Pearl Lemon Accountants

Author: Pearl Lemon Team

  • How You Manage Trade Creditors May Save Your Business Someday

    How You Manage Trade Creditors May Save Your Business Someday

    For the smooth operation of your business, you rely on good relationships with creditors. The cash flow of most businesses is influenced by suppliers – also known as trade creditors- the bank, and statutory bodies such as HM Revenue & Customs (HMRC).

    You might not be able to pay your bills on time if your cash flow is tight. Following the COVID-19 pandemic, this has become a major concern for many businesses, some of which have never had to deal with such issues before.

    Your trade creditors will have more trust and confidence in you if you handle the situation well. However, if the situation is not handled properly, it can quickly escalate into a crisis.

    The Value of a Trade Creditor Policy for Your Business

    Building a strong and trusting relationship with your suppliers and other trade creditors requires a well-thought-out payment policy.

    Determine your purchasing objectives for each supplier.

    • Reliability is usually the top priority, followed by quality, price, and credit terms.
    • Take a look around. If you have a good choice of suppliers for a specific product, your supplier may be willing to extend the credit period in order to keep your business.
    • To ensure that everyone is on the same page, agree on these goals with your accounting department or accountant.

    Establish a general payment policy.

    You might, for example, pay within 30 days of receiving an invoice. Whatever terms you choose, make sure that your suppliers are aware of your payment terms and that you are aware of theirs. Make a list of your terms of business and ask any new suppliers to sign and return them.

    If the supplier’s terms of trade conflict with yours, reach an agreement (in writing) before placing an order.

    Make sure you stick to the ‘rules’ once you set them. You should be able to pay your trade creditors on time if you manage your cash flow well. Even when it is not necessary, there is a tendency on the part of some business owners to postpone payments as a source of free credit. Don’t do it, as it’s never a good idea, especially in a world where ANYTHING could happen tomorrow.

    Identify Your Key Trade Creditors

    Determine which creditors are critical to your company’s survival and growth. Then devise strategies to win each entity’s support, which would potentially put you in better position to plead for leniency – and time to pay – were you to run into major financial trouble.

    Your financial backers are usually at the top of your priority list. Treat your bank as an investor by providing regular management accounts in a format agreed upon by the bank.

    Make sure you understand the consequences of failing to make a payment on time. When, for example, would your hire purchase company take possession of the equipment?

    Determine which vendors are mission-critical.

    These are usually suppliers who have no other options available right away. IT suppliers (who maintain your IT system on a regular basis) are frequently at the top of the list, as switching suppliers can be risky. Your landlord may be able to evict you if you do not pay your rent. Your landlord, on the other hand, would also have the authority to seize goods on your property without having to go to court.

    Suppliers of commonplace items that can be purchased elsewhere are at the bottom of the list, as an inability to make use of what they offer may not be as disruptive.

    Determine which trade creditors are likely to be uncooperative.

    In the event of insolvency, this is frequently determined by their creditor ranking.

    Late payment can result in automatic surcharges from statutory bodies like HMRC. Your local government has the right to sue you if you don’t pay your business rates. Telephones, electricity, water, and gas can all be turned off by utility companies.

    It’s difficult to establish a relationship with large, faceless corporations. You may be penalized immediately if you withhold payment due to a dispute. It’s possible that you’ll have to pay first and then argue later.

    Building Better Relationships with Your Suppliers

    Building better relationships with regular suppliers can not only help you if you run into trouble, but may also lead to things like bigger and better discounts, extended time to pay in general and all around preferred buyer status, so it’s worth taking the time to do so with your key suppliers.

    Here are some tips:

    • Negotiate and stick to clear, written agreements from the start.
    • Keep in mind that your supplier has the right to charge interest on late payments.
    • Involve your suppliers in your company so that they are aware of your requirements.

    Because they supply other businesses like yours, suppliers are often good at coming up with ideas for how to improve your product or your entire business.

