants that best fits your needs is quite challenging.
At whatever stage of your venture, hiring the right professional provides many more benefits than using software for bookkeeping and tax return preparation. Consider these five factors to help you find the perfect firm for solid financial management, strategic decisions, and optimum savings.
Why Outsource Your Accounting?
Some companies outsource accounting instead of hiring staff to handle related tasks. While the rationale usually varies from company to company, below are three common reasons:
1. Controls Costs
A primary motivation for businesses to get external limited company accountants is to cut down on operational expenses. Hiring employees may sometimes cost your business more than outsourcing because of salaries, paid benefits, training, and bad hires.
Since oversights tend to happen more frequently with untrained staff, you may incur unnecessary but avoidable expenses. Prevent revenue leaks from rookie mistakes by working with an experienced accounting firm like Sterlinx Global.
2. Improves Efficiency
Many companies hand off accounting to outside professionals to boost productivity and efficiency. When your business has limited resources, it’s crucial to utilise them in a way that delivers the most benefits.
When you or your employees take on multiple roles to keep the business running, it leads to overworked people and underwhelming performance. Error-riddled outputs won’t do your business any good, primarily when it affects your clients. Make better use of company resources by taking non-core functions off your plate.
3. Maintains Focus on the Business
As you try to keep up with a non-core aspect of your business, such as accounting, you’re likely wasting time and effort on something that won’t bring in additional revenue or long-term growth.
Outsourcing this area to experts lets you direct your full attention and energy into running your business’s core operations. Rather than worrying about the mundane tasks of recording daily transactions, you can focus on making strategic decisions to drive earnings, be competitive, and take your operations to the next level.
Working with the right limited company accountants is worth the investment. So choose wisely with the following five considerations in mind.
Like any hiring process, most companies prefer employees with great work experience to get the job done. This requirement is also applicable when you’re looking for someone to manage your accounts, file tax returns, and prepare financial statements.
Hiring a professional with years of experience ensures your financial needs and goals will be met. A professional’s longevity in rendering accounting services suggests they’ve already worked with numerous clients and maintained good business relations with most of them over the past years.
Look for a firm that’s been in business for at least ten years—Sterlinx Global already has 18 years of experience. They’ve likely gone through several economic cycles and survived some of the worst crises, pointing to their resilience and solid experience.
Not all limited company accountants are the same; some specialise in certain industries or cater to particular businesses because they’ve developed expertise in handling accounting issues related to these areas.
Before partnering with an accounting firm, identify their client portfolio to determine if your business is a good fit with them. Ask questions on their areas of expertise and core strengths. Remember—your requirements and their qualifications should be aligned at best.
Suppose you’re an e-commerce seller, and your daily volume of transactions is substantial. Plus, you also need to comply with different local tax laws. Work with an accounting firm that manages clients in the same business as yours—they’ll already have the experience and will know what’s expected of them.
One of the most critical but oft-overlooked considerations in hiring limited company accountants is communication. If you and the firm can’t communicate well, it will usually lead to more significant problems.
Pick a firm that responds promptly to your queries and calls for assistance—if it takes them a while to get back to you, you are not their priority. Expect this type of interaction throughout your partnership, so think long and hard about whether it’s acceptable for you.
It’s also crucial to factor in language barriers and jargon, as these two can make communicating even more challenging. Look for an accountant who converses in a language you’re comfortable with to minimise errors due to mistranslation.
It’s also better when limited company accountants can explain numbers, financial reports, and regulations at a level you can comprehend. If they can break it down in layman’s terms, you can gain insights and make strategic decisions faster.
4. Resources and Technology
Ask your prospective accounting firm about the tools and technologies they’ll use in managing your accounts and preparing reports. Also, inquire how capable their resources are in handling your requirements—some applications have limited capabilities, hindering the proper delivery of services.
Innovations like expense management software and online platforms simplify tasks; however, they require training to be used effectively. If your firm’s accountants are familiar with these tools, it means their skills are up-to-date and they can handle some of the most rigorous activities.
