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Accounts warning signs

Accountants get to see their business owner’s financial results at least once a year. Here are some signs that suggest that it may be worth investing some time reviewing the business strategy.

Warning sign 1 – Overdrawn Director’s Loan Account

When a director of a limited company takes out more than their salary and dividends an overdrawn loan account can be created. This indicates that the company is not making sufficient profits.

Warning sign 2 – Struggling to pay tax

A company has different tax payments; PAYE, VAT and Corporation Tax. If the company is struggling to pay any of its liabilities then cashflow is tighter than it should be. Remember, you should build up cash every month to pay the Corporation Tax bill at the end of the year.

Warning sign 3 – Long term overdraft

An overdraft can be a very good way of funding a short term cash requirement but it should be paid off within 3-6 months. If you’ve had an overdraft for more than 12 months consider turning it into a loan and pay the debt off and think about why your business is unable to repay the overdraft.

Warning sign 4 – Not buying new assets

The Balance Sheet of your accounts shows your assets and liabilities…each year a claim for depreciation will be made which reduces the value of the assets.

If a business is healthy you would expect to see new assets being bought to replace old assets e.g. tools, van and new computers. But, if your business is not making really good profits it cannot afford to reinvest in assets consider reviewing the strategy.

Warning 5 – No marketing spend

Your Profit and Loss account shows all your expenses for the year…a low marketing spend can indicate there is not enough profit to reinvest in developing the business. The expenses of a healthy business include Website improvements, Search Engine Optimisation, Public Relations and Pay Per Click.

There are a number of other warning signs but these are not shown in the accounts…the next article will list these.

If you would like to review your business strategy get in touch.

Image from Flickr by Andrew Klimin

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