    Keep them informed in order to earn their trust. Otherwise, minor issues can grow into major ones. It is not sufficient to call the supplier to explain the situation if you withhold payment (for example, because you received damaged goods). You should also confirm it in writing, copying their finance director on the letter.

    When a supplier reviews their aged debtors list, they may assume that you are simply refusing or unable to pay on time unless they know your reason for non-payment. Keep up with what’s going on with your suppliers as well. A change of ownership, for example, can result in a significant reduction in the amount of credit a supplier extends to you.

    In exchange for giving suppliers what they want, ask for benefits. You could, for example, bargain for better service in exchange for committing to regular orders or paying on shorter terms.

    Build a Better Relationship with Your Bank

    Your bank is often one of your biggest trade creditors, as their largesse in providing loans may be the only reason you got your business idea off the ground in the first place.

    When you’re in a cash flow crunch, you’ll need your bank more than ever. If your bank, on the other hand, is financially vulnerable, this is the time when it is most likely to reduce its financial support for you. Unless you have taken the time to really work on your relationship with them:

    Determine who the bank’s real decision-maker is.

    Computer-generated risk profiles are increasingly being used to make lending decisions. As a result, local bank managers have less decision-making authority. Despite this, you’ll need a bank champion who understands your business and will be heard when decisions are made.

    Establish a track record so that the bank has confidence in you and the information you provide.

    Regularly provide the bank with management accounts, including cash flow forecasts and a brief explanation of any variances. Rather than waiting to be asked for information, be proactive. Banks have been known to reduce a borrowing facility as a direct result of a company’s request for it to be extended (due to financial difficulties). Providing the correct information in the first place is the most effective way to avoid this.

    Notify the bank in advance of any cash shortages.

    The earlier you warn your bank you may be running into temporary difficulties financially, the more likely you are to receive assistance. Provide evidence that the cash shortage is only a matter of time. Evidence from a third party, such as a confirmed order, can be particularly powerful.

    If the Worst Happens

    Your trade creditors may be the last thing on your mind if you run into financial difficulties, but they can’t be ignored. If you are in financial difficulties, or expect to be, get professional advice quickly and, despite the fact that it’s natural to panic, let them help you come up with a plan for weathering the storm, and appeasing your trade creditors, until you can do what you do best – build your business – to the point where you are back on an even keel again.

  • How You Manage Your Trade Debtors Can Make or Break Your Business

    How You Manage Your Trade Debtors Can Make or Break Your Business

    It’s a sad fact that more than 60% of small businesses in the United Kingdom fail within the first three years of operation. Even more tragic is the fact that many of these businesses failed not because they had a bad idea to begin with (though some did! ) but because of poor cash management.

    These businesses couldn’t deliver on their plans because they didn’t have enough working capital (cash). It’s even more regrettable because, in many cases, it didn’t have to be this way.

    Managing your trade debtors more effectively is one of the simplest (and cheapest!) ways to improve your cash flow.

    Trade debtors are clients and customers to whom you’ve issued an invoice but have yet to receive payment.

    You may believe that it’s fine because all of your clients eventually pay your bills, so you don’t want to change anything you are doing right now(or not doing as the case may be). This is a fairly common story, but bear with us for a moment.

    Let’s say you offer 30-day payment terms to your clients. You invoice in arrears (when the job is finished), and your clients pay 60 days after the due date (recent studies show that the average debtor days in the UK is over 50 days). Let’s also imagine that the project took two months to complete.

    You’ve effectively given this client a loan with no interest for 150 days or more. Consider that the costs of completing this work were paid months ago with no income to cover them, and you can see why this isn’t the best way to run your company. In fact, it’s a very quick way to run it into the ground.

    There are even more downsides to letting late paying trade debtors slide:

    • The longer an invoice is outstanding, the more likely it will never be paid.
    • Relationships with clients become strained
    • The cash flow becomes uncontrollable.
    • Capital is being used to provide interest-free loans to trade debtors rather than being re-invested in the business to help it grow.