Select a firm that offers prompt, quality support to its clients. A good team of limited company accountants will be proactive in handling your accounts to prevent problems from cropping up and eventually snowballing.
To determine whether a firm is a good fit for your business, ask about their risk tolerance—are they conservative or willing to take on calculated risks? How will they treat income and deductions that may impact your bottom line? If you’re on the same page on such matters, then they can provide the support you need.
It’s also reassuring to know you can reach out to them when issues arise at your end, even outside business hours, on the weekend, or during the holidays. But if there’s a significant time difference, note how long it takes for them to respond and see if the waiting time is reasonable for you.
Frequently Asked Questions
Should cost be an important consideration when hiring?
It mainly depends on your priorities. If you’re too focused on spending as little as possible, you’ll probably choose the least expensive alternative. However, keep in mind that it isn’t always the best. The firm is likely cutting corners to offer the lowest rates, resulting in sub-par service.
Consider the costs but look into other factors as well.
Are there downsides to outsourcing accounting?
As with any business activity, there are risks associated with hiring external limited company accountants than employing in-house. One is the possibility of security breaches since they can access your company’s sensitive data and confidential information.
Another is miscommunication between the two parties, which can cause delays or problems.
How do I begin the search for an accounting firm?
Nowadays, the best place to start is on the Internet—a quick search will reveal thousands of results. Narrow down your choices by adding keywords to your search phrase. Once you have a list, read customer reviews and feedback to understand how they work with their clients.
Searching for a team of limited company accountants that best fits your financial needs and goals doesn’t have to be a hit or miss. Let these five key considerations guide your vetting process to find the right business partner.
Want to grow your online store’s earnings but unsure where to start? Find out how you can go from surviving to thriving with a few tips and tricks on Amazon accounting.
A Guide on Generating Higher Income Through Amazon Accounting
Being a seller on the world’s largest e-commerce platform can be immensely rewarding but just as challenging. Turning your online business into a lucrative venture takes more than a good product listing—you also need a solid understanding of Amazon accounting. Here are some important things to consider.
How Amazon Accounting Differs from Other E-Commerce Accounting
Accounting for e-commerce is a different ballgame from the typical business accounting, even more so when you’re a seller on Amazon. There are a few extra considerations to keep in mind, such as the following:
FBA vs FBM
Some e-commerce sellers are under the fulfilment by Amazon (FBA) arrangement, wherein they pass on their entire shipping responsibility to Amazon by handing off some or all of their inventory. Such service isn’t available on other online marketplaces like eBay and Etsy, and this setup is called fulfilment by merchant (FBM).
Accounting for inventory under the FBA is slightly more complicated than FBM of other platforms since it’s harder to keep track of your products. They could be at a fulfilment warehouse, en route to buyers, or for returns.
Since Amazon only relays the information to the seller, you don’t have an accurate picture of your inventory figures compared to when you manage the entire order processing.
VAT and sales tax are already confusing to begin with. And with FBA in the picture, Amazon accounting becomes even more cumbersome.
If you’re selling in the US via FBA, your tax nexus includes states where your products are warehoused. The same principle applies to Pan-EU FBA but not the term. Talk to an Amazon accounting expert from Sterlinx Global to determine if there’s a tax implication to your business and how you can address it.
Another aspect wherein Amazon accounting is unlike accounting for other e-commerce platforms is the fees.
As the largest online marketplace, Amazon understands how powerful its reach can be. If you want to make more sales, selling on the platform comes at a higher price—commission and FBA fees are some of the expenses weighing on your margins.
How Amazon Sellers Can Scale with Accounting
Growing your online store takes more than a keen eye for business—you also need to do your Amazon accounting right. Improve financial performance by being savvy with your accounts and books.
1. Stick to the Accrual-Based Method
There are two business accounting techniques: accrual and cash basis. Of the two, it’s better to use the accrual method to see your revenue streams and expenses more clearly—you recognise sales when earned and expenses as incurred, regardless of when cash exchanged hands.
