5 Business Skills to learn this year
New Year, new me, and what about a new business? The New Year can strike up inspiration for a lot of people, whether you want to learn a new skill, set new goals, or even start your own business! If this is your calling, we’ve compiled 5 key business skills that will be essential to learn so that you can effectively manage a business:
1. Learn how to understand and manage your cash flow
Controlling a steady cash flow can be the make or break of any new business, especially during the early stages of the initial set-up. Issues with cash flow are the number one reason that start-ups fail, so it’s important that you learn how to understand and manage this flow to make sure that it is as efficient as possible from the beginning.
A key tool to managing your cash flow is to create a 12-month projection plan. This will plot out your estimated expenses and income. It can be more difficult to predict your earnings, especially if you are starting a new business for the first time because you won’t have any past experience to rely on. However, noting down your fixed expenses such as rent, utilities, stock, and salaries will give you a good idea of how much you’ll need to earn to break even and be able to afford these outgoings.
You should also keep in mind any seasonal trends that may affect your business. For example, if you run a café in a seaside town, it would be fair to plan to have more customers in the summer due to tourists and less business in the winter, especially if the weather is bad because less people are likely to be out and about.
In addition to a projection plan, you may want to take some time to learn about the different types of cash flow calculations. Once you have learned how to do this and understand what each is for, you’ll be able to determine which type would be best for you to use to keep an eye on your cash flow. Every business is different so it means that, just because one business uses one report may not necessarily mean it will be helpful for you to understand the true status of your cash flow for your own business.
Building a cash reserve is our top tip for managing your cash flow as it can keep your business afloat during dry spells, but there are also many other strategies to help improve cash flow. Try opting for payments plans which will help you to avoid parting with large sums up front where possible.
2. Learn how to use accounting software
Using digital accounting software is becoming more and more necessary as HMRC roll out their Making Tax Digital (MTD) initiative which aims to completely digitise the UK Tax system. Not only will it soon be unavoidable, but it can genuinely be a game change for your business. Although using traditional software such as Excel spreadsheets can be familiar, it leaves room for human error and can be time-consuming or even costly where mistakes are made.
Automating your accounting processes will give you back time, be far more accurate and give you strong real-time visibility over your accounts. It will also make it much easier for you when you come to complete your tax return and can potentially lower your accounting fees if you present everything via accounting software.
Most digital accounting packages have great reporting features which can make things much easier for you than trying to create graphs and dashboards yourself through Excel. Many also have additional plug-ins such as payroll functionality which make it flexible and easy for you to transition as you grow your business.
For a small to medium-sized business, we would recommend an accounting package such as Sage50 or Xero. However, if you work in a niche industry, it is worth checking to see if there are industry-specific softwares that you can utilise.
3. Learn how to calculate corporation tax for your limited company
This skill is essential if you’re going to start your business as a limited company. Although many companies will rely on an accountant to complete their company tax return, it’s still nonetheless important that you understand how your final tax bill figure is generated as well as what you can do to reduce it!
The basics you should get your head around include knowing that the main rate for corporation tax is 25% as of April 2023. This rate only applies to companies with a turnover of £250,000 or more. There is then a secondary rate which is known as the small profit rate for all companies with profits of no more than £50,000 a year and this is charged at a rate of 19%. For companies with profits in between these two thresholds, there is then the marginal relief scheme which allows you to apply a tapered reduction of the main corporation tax rate to your profits.
It’s also very important for you to know when your corporation tax is due, as missing the deadline can lead to heavy fines. Every company will have its own corporation tax deadline, and this is 12 months from the end of your company’s accounting period. Do not be caught out by the separate deadline of PAYING your corporation tax because this is only 9 months and 1 day after your accounting period. We know this is confusing, and doesn’t make the most sense, but HMRC makes the rules!
Finally, learn how to reduce your corporation tax bill by finding out what is an allowable business expense and what is not. Be aware that, whilst some expenses may mean lowering your corporation tax, it could lead to increasing your personal tax so be sure to weigh these up before proceeding.
4. Learn how to calculate and understand your profit margin!
Whilst cash flow is crucial to the survival of any business, profit is always the goal. Your profit margin will have a significant impact on your business’ success, its ability to grow, and securing potential lenders or investors if you decide to go down that route. It’s a powerful metric to keep your eye on for longer term plans as opposed to cash flow which is important in a much more immediate way.
Similar to calculating cash flow, there are also different variations on how to calculate profit. Businesses can measure their profit margins by calculating their gross profit margin, their operating profit margin, or their net profit margin. You will need to assess which will be most suitable for your own business.
Your profit reports are important business tools to use because they’ll help you identify areas of your business which are profitable and therefore may be able to replicate, such as by buying similar stock. Or, the reports will show you areas which are not as profitable and therefore help you identify where you should cut costs. For example, if your delivery costs are high then it may mean looking for other courier solutions or suppliers. There are many other strategies for improving your profit margin.
At the end of the day, profit is what will allow you to thrive. Many businesses are built and started through passion, but it’s undeniable that everyone will want to make money to be able to fund their lifestyle, support their families, and pay for everyday outgoings. The more profit your business can earn, the more financially stable you will be.
5. Make sure you know the rules for taking out dividends
This leads us nicely onto skill number 5 – understanding and knowing how to take out dividends from your limited company properly! One of the advantages of running a limited company is being able to take out dividends from the business. This is because dividends have their own allowance separate from your personal allowance, as well as being taxed at a lower rate than the standard income tax rates that are applicable to earnings such as wages, and do not attract national insurance contributions.
However, the most important rule to follow for taking out dividends is that you can only withdraw them from your company where you have sufficient profits to do so! This means that there must be money left in the company after all your taxes have been paid, and then these can be taken out as dividends. If you have taken out too much money from your company without sufficient profits to do so, it means you have taken out illegal dividends. Don’t worry, it’s not a criminal offence, but it does result in heavy extra taxes, so it’s wise to avoid!
Although taking out dividends is straightforward (especially if you’re the only shareholder in your company to start off with!), there are set procedures to follow which you need to complete accurately. These include recording the distribution of dividends officially and ensuring it’s included in your annual accounts. Be aware that you’re allowed to take out dividends whenever you wish, multiple times throughout the year if necessary and so long as you have the profits to do so, but you must ensure you complete the formal administrative procedures each time.
Starting a new business for the first time can be both exciting and daunting at the same time; it requires a lot of effort and careful planning to succeed. However, it’s an incredibly rewarding experience. By mastering these 5 key essential business skills, you can set yourself up for success, avoid common pitfalls and be in the best position to start your business with confidence. Best of luck with your new venture this year!