    Fortunately, it does not have to be all doom and gloom because a well-designed trade debtor management procedure is simple to implement and should begin producing results almost immediately. Here’s how.

    Introduce Solid Service Agreements

    Once your service proposal has been accepted, and you’re enjoying the honeymoon phase of your professional relationship, it’s time to introduce the business equivalent of a pre-nuptial agreement – the services agreement (aka the engagement letter). This should take place before any actual work begins.

    This contract should spell out what services your company will provide, to whom they will be provided, the agreed-upon fees, and payment terms, among other things. They establish expectations up front so that neither party is surprised – no one likes surprises.

    Explain in your agreement when you expect to send your invoices, whether it’s in advance, as progress invoices, or at the end of the job. The agreement should also state that you reserve the right to charge for work requested that is outside the scope of the original price (for example, you quoted to build their profile in print media but not manage their social media accounts) and that you will not be undertaking any further work if invoices are not paid.

    It’s a good idea to walk your client through the agreement because many people are prone to signing documents that have been emailed to them without fully understanding them.

    Before the job begins, both parties should sign the agreement and file it away for safekeeping. There are templates for these agreements on the internet, but we recommend having a lawyer draft something simple for you to use as a template for all of your future work.

    Invoice Properly

    Send the invoice, and you’ll be paid. It may appear simple, but the truth is that many people have problems with trade debtors simply because they do not send invoices for their work (we see this all the time).

    Invoices should be issued on a regular basis throughout the job, and work should be halted if invoices are unpaid and past due. Here are some helpful hints for sending invoices:

    • Make sure the invoice is clear and easy to read and understand – who sent it, what was it for, and how much did it cost?
    • Include as many payment options as possible so that non-payment because they did not know how to pay is not an excuse.
    • Send the invoice to the correct person – find out who the invoices should be sent to before you send them.
    • If you send the invoices with other work or documents, they may get misplaced. Always send them separately, and if you want to be extra cautious, try sending them from a different email address (e.g. accounts@). Your project management and/or accounting software should be able to assist you with this.

    Dealing With Trade Debtors Who Just Don’t Pay

    Unpaid invoices are the bane of any business owner’s existence, and while there is no way to completely avoid them, there are some strategies you can use to reduce the risk of late or non-payment. Here, consistency is key; make sure the procedure you implement for dealing with late paying trade debtors is followed at all times.

    Put yourself in your client’s shoes first. Did you spell out exactly what the fees would be and when they’d be due? Have you sent out enough reminders and notices to ensure that the invoice is paid? Do you accept a variety of payment options? Have you followed through on what you said you’d do? Check to make sure the fault isn’t yours before setting the dogs on a client.

    Send out reminders. Remembering to send these can be time-consuming, tedious, and risky for client relations because it’s easy to get them wrong, and a client receiving an undeserved overdue payment reminder can be upsetting. Set up a reminder system that actually works, to avoid this.

    You’ll need to escalate the issue once an invoice has passed a certain point, so the non-payer understands you’re serious about collecting the money. It’s time to call after a few email reminders. Remember to tread carefully and simply call to see if you’ve made a mistake or if there’s another reason for the unpaid invoice.

    If no amount of reminders or phone calls succeeds in getting you paid, it may be time to file a claim with the local court, hire a debt collection agency, or hire a lawyer. Debt collection companies usually simply take over the task of emailing, calling, or mailing the debtor, and they usually have better luck than the owner because trade debtors then understand the gravity of the situation. Lawyers can be very effective, but they are also very expensive; proceed with caution!

    All sounds like a lot, or not something you are comfortable dealing with? Managing trade debtors effectively is yet another thing an accountant can take off your hands, and yet another reason to hire one!

    FAQs

    What are trade debtors?