As such, you can make more strategic decisions for income growth from the derived profitability figures.
That said, it doesn’t mean you should write off the cash basis method altogether. The technique comes in handy when tracking cash flow. However, don’t fall for the trap that being cash-rich is tantamount to profitability; it isn’t since it doesn’t consider accounts payables.
2. Pay Attention to Your Inventory
If you want to boost your bottom line, one of the essential Amazon accounting items to monitor is your inventory.
The e-commerce charges fees for products under FBA in exchange for handling storage and shipping—that’s the price of convenience. However, such inventory-related costs may set you back more than they should, narrowing your margins.
Figure out which products are more cost-effective with FBA. Amazon charges a range of fees related to inventory, including storage and returns processing fees, which can then add up to your cost of goods sold. Identify items that cost you more to maintain in your store than remove altogether.
If Amazon fees are trimming your profits, consider opting out of FBA to keep inventory costs down. A good rule of thumb is to downgrade when the total number of units sold is less than 40 per month.
3. Focus on Profitable Products
Another way to increase your Amazon earnings is by identifying products with high returns and focusing efforts on marketing them.
Many vendors make the mistake of maintaining excessive inventory in anticipation of higher profits with sudden increased demand. However, betting on trends doesn’t always translate to sales and higher earnings unless you’ve researched them extensively.
Instead, determine your top-performing products based on their margins and develop cost-effective strategies, like campaigns and bundling, to drive sales. As for your poor performers, decide whether they’re worth the push or better off taken out.
4. Keep a Close Eye on Expenses
Inventory-related fees aren’t the only costs you should be worried about—your overhead expenses will also weigh on your earnings.
Understand how the platform’s seller fees impact performance. You are likely incurring other expenses necessary to run your online business, including utilities. The higher your operational costs are, the narrower your margins will be. And an ideal net profit margin is around 40%.
Break down expenses and examine them on a more granular level to identify areas for improvement. For example, you may be better off with an individual seller account, purchasing stock with lower shipping fees, or streamlining operations.
5. Calculate the Correct Tax
Whether you’re collecting VAT or sales tax, it’s your responsibility to remit these taxes to the proper authorities. But with different local tax regulations in every market you’re in, it’s easy to get confused with compliance.
Paying the incorrect amount on your tax liabilities results in unnecessary costs to your e-commerce business. When you overpay, you cannot refund, but when you remit less than the tax due, you’ll be fined. Aim to compute the correct tax amounts to improve your bottom line.
6. Work with Professionals
If you want your store to gain traction and increase earnings but are unsure where to begin, it’s better to consult an Amazon accounting expert from Sterlinx Global. They have the expertise and experience in managing and analysing accounts, as well as providing accurate financial reports so you can make sound business decisions.
By handing off accounting services to professionals, you can focus more on growing your business instead of figuring out what the numbers mean.
Frequently Asked Questions on Amazon Accounting
Would VAT or sales tax reduce my income?
No, it shouldn’t. Consumption taxes like VAT and sales tax are charged to the buyers. As a seller, you are responsible for collecting and remitting them to the government.
However, many Amazon sellers incorrectly estimate their tax liabilities. When this happens, taxes become an additional expense that cuts through your profits.
Can I handle Amazon accounting myself?
Yes, you can manage accounting on your own if you have a good grasp of the basics. But, it can be time-consuming, especially when you’re meticulous in dealing with numbers. Also, it diverts your attention and effort away from activities with better returns, such as creating campaigns and improving brand reputation.
Amazon deposits an amount in my bank account regularly. Should I consider this as sales?
No, you shouldn’t. It’s a common mistake of many Amazon sellers to record these bank deposits as revenues.
While these cash deposits include store sales, they are net of fees charged by the e-commerce platform. Moreover, the remitted funds do not reflect the date of actual sales. Avoid using these as a gauge of your profitability.
Scaling your online store operations takes more than savvy marketing campaigns—you must also have a deep understanding of Amazon accounting to spot pain points in your profitability and address them.
