Sole traders are usually entrepreneurs who decided to start a business and learn on the way. As a result, important business terms and knowledge can be overlooked. In order to make your business life easier, i24 has compiled a list of essential terms that you should know.
Making Tax Digital (MTD) is being implemented by HMRC as we speak. It is a drive to make more taxes digital through third-party software. By doing this, they hope to cut down on current common errors, make submission easier, and create a new market in MTD technology.
Sole traders can pay from 20% to 45% income tax on all business profits, so it’s important to be familiar with the term and functions.
Value-added tax (VAT) can be valuable for sole traders, depending on the business. While it is mandatory for businesses that earn £85,000, it can also be opted into voluntarily to benefit from trading with other VAT registered businesses.
It’s important for sole traders to consider corporation tax should they wish to expand into a limited company. It is a 19% charge on all business profits made by the business entity. As a limited company owner, you would not pay this directly, but would still pay tax on what you earn as an employee of your own company. This means that personal profits might be lower.
By allowing customers to purchase on credit now and pay later, you start to build accounts receivable. The term is more important for accounting sheets than it is for usage, but it’s important to know for reference.
Accounts payable (AP) is when the company has yet to pay the money it owes. While it might sound like another term for debt, it can refer to things such as unpaid invoices. Keeping track of AP is important, and on the account sheet, it plays a big part in calculating the cash flow balance.
A standing order is similar to a subscription service. It refers to regular payments over a long period of time for something specific. You might use it for something that happens regularly, e.g. training.
Net 30 refers to the payment terms of a contract or invoice. There are similar terms that adopt the same format such as net 9, net 14, and so on. They reference the days until payment is due, so, net 30 means payment is due 30 days after the end of the month the invoice was issued.
A recurring invoice is an invoice that is scheduled to be sent multiple times, often for the same service. It is not used for invoicing multiple times during a single project.
Interim invoices are similar to recurring invoices in that they are used for a recurring, consistent payment. The difference between the two comes from the usage. An interim is exclusively used for single, long-term projects.
A final invoice is used at the end of a transaction or project. It is the most common method of invoicing and is often seen as the professional way to invoice.
This is charged to the business every time their bank processes a payment for them. They have varying rates and can become quite complex, especially when dealing with business-specific deals and accounts.
Running a Business
Inbound marketing is used to describe content that passively attracts views. Examples include videos, podcasts, or even blogging.
This type of marketing reaches out to customers through methods like cold calling, emails, and promotions.
A business’s net cash flow is the total earnings that it brings in over a certain period. It’s important to know this for tax returns and overall business stability.
Variable costs are the expenses that scale directly with business production. Examples include the cost of raw materials or production.
Contrary to variable costs, fixed costs are business expenses that don’t change in correlation to the scale of a business. Common examples include singular employee wages, loan repayments, or insurance.
While it’s common to mistake a profit margin as the difference between costs and gains, this isn’t completely correct. A profit margin is the percentage figure gained from (total revenue – total expenses) / total revenue. It’s used as a way to see a business’s health and is commonly used to estimate future revenue streams.
Starting A Business
HMRC is the government organisation that handles businesses and tax returns in the UK. They are the go-to for information regarding business management and account information.