    A trade debtor is a type of invoice that is supposed to be given to you by your customers.

    How do you keep track of trade debtors?

    The primary way to keep track of trade debtors is first to send the invoice, track the payments weekly and send a reminder if payment has not been received. Once the payment has been received, update your receivables document and mark the payment as “paid”.

    If you would like more information, feel free to book a call with our experts!

    Is trade debtors a debit or credit?

    The accounting software classifies the trade debtor (or accounts receivable) as a debit and posts a credit on the sales account.

    For more information, book a call with our experts today!

    Are trade debtors an expense?

    No, trade debtors are not considered an expense. On the contrary, they are considered an asset.

    If you would like more information, feel free to book a call with our experts!

  • When Should You Charge VAT on Takeaway Food?

    When Should You Charge VAT on Takeaway Food?

    When Should You Charge VAT on Takeaway Food

    We’ll assume that if you are reading this article your business, whatever it may be, sells takeaway food and/or drinks. We’ll also assume that it is VAT registered, and you have questions about whether certain items you offer to the public should include VAT in the purchase price. And you are a bit confused, which is not surprising, as the issues around VAT on takeaway food are complex to say the least.

    However, if you read on, we can promise to make things clearer, even as the COVID-19 pandemic has muddied the waters around VAT on takeaway food even further.

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    Let’s start with the undisputed basics of VAT on takeaway food:

    • On zero-rated products, you charge a flat rate of 0% VAT. The sale of coffee beans, for example, is tax-free. So, if you run a coffee shop, and you sell a whole bean version of your delicious brews to the public in a container, that is a zero-rated product.
    • You charge VAT on standard rated products. Hot drinks are always standard rated. So when you turn those zero-rated coffee beans into a nice cup of hot takeaway coffee, it becomes a standard rated offering, and you charge VAT.
    • The standard VAT rate is 20%.

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    When a retailer provides food and drink for human consumption, it is frequently zero-rated. Standard rated meals and drinks are frequently served hot or consumed in a café or restaurant. However, some cold or takeaway foods and beverages are zero-rated. There are numerous exceptions to this rule. There are also some gray areas. Yes. This IS complicated and confusing, so we feel your pain.

    VAT applies to sales made in the course of catering. Catering for a wedding, delivering ready-to-eat meals, or providing packed lunches are all examples of this.

    Catering sales, on the other hand, do not include meals that require additional preparation. Preparation can include anything from reheating to arranging on a plate. This isn’t to say it’s automatically rated zero, so keep reading.

    Then there’s the question whether or not your product is consumed on your premises. If this is the case, you must charge VAT. All chairs and tables inside and outside your restaurant, as well as shared tables reserved for customers, are included in your premises (like shared tables in a shopping mall). Your premises do not include public benches or airport lounges.

    If you’ve made it this far, it’s safe to assume you’re selling takeaway food or beverages.

    Are the foods and beverages served to your customers hot? The term “hot” refers to a temperature that is higher than the ambient temperature; however, HMRC states that whether food is served hot or not is self-evident and do not provide an actual numerical temperature standard.

    The first requirement for charging VAT on takeaway food is that it be hot. You must also pass one of the five tests listed below:

    • Is the food heated so that it is hot for the consumer? Pizza, burgers and hot coffee are all supposed to be hot when consumed, so are good examples of hot takeaway food.
    • Is the food heated up to order? Like warming up a panini or a sausage roll if the customer asks you to.
    • Do you keep the food hot after it is prepared? Examples might include keeping hot dogs in hot water or items being kept in keep hot cabinets or under heat lamps.
    • Do you serve the food to the customer in keep hot packaging? Food in plastic containers isn’t always designed to stay warm. You could argue that they’re used to keep food sealed and protected from the elements. However, foil-lined packaging is clearly intended to keep food warm.
    • Do you advertise that the food is served hot? It’s enough to include the words ‘hot’ or ‘roasted’ in the name.