Let an accounting firm like Sterlinx Global help in easing the burden so you can redirect your efforts to revenue-generating activities.
Had your Amazon seller account suspended? Don’t panic—you can still have it reinstated when done right. Get back on track by learning how to handle an Amazon suspension appeal.
A Guide on Managing an Amazon Suspension Appeal
When you’re a seller on the largest online marketplace, getting your account suspended is a nightmare. It translates to lost revenues, with these losses increasing further the longer your account is inactive. Fortunately, you can make a strong case for reversing your suspension with Amazon. Here’s how you should do it.
What an Account Suspension Means
When Amazon suspends your seller’s account, you won’t have selling privileges. During this time, your product listings will not be visible on the platform. It translates to a significant loss in revenues and reputation, especially if you’ve been frequently among the top results.
Depending on the type of account suspension, you can request your status to be reversed and your selling privileges reinstated through an Amazon suspension appeal.
Why Amazon Suspends an Account
The main reason Amazon revokes the privileges of more than a thousand sellers is the latter’s violation of the platform’s guidelines, terms, and conditions. Because of the e-commerce giant’s many complicated policies, some sellers have inadvertently overstepped some of these strict regulations, resulting in their suspension.
Although Amazon doesn’t publicly disclose why they suspend accounts to protect their process, some sellers have figured out a few of the most common reasons for revoked privileges. Some of these include:
Poor product quality
Counterfeit or inauthentic items
Sale of restricted or prohibited products
Goods are not as advertised
Intellectual property violations
Delays in fulfilling orders
No shipment tracking provided
Multiple negative customer experiences
Manipulating reviews or feedback
Running multiple seller accounts
Amazon’s main priority is its customers, not the sellers. No matter how big a brand or store is, the e-commerce giant will suspend it if it finds reasonable grounds to do so, especially if the complaints come from the buyers.
Despite being strict, the platform allows sellers to request a reversal. They can file an appeal, but it doesn’t always guarantee promising results, especially if done incorrectly.
How to Handle an Account Suspension Appeal
The suspension of your Amazon seller’s account can be catastrophic to your business and finances. Besides lost revenues, you continue incurring operational expenses, such as employee wages, warehousing fees, and other costs, impacting your earnings.
It’s crucial to end the unfavourable status as soon as possible, so below are five tips on efficiently dealing with an Amazon suspension appeal.
1. Never Rush Your Appeal
When Amazon sends a notification regarding account suspension, it only includes a simple explanation for its action. If it’s your first time receiving one, do not panic. Avoid sending out multiple emails asking the online marketplace to reconsider their decision—this hurts your chances of a reversal even more.
Fortunately, Amazon gives suspended accounts a 17-day window to file an appeal for reinstatement through seller central. Take this time to examine your operations and identify possible reasons your selling privileges have been removed.
Also, refrain from asking for more details from Amazon—every communication sent counts as an appeal on their end, further hurting your chances of reinstatement.
2. Be Professional
Another common mistake made by many online sellers on their Amazon suspension appeal is responding with high emotions. It’s only expected that you’d be angry over the sudden deactivation, especially if you’ve been faithfully abiding by the rules.
Never use foul language, threats, and emotional appeal in your response. Avoid criticising the e-commerce giant’s policies and processes—your opinion is unwarranted and unprofessional. Plus, it puts you in a less favourable position in their eyes.
Instead, be concise with your communication and remain professional in every interaction. Amazon will likely be more considerate of your situation.
3. Perform a Comprehensive Assessment
Use the 17-day period to conduct an internal assessment of your operations and performance. Begin your investigation based on Amazon’s disclosed justification in its suspension notice.
For example, if Amazon suspended your account for sub-par performance, check the metrics in your seller central dashboard. Below are acceptable performance ratios:
Order defect rate <1.0%
Pre-fulfilment cancellation rate <2.5%
Late shipment rate <4.0%
Order defect rate: The ratio of orders with negative feedback, chargebacks, or A-Z guarantee claims to total completed orders.
