Making Tax Digital – Your SME Opportunity

You can put off filing your digital tax return until tomorrow, but if you defer it indefinitely you could face a punitive fine from HMRC.

The Making Tax Digital initiative doesn’t have to mean you need to hire a professional accountant, but if fees upfront are transparent and enable you to pick and choose your service offerings, this can be an opportunity to streamline and assess the profitability of discrete business divisions.

Looking at your different categories of expense as a percentage of revenue will help you to identify an increase or decrease in distinct overheads and determine how effectively your capital is allocated. Return on capital employed is a ratio of net profit over capital tied up in the business, plus any non-current liabilities i.e. sources of finance – bridging, mezzanine and other loans with a duration, or tenor, of more than a year.

Using profitability ratios to compare business performance to industry benchmarks, and/or successive reporting periods, enables you to quantify efficiency – unit turn on equipment, offset in acquisition cost by depreciation charges, with accumulated depreciation recorded as an outstanding liability in the Statement of Financial Position. You can also offset employee productivity as a percentage of revenue.

To meet reporting deadlines on accruals, which need to be reversed at the beginning of the succeeding financial year, it helps to be linked in to an accounting practice which is committed to accurate and timely reports. Accrued income is an asset of the business; accrued expenses are classed as a current liability and should be recorded within the accounting period to which they refer, regardless of whether payment has yet been received. This enables a more accurate understanding of the business’s financial posiiton.

Prepaid expenses are also an asset recorded as such on the SFP. Income which was pre-payed before an invoice was posted can be entered as such in the relevant daybooks until it is due, but to reconcile cash book statements showing the payment as made, prepaid income is classed as a liability until receipt can be recorded during the reporting period to which the prepayment applies.

People with an active subscription to an accounting software programme might be tempted to use a D-I-Y approach to managing their cash book, but for peace of mind, and to ensure an accurate snapshot of your business’s profitability and financial position, you may be better off out-sourcing the technical aspects of financial reporting, and most accountants and/or bookkeepers will work in a collaborative process with you to guarantee completeness and relevance of documented business processes.