    Food and drink that is served hot and meets one of the five criteria above is subject to VAT.

    How do you legally say your food needs more preparation or isn’t served hot, to avoid charging VAT?

    • Include instructions for reheating your takeaway meals.
    • Don’t package your food in foil-lined containers.
    • Allow hot food to cool naturally, though for hygiene reasons, keep it at a low temperature.

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    VAT and Cold Takeaway Food and Beverages

    Congratulations, your sale is probably zero-rated if you’re selling cold takeaway meals, or you don’t meet one of the five conditions for hot food.

    However, HMRC has designated some products as standard or zero-rated.

    Some of the most common items are listed below.

    Cold takeaway foods and drinks that are standard rated:

    • Confectionary and ice cream
    • All alcoholic beverages
    • Sports/energy drinks, juices, smoothies and bottled water. The Innocent Company, who make those yummy fruit and veggie drinks – once tried to argue in court that their products were liquified salads and therefore exempt from VAT, but they lost that argument.
    • All potato crisps and some bagged savory snacks.

    There are also some exceptions that are zero-rated that you might not expect to be:

    • Baked Alaska – baking that ice cream turns it into a zero-rated item.
    • Most traditional Indian, Pakistani and Japanese dessert delicacies considered ‘traditional’ and ‘native’ to the culture they originate from.
    • Rum babas and fruit preserved in alcohol are zero rate products. However, alcoholic jelly shots are not.
    • Iced coffee, as it’s supposed to be served cold.
    • Corn based snacks, vegetable based snacks, and unshelled nuts.

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    Answering More Common Questions About VAT on Takeaway Food

    So, there’s no denying that the issue of VAT on takeaway food can be a confusing one. Here are the answers to some of the most commonly asked questions about other issues we’ve yet to cover:

    Is All Cold Takeaway Food Zero-Rated?

    Unless it’s on the list of exceptions, cold takeout food gets a zero rating. Ice cream, orange juice, potato crisps, and most confectionery items, for example, are standard rated exceptions.

    Should I be Charging VAT on Takeaway Pastries?

    Maybe. Or maybe not. Croissants can be sold hot or cold. If you sell them cold, they are zero-rated. If you heat them up – perhaps by toasting them – to be consumed hot, then they become standard rated and subject to VAT. The same is true of sausage rolls. If you keep them in a cabinet to be served hot, they are standard rated. If you serve them cold or chilled, they are not.

    Do I Have to Charge VAT on Condiments?

    No, as the use of condiments calls for some consumer preparation, condiments are zero-rated.

    While all of this is complicated, ignorance is no defence under law, so it is in your best legal interests to ensure that you are charging VAT on takeaway food when you should be. However, you should also be aware of the rules so that you can skip the extra charge when allowed and pass those savings on to your customers. 

    When in doubt, don’t guess. Consulting an accounting specialist to address your unique situation will be a lot cheaper (and easier) than answering a case brought against you by HMRC!

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    Frequently Asked Questions

    Is there VAT on takeaway food?

    Yes and no. There is a VAT that applies to hot takeaway food. However, there is no VAT on cold, chilled or frozen takeaway food. 

    Looking for more information? Let’s chat!

    Is there VAT on takeaway fish and chips?

    Yes, there is. There is a 5% VAT on hot non-alcoholic drinks and hot food. Since fish and chips are served hot from all possible outlets or stores, it’s safe to say that there is VAT in there.

    What foods are VAT exempt?

    Most foods are exempt from VAT at a 0% rate, so you don’t have to pay VAT. 

    However, some foods are not VAT exempt, including: 

    • hot food, 
    • sports drinks, 
    • catering, 
    • alcoholic drinks, 
    • mineral water, 
    • crisps and savoury snacks, 
    • hot takeaways, 
    • soft drinks, 
    • confectionery, and 
    • ice cream.