Pre-fulfilment cancellation rate: The ratio of orders you’ve cancelled prior to shipping out vis-à-vis total orders received.
Late shipment rate: The percentage of items dispatched past the estimated shipping date.
Since Amazon doesn’t go into specifics regarding your suspension, the problem may have also stemmed from violating one of the online marketplace’s many rules. It can range from selling counterfeit goods and unauthorised product distribution to offering discounts in exchange for positive reviews and copyright infringement.
4. Create a Solid Plan of Action
Suspensions vary in severity—the more serious it is, the longer the reinstatement may take or the less likely the appeal will be successful. But don’t despair—a well-constructed Amazon suspension appeal can overturn a punishment.
When the e-commerce giant requests a Plan of Action, refrain from submitting a generic plan. Amazon will usually detail what should be included, such as supporting documents like invoices and product safety information. Furnish them to strengthen your case.
Your Plan of Action should cover the following:
Root cause analysis: Identifies the reason for suspension or offence based on your internal examination
Remediation: Discusses actionable steps to rectify or address the problem
Preventative section: Outlines clear corrective measures to prevent future violations, reiterating your intention to continue providing top-notch customer service
Remember to keep your Plan of Action brief but comprehensive. While Amazon prefers data-driven, fact-based appeals, it’s also essential to admit fault and acknowledge the harm done to your buyers.
If you’d rather not take chances with your Amazon suspension appeal, consult an expert from Sterlinx Global.
5. Avoid Asking for Updates Immediately
After sending your appeal through the proper channel, refrain from requesting updates immediately. Wait for at least 48 hours before sending a follow-up email; generally, Amazon acknowledges receipt of your appeal.
Sometimes, the e-commerce giant requests clarifications or supplementary information. Do your best to respond right away since the 17-day window doesn’t pause or reset. If you don’t provide the information, Amazon may reject your appeal.
Frequently Asked Questions
What will happen if I don’t file an appeal?
If you forgo filing an appeal, do not expect your account to be reinstated. Amazon takes customer complaints and policy violations seriously, which is why they’ve revoked your selling privileges.
Keep in mind that submitting an appeal is a formal process and one that sellers should be aware of.
If my account gets suspended, should I open another account instead?
No. While you can open another seller account, don’t do it—Amazon will treat such action as circumventing your suspension, jeopardizing your chances of reinstating your privileges.
Moreover, the platform treats multiple seller accounts as a policy violation, putting you further into an unfavourable position.
What should I do if my appeal gets denied?
If Amazon denies your suspension appeal, don’t despair—you still have another chance to submit your Plan of Action. Revise it to be more detail-oriented.
There is no limit to how many times you can re-submit your plan. However, the longer it takes to reactivate your account, the higher your losses. Speak to a professional, like someone from Sterlinx Global, to draft a better appeal.
Getting your account suspended isn’t something you want to happen, but when it does, look at the bright side of your ordeal. Knowing how to navigate negative circumstances and manage an Amazon suspension appeal is an excellent learning experience for sellers.
Implement long-lasting changes to ensure you’re always up to par with Amazon’s quality standards. And if you need help on where to start, let the professionals at Sterlinx Global lend a hand.
Planning to expand your customer base to Germany? Learn about the German VAT regulations and how to comply with them as an online seller.
A Guide on German VAT for E-Commerce Businesses
The best way to grow your business as an online seller is to expand your reach beyond your current customer base. Germany, like other European Union (EU) member states, is an excellent place to begin your strategy. Start on the right foot with crucial information about German VAT and its compliance.
1. All Imported Goods Are Subject to VAT
When you’re based outside the EU, any goods you sell are considered an import. And if your buyer lives in Germany, they must pay VAT on products purchased from your store, which you will remit to the government.
Prior to 1 July 2021, imported goods with less than €22 value were exempt from German VAT. However, the EU abolished the exemption in the revised VAT rules for cross-border e-commerce activities.
Some non-EU sellers mislabel and undervalue the consigned goods to avoid charging VAT. This loophole allows them to lower prices than their EU competitors and circumvent paying taxes, costing the government millions in uncollected revenue.
