Doing more with cloud accounting and outsourcing; a theoretical case study

Even in this age of Making Tax Digital (MTD) and monthly software subscriptions, a number of businesses still manage their finances on desktop software isolated from the timely support of their accountant.

Let’s explore how keeping your finances in the cloud, and sharing access with your accountant could benefit both the business and its owner with this theoretical case study.

The business owner currently maintains their records on desktop software and provides their accountant with a backup three months after the year-end. This is the first time the accountant has seen the financials since last year. The accounts and corporation tax return are prepared to show a 50% increase in net profit and a comparable increase in the corporation tax liability. There is now a cash surplus in the company bank account, but it is too late to do anything to minimise the tax liability.

Now into month five of the current financial year, the business owner makes the decision to move to Xero. Albert Goodman set up Xero, transfer the trading balances from the desktop software and train the client on how to use the software.

Aside from the initial time investment in training and setup, the benefits are almost immediate. By using Hubdoc, a free add-on, to automate the entry of purchase invoices, and bank feeds to automate the entry of bank transactions, the time saved means that the business owner now has additional time to reinvest in the business.

This time is used to invoice customers more regularly and accurately based on costs being tracked within Xero. Invoice reminders are set up in Xero prompting customers to pay overdue invoices, thus reducing the time customers take to pay. Both these processes improve cash flow into the business.

As invoices are being uploaded to Xero via Hubdoc, all the information required for Albert Goodman to review the quarter two VAT return was accessible remotely. This compliance review uncovers underclaimed VAT and gives comfort to the business owners over the accuracy of the information submitted to HMRC. Whilst this may have been picked up at the year-end, doing it in real-time on a regular basis is much more effective and saves over/underpayments of VAT.

On reviewing the quarter three VAT return it is apparent that the business is having another strong year; profits are anticipated to have increased by 200% at the year-end. The accountant highlights this to the business owner and suggests ways to mitigate the tax liability:

The business owner was already considering replacing the double-cab pickup truck they use to travel between sites. With the 130% first-year capital allowance super deduction available to companies until 31 March 2023, the £30,000 truck reduced the tax liability by circa £7,500. A saving of 25p for every £1 invested.

Both director-shareholders had underutilised personal pension schemes. Given the strong performance of the company the cash surplus, an introduction to Albert Goodman Financial Planning is made. It is agreed that the company will make personal pension contributions for the business owners. Pension contributions are a tax-deductible expense in the company (within certain limits) and add to a personal investment that will grow tax-free for the business owners.

Managing tax bills is only one aspect of running a business; liabilities still need to be paid so before making the pension contributions, the accountant prepares a short-term cash flow forecast to find the optimum contribution level to balance tax savings whilst leaving enough liquidity in the business to support growth and payment of debts.

The business has now outgrown the capacity of the business owners to manage all the day-to-day financial management tasks by themselves. By using the data acquisition tools in Xero and Hubdoc, Albert Goodman now handles the bookkeeping; maintaining the customer and supplier ledgers and reconciling the bank.

This feeds into the quarterly VAT return review, at which point management accounts are also prepared; comparing current performance against historic and budgeted performance.

With this approach, we are on hand throughout the year to meet with the business owners as required. Tax planning is handled proactively, and year-end compliance is handled swiftly after the books are closed.

Please do get in touch with your usual Albert Goodman contact or Darren Jasper if you would like to discuss this further.