Bookkeeping, invoicing, and getting paid

In order to operate profitably and smoothly, the directors of a contactor limited company must keep their financial records up to date. By doing so, invoices will be issued quicker and accounts will get filed faster.

In addition, a running record on expenses incurred should be maintained so that, at year end, when an accountant is preparing to send returns to both HMRC and Companies House, deadline submissions are comfortably met and personal & corporate tax liabilities are minimised.

In this section, we consider:

  • the importance of contractor bookkeeping software
  • keeping regular bookkeeping
  • providing estimates to clients
  • the importance of invoicing immediately
  • chasing clients for payment of invoices
  • offer clients a number of different ways to pay
  • keeping receipts generated by allowable expenses
  • putting money aside
  • separating personal and business finance
  • keeping business records safe.

The importance of contractor bookkeeping software

Most contractor limited company owners now use contractor bookkeeping software, normally recommended to them by their accountants whose systems will be able to take direct information feeds from their clients.

There are a number of specialist independent contractor bookkeeping software packages on the market.

As a basic rule, bookkeep regularly

Accountants generally recommend that contractor limited companies update their bookkeeping software as soon as an invoice is issued or received. By doing this, a lot of administrative time is saved and the chance that mistakes are made in the recording of transactions is minimised.

Independent contractor bookkeeping software packages link to both the current and savings accounts of limited companies. Once transactional information is downloaded from a bank, invoices paid can be marked against the relevant clients.

Provide estimates to clients

All online bookkeeping packages currently offer contractor estimate and invoice software. When meeting with a potential client, an estimate for the work can be sent via a mobile phone app or desktop software. If the client goes ahead with the order, the estimate then can be turned into an invoice.

Invoice immediately to boost your cashflow

As soon as a job has been completed or a milestone for payment reached, an invoice should be immediately issued to the client. Contractors are advised that, at the point of reaching agreement to start work for a client, that the name and contact details of the relevant person in accounts payable should be taken.

At the point of issuance for the invoice, it should then be emailed to the main job contact within the client’s firm and to the contact person within accounts receivable. This can be done with contractor invoicing software and/or a contractor invoicing app, standard parts of most bookkeeping packages.

Chase clients with due and overdue invoices

By updating bookkeeping software regularly, the director of a contractor limited company will be aware of the invoices that have become due for payment and those which have become overdue.

On average, 27% of invoices issued by UK contractors and limited companies are paid late. Late payment of invoices causes severe cash flow and viability issues for many businesses, particularly within the first 3 years of trading or during periodic downturns in orders.

Online bookkeeping systems can be programmed to send clients reminder emails before, on, and after the due date. Automation of this task saves contractors a great deal of administrative time and stress.

Offer a variety of different payment methods

According to Xero, the online bookkeeping firm, an invoice sent out with the options to pay of bank transfer and cheque will be settled in 38 days. If a credit or debit card option is offered in addition, the time taken reduces to 19 days.

Direct debits are becoming increasingly popular as is timesheet finance, a form of invoice factoring specifically aimed at contractor limited companies.

Keep track of receipts generated by expenses

In order to reduce personal and corporate tax liabilities as much as possible, all receipts should be kept and ideally paired with the relevant payment recorded in bookkeeping software. Care should be taken to classify each item of expenditure properly, where necessary making notes on how the expense was incurred and why that expense was incurred for the sole purpose of business.

It is possible to keep them as paper records however many bookkeeping software packages allow users to attach a scanned receipt to an entry or to take a picture of a receipt on a mobile phone.

Put money aside

It is much easier to predict when cash will leave a contractor limited company account than when it will come in. The amount of cash generated by and paid into a limited company depends on the volume of work available, the nearness to completion of that work, and the speed with which clients pay their invoices.

There will be some times when there is a lot of money in a contractor limited company bank account and other times when there is a lot less. Many contractor accountants advice that between 25-35% of paid invoices are kept aside in a savings accounts to pay tax when due and to provide working capital during slower trading periods.

Separate personal and business finances

A contractor limited company is a “person” with legal rights. Any money stored in a contractor limited company’s bank account belongs to the company and not to the directors of and shareholders in that company.

Failure to separate personal and business finances will mean that an accountant’s bill for preparing tax returns will be higher. This is because of the level of work involved in understanding whether an item of expenditure was personal or business plus tracking down the correct invoice or receipt to prove it.

Keep your records safe

HMRC expects contractor limited companies to keep records for up to 6 years after year end. If a claim has been made on a cost or expense and there is no supporting documentation or receipt, a previous tax bill may be adjusted meaning that an additional tax liability will become due.

Please note that PAYE records must be kept for up to 10 years.

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