2. There Is a Minimum Threshold
Before the revised VAT rules were issued in 2021, EU countries had different turnover threshold requirements for VAT registration. In Germany, distance sellers only needed to register if their annual sales revenue exceeds €100,000. But now, that has been replaced with a lower limit.
The new EU-wide threshold to register for VAT is €10,000. If you intend to carry out transactions subject to German VAT, i.e., sell goods online, it’s better to arrange registration even if you anticipate gross sales to be below the set threshold.
3. You Must Be Registered for VAT
Remember to apply for German VAT registration before commencing your business activities. Otherwise, you may face penalties for submitting your registration late or while already doing business involving taxable goods in the country. German tax authorities can be severe in penalising violations.
Like in other EU states, Germany doesn’t require non-resident e-commerce sellers to establish a local presence to trade. It does, however, mandate VAT registration on activities like importation and distance selling.
To register correctly, contact the jurisdictional tax office in the relevant German state. Submit the registration form completed in German along with the following documents:
• A copy of the Articles of Association
• An excerpt from the business’s trade register
• Certificate of VAT liability if registered in other EU member states
• Proof of economic activity in the country
• Power of attorney, if using a fiscal representative or agent
The local tax authorities may require some documents to be translated into German. Moreover, they are quite critical of foreign companies’ VAT registration because of substantial lost government revenues and the potential for carousel fraud.
4. Fiscal Representation Is Optional
When registering for German VAT, non-EU businesses don’t need to appoint a fiscal representative. Foreign companies can apply themselves if they know the language and are familiar with the process.
However, working with a fiscal representative or a tax advisor from Sterlinx Global is still highly recommended. Their primary responsibility is fulfilling tax obligations, such as submitting and filing VAT returns, on behalf of their clients.
5. VAT Registration Can Be with One EU State Only
To improve VAT collection in the EU, one of the new rules for cross-border e-commerce activities includes the introduction of the Import One Stop Shop (IOSS). This online platform for non-EU sellers allows them to register for VAT in only one EU member state.
Once online sellers obtain their IOSS number, there’s no need to register for VAT in all the EU countries they will sell in. They can declare and pay the VAT of goods imported from non-EU territories.
The streamlined system ensures that the correct tax amount goes to the right EU member state. That’s because keeping track of the applicable VAT rate can be confusing, even to seasoned e-commerce businesses, because of the different tax legislations in each EU country.
6. Standard VAT Rate Is Above 15%
As a member of the EU, Germany based its VAT legislation on EU directives. Although the country can set its standard rate, it should be higher than 15%. The German VAT rate is currently 19%.
At the height of the COVID pandemic crisis, Germany temporarily cut its standard rate to 16% to support the economy. Except for hospitality businesses, the VAT rate has now reverted to its pre-pandemic level.
Like other EU member states, the country’s VAT system is tiered. Apart from the standard 19% rate applicable to most goods and services, the country applies the reduced rate of 7% to certain items like food, books, newspapers, other periodicals, timber, and some agricultural inputs, to name a few.
7. Know Your VAT Obligations
Being registered for German VAT as an e-commerce seller means you have certain responsibilities to fulfil. Two important obligations are to settle your tax liability with the proper authorities and file the corresponding returns.
For newly registered businesses, they must submit VAT returns monthly for the first two years. After the prescribed period, the frequency varies according to net VAT due in the prior year:
Above €7,500: File every month
Below €7,500: File every quarter
Less than or equal to €1,000: File every year; no preliminary VAT returns required
In addition to monthly or quarterly filings, all companies that are VAT-registered must file an annual return for each calendar year, regardless of revenue.
VAT returns are due by the 10th of the month following the covered period. Moreover, the annual VAT return should be submitted by the end of May of the next calendar year. But if it falls on a weekend or national holiday, it is extended to the next working day.
VAT returns submissions are done electronically through the ELSTER systems of the relevant German tax office, which depends on your country of residency.
