I have a client who has just started a small beauty business run on a cash basis only (for now). She is really stuck for cash and so rather than having to keep going to the bank to lodge £20 to £30 pounds each day into the business account and then take it out the next day I'm wondering if she should have a receipt book for herself which she dates and signs as drawings? Alternatively, a petty cash system although I'm not yet sure how much she is actually drawing per day. Any suggestions?
She must record everything but she would only bank what she has not used.
Have a receipts book recording all income and then you match that up between the amounts that she takes, the amount that she can show as cash paid receipts and the amount banked.
Everything remaining (after deducting the legitimate expenses with receipts paid in cash) goes to drawings as the balancing figure.
The downside to cash businesses like this is that they are open to abuse so even keeping all of the required paperwork seemingly sqeaky clean they are still prone to more than their fair share of investigations, espechially of the type going down the questioning how the taxpayer can aford their lifestyle on the income declared.
Just make them aware of the downside of cash businesses otherwise when they get the visit asking them to justify everything the first assumption will be that you have done something wrong rather than the reason for the visit simply being the business model and nothing to do with the specific business.
HTH,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks Shaun. So you are saying that until she starts trading on an accruals basis then she is more prone to more than a fair share of investigations. It's is really a very small business at this stage where local clients pop in for a treatment and pay by cheque/case. Can you suggest another business method at this early stage other than cash/cheque?
She has a typical stationers cash receipt book which she issues to clients on receipt of cash and is keeping her receipts for expenses etc. I know the difference in the bank rec would be drawings but I suppose for my benefit it would be better if she kept a note of all the individual drawings (including dates) so that I can enter these into the drawings T account. Do you think this it will be necessary to account for each individual drawing or can I just use the bank rec balancing figure as one entry in the drawings account.
Another quick question which I'm hoping I can slip in here without starting another thread is that she is offering a discount for December and so I have said that she will need to include that discount on the receipts she issues to clients as I will need to show this in the books as discount allowed. I may be in overkill mode here but my understanding is that I need to account for everything even though (as especially) as it is a cash basis business.
She is stuck for cash but needs to record drawings and all transactions diligently. There's never going to be a perfect answer but there may be a trade-off here between safety from the attentions of HMRC and the fuss of often banking small amounts.
It occurs to me that she could have a 'float' but I am sure she should have a dedicated business bank account as soon as possible. The latter doesn't need to be an official business one because at this level of trading, the bank are unlikely to query it. It does need to be business transactions only, and you should analyse it. If her business grows then any bank charges arising will be partially covered by reduced bookkeeping fees. Wading through domestic expenditure can be time consuming.
I would suggest that weekly is a reasonable frequency of banking but I leave it to you as to how much the float should be. It needs to be financed and there's the trade-off. At the end of the day you'll have given her these two pieces of advice and if she doesn't take them you have greater leeway both on your fees and the ability to say 'I told you so'. Less worry for you too.
sorry for the delayed reply, not been on the site very much and have only been answering the odd post whilst ensuring that we remain spam / troll / SEO free (I know that we got a bit yesterday from the other side of the pond but ask yourself, where is that poster now, lol).
Tim absolutely hits the nail completely on the head. I wasn't saying that there was anything amiss with what your client is doing or that they should change their approach. Its just a sad fact that the little businesses are the ones that seem to have the poorest internal controls so get more attention than they deserve from HMRC even where being run with complete integrity.
Sometimes it does feel that HMRC just go after low hanging fruit where the real pickings to be had are further up the tree.
As for the discount question its very much swings and roundabouts and all depends upon how your client phrases things.
Billing with a discount will alert clients to an imminent rise and to what amount. It would certainly come across better.
However, it could also be an initial rate that's a standard (say) three month rate rising at the end of the introductory period.
That wouldn't be a discount, it would simply be an introductory rate.
As I say, all in the phrasing by the client.
Where clients use duplicates books to provide hand written receipts to known clients for cash when I plug them into the system I provide the client with batches of invoices for them to print off for their records.
It's nothing for me to produce them (generated from the client id, date and amount which I would be entering anyway) and makes a nice value added to the service.
Clients always seem to think that they are getting their moneys worth when they see something that they can touch where of course the bulk of the real work is actually invisible to them.
If a client wanted me to print the invoices rather than simply receive an email with attachments I would charge for it (45p per A4 sheet).
kind regards,
Shaun
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