The charges for failing to comply with the deadlines are as follows:
• Late filing: 10% of the VAT due but no more than €25,000 per return
• Late payment: 1% of the VAT due per month of delay
Avoid paying hefty fines for non-compliance with the assistance of a tax agent or fiscal representative from Sterlinx Global.
Frequently Asked Questions about German VAT
How long does it take to be VAT-registered in Germany?
Getting your VAT registration number in Germany often takes several weeks or up to a month. The processing period is slightly longer than in other EU states because German tax offices conduct thorough checks on foreign companies to prevent fraudsters from applying and to minimise revenue losses.
Can I register for German VAT myself?
Yes, you can. However, it’s not the most efficient use of your resources. Remember that German tax offices are generally strict with VAT registration to reduce fraudulent transactions involving non-EU businesses. Expect to spend a lot of time and effort, both things which are better utilised in running your business.
Is it possible to compute VAT obligations on my own?
You can compute your German VAT obligations yourself—the IOSS makes it easier to track your tax liabilities. But it can quickly get confusing when you’re also selling in other EU states since VAT rates vary across the region. Save yourself the trouble by working with an accountant from Sterlinx Global.
Expanding your market reach to Germany is an excellent growth opportunity. But before venturing into it, learn more about the German VAT to avoid surprises that may cost you. And if you need professional advice or assistance, the experts at Sterlinx Global are ready to lend a hand.
Whether you’re a builder, roofer, plumber, electrician, or otherwise engaged in the trade industry, construction accounting is often the last and least of your concerns. However, forgetting to get your accounts in order can be a recipe for failure. Here are key insights accountants for construction want you to know.
A Guide on What You Should Know, According to Accountants for Construction
Taking control of your finances and books is just as important as taking on more work to grow your business. However, not all tradespeople and entrepreneurs have an idea of how to do it and where to begin. This article is a short guide to get you started.
1. The Ideal Structure Differs for Every Business
Not all businesses in the construction industry are the same—some focus on building, while others specialise in plumbing, electrical works, and roofing, among others. Remember that your particular circumstances dictate how you should structure your business.
For instance, if you have big projects, it may be better to set up your business as a limited company instead of a sole trader or partnership. Talk to a team of accountants for construction from Sterlinx Global to know what suits your needs best.
2. Estimate Projects Correctly
The first step in managing finances is to grasp project costing. Regardless of your usual contract size, you must have a solid understanding of how much you should quote a job.
Learn to break down a project’s materials, labour, and other overhead costs. Be detailed in doing this so you can arrive at an accurate break-even figure. Before sending out a quote, don’t forget to have allowances for any unforeseen expenses from delays and oversights.
3. Project Management Is Crucial
Experienced contractors and subcontractors will tell you that construction works rarely go according to plan. Despite extensive preparations, jobs sometimes require recalibration or revision as they progress, negatively impacting costs and profits.
Control costs by staying on top of ongoing projects with detailed timelines and budget schedules. It’s best to anticipate or address any deviations and delays early on to prevent them from snowballing.
4. Keep an Eye on Your Margins
Revenues shouldn’t be your only measure of success—simply because you have more work doesn’t mean you’re earning well.
Accountants for construction will tell you that gross profit and margins are a better gauge of financial performance. These figures show how much you’ve earned on a contract, given the costs incurred for rendering the service.
For example, a £400 project requires £300 in labour and materials, resulting in a £100 profit and gross profit margin (GPM) of 25% (£100 / £400). If that’s an acceptable rate, aim to maintain it for every job and monitor it regularly throughout a project’s lifecycle.
5. Avoid the Cash Flow Pitfall
In the construction business, tracking the movement of your funds can be complicated. There’s often a disparity between billing and recognising revenue.
For instance, with progress billing, you only get paid for the percentage of work completed. Even with cash expected to come in, you may still have insufficient funds to purchase materials.
Balancing your business’s cash flow is necessary to ensure you’re not cash-strapped at any point in your operations. Rein in your receivables by regularly invoicing your clients—for those that cannot pay on time, stop work to prevent money from being tied up further in the project.
Asking for a down payment is common, especially when the work requires costly materials.
6. There Are 4 Construction Accounting Methods
To address challenges in accounting, construction businesses often use more than one accounting method for every project. As a contractor, you must understand the key differences between each.
The cash basis method recognises revenue upon cash collection and expenses with money spent. On the other hand, the accrual method records revenue when earned and expenses when they occur, without considering when money changes hands.
Besides cash and accrual basis, there are two more methods: percentage-of-completion (PCM) and completed-contract (CCM). With PCM, revenue and expenses are apportioned based on the project’s progress. CCM only recognises a project’s financial activity upon its completion.
Each accounting method will impact revenues, expenses, and tax due. Most companies use a combination of two or all four. Talk to a construction accountant to know which fits your business, as it can be a complex topic.
7. Compliance Is Tricky
Legislative accounting requirements in the UK are constantly changing, and keeping up with changes is something you may have overlooked because of your workload. However, that’s often not a reasonable excuse to waive charges.
Many accountants for construction will tell you that estimating your obligations to the HMRC is confusing. And mistakes on VAT, corporation tax, and CIS can be expensive.
8. Beware of the CIS Trap
Under the Construction Industry Scheme (CIS), contractors must withhold a certain percentage of payments to their subcontractors and remit these to HMRC. These deductions are considered advance payments towards a subcontractor’s taxes and National Insurance contributions.
The deduction rate is 20%, but it increases to 30% if a subcontractor is unregistered for CIS. If you’re a contractor, consider registering as a subcontractor in case you take on a project as one. The CIS registration process depends on your business structure.
Since additional CIS measures are put in place or revised occasionally, calculating the deductions and filing returns with the HMRC can be complicated. Let an accountant handle it to avoid the pitfalls.
9. Know the VAT Reverse Charge
In addition to CIS, those in construction have to deal with the VAT domestic reverse charge.
The scheme, an extension of CIS, was introduced to change the handling of VAT for certain construction industry services and building materials. It applies to transactions between VAT-registered contractors and subcontractors.
Instead of subcontractors accounting for VAT in their invoices, the contractors will settle the VAT directly to HMRC. This change was made to minimise fraud as VAT-registered construction businesses charged for VAT but never remitted the amount.
10. It’s Better to Work with a Professional
The nature of businesses in the construction industry creates complex accounting and tax management issues.
Different contract terms, project-based revenues and costing, and varying project timelines make it difficult for contractors to keep up with accounting. Delays in managing accounts can impact your finances.
While it pays to know the basics, it’s more efficient and cost-effective to outsource the heavy lifting to a team of accountants for construction.
Since they specialise in this practice area, they’re well-versed in the industry’s unique accounting rules for taxation and reporting.
Frequently Asked Questions on Construction Accounting
Can I use cash basis accounting for my business?
It depends. If you are VAT registered and have an income of £150,000 or less, you can recognise revenues and expenses through the cash basis method. To date, it is only allowed for sole traders and partnerships and not limited companies. Always check the HMRC website for updated guidelines.
Should I only hire a bookkeeper instead of an accountant to maintain accounts?
You could, but only if you have an excellent grasp of accounting and tax management.
It is understandable that you want to be cost-efficient in running your business. However, going without a dedicated accountant for construction may cost you more in the long run. Higher HMRC obligations and hefty fines are avoidable expenses with a specialist on board.
Is my business covered by CIS even if I don’t build structures?
According to HMRC, CIS encompasses most construction work. There are exceptions, such as architecture and surveying, scaffolding rental, carpet fitting, materials delivery, and unrelated work on a construction site.
So even if you’re a self-employed plumber, electrician, or roofer, you are still covered by CIS guidelines.
Being in the trade industry can be lucrative, especially when you understand how to handle your finances. However, doing the math right requires proper management of your books. Let these 10 important facts guide you, but it also helps to have a team of accountants for construction from Sterlinx Global.