For example, the workers may feel that there will be an increase in the standard of living because of a 5% increase in their salary as their income has now increased. However, if the rate of inflation is 7% which means the prices are increasing at a faster pace as compared to the increase in income, the effective purchasing power will fall and the real wages will be down by 2%.

If there is a cut of 1% in the salary of the workers, then workers feel low psychologically. However, when there is a decrease of 2% in the prices then irrespective of their pay cut, their effective income increases by 1%. Even if there is a pay cut, they can still purchase more goods and services than before. This however might not look credible instantly. Initially people might desire for increase of 5% in their wages compared to a wage cut of 1%.

Origin of the term:

Irving Fisher was the first to create this time money illusion concept. As per him price rise and money illusion combination could be detrimental to the economy. However, this concept of money illusion was actually made popular by John Maynard Keynes.

What are the various reasons for money illusion:

1. Price Stickiness: As there is a psychological blow in raising prices so firms may not be willing to change prices as per costs. Consumers usually opt for stable prices and when there is a price rise the consumption pattern is discouraged due to uncertainty.
2. Failure to distinguish between Nominal and Real values: It is not obvious when government declares that record levels of money has been pumped into  health care system as it might not have included effects of inflation and thus might represent only a smaller real increase. Another example is change in the property prices; it is easier to compare nominal house price than the inflation adjusted price.

1. Wage Stickiness: During the period of deflation, the workers might not like the idea of a wage cut as that is associated with the psychological perception of a fall in nominal wages. Thus, in a period of deflation, we can end up with real wage unemployment – unemployment caused by wages above the equilibrium.

1. Myopic Loss Aversion: Behavioural economists suggest that the visible losses affect people more than the invisible losses. For example,
   A) If there is a 4% rise in price and if there is a 2% increase in wage then the real wage cut is actually 2%.
   B) If there is no rise price and if there is a 2% cut in wage then the real wage cut is actually 2%.
   Research suggests that people perceive A is better off than B even if the outcome is same.

1. Lacking precise calculation: In day to day life people fail to make precise calculation and use approximate rules of thumb so as to save time. In the process they view money as something that is a constant source of value which makes life easier. And because of which they consider that a £100 has a constant value and hence they don’t take the small effects of inflation into consideration.

1. Missing information: Nominal wages can be easily seen by people, but the knowledge of price changes and calculation of real values is required to know real wages.

1. Contracts are not closely linked to inflation: As there is a dislike for price changes, contracts usually help to keep the prices same.

1. Underestimating the rate of inflation: Misleading impression is given by some countries. For example: In the year 2015, Argentina had an inflation rate of almost 28% which was stated by the government as 15%. Such reduction in the rate can actually mislead the consumers making them believe that they have higher spending power.

Real and Nominal terms:

Money illusion can be understood by knowing the difference between nominal and real value.

Nominal value takes into account the current monetary value whereas the real value takes into account the effects of inflation.

Nominal value presents the current headline monetary figure whereas real value provides a guide to actual purchasing power and the opportunity cost of workers.

If there is an 8% increase in nominal wages with 6.5% inflation, then the real wage increase in 1.5%

If the nominal interest rate is 3% and the inflation is 2% then the real interest is 1%

Money illusion and adaptive expectations:

Monerarist economists believe that money illusion is short term and where there is a time lag before consumers realise prices have increased.

A temporary increase in real output is caused due to an increase in money supply as money illusion exists in the short run. A rise in aggregate demand is caused because of an increase in money supply and people respond to it. An increase in nominal wages is observed due to rise in money supply and hence more labour is supplied by the workers and there is an increase along the short-run aggregate supply. And in the process workers realise that the prices have actually risen and that the increase in wages was only a nominal increase. And in the long run workers don’t do overtime and the output returns to the same real output.

Monetarist Phillips curve:

Short term fall in unemployment is seen because of increase in money supply because of money illusion.

However, in the long-run, unemployment remains at the natural rate. And the expectations are rational in nature as there is no money illusion.

Some economists are of the opinion that there is no money illusion. As per them, individuals might not always be wrong.

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What is budgeting? 

It is the process of planning to spend money over a particular period of time. Thus, the spending plan is called budget. When there is a spending plan then one is aware of in advance whether one would have enough money to do the things one would like to do. However, when one does not have enough money, one can choose to spend on the things of priority that are really important to him.

What is forecasting? 

Financial forecasting is a process of estimating or predicting the future performance of a business. Sales goals and targets are taken into consideration.

Both budgeting and forecasting are also used individually yet it is recommended that they be clubbed together and be used so that financial planning and analysis could be better understood.

A forecast is prone to alteration. However, a budget does not change and has to remain the same. Such tools come handy as they restrict companies from overspending and running out of cash.

Given below are the reasons that make budgeting really important and also mentioned are the advantages of having a cash flow forecast:

Early identification of risks so that they do not turn into something serious

Business evaluation is done by an important process called as financial forecasting which in turn lets us see the profit and loss statement. Capital funding or any significant financial investment would be harder to gain in case the business entity fails to prove that it is profitable or that it would become profitable in future.

Planning and Predicting cash flows

Many are the benefits of cash flow forecasting. One is that it guarantees enough cash for operation is always available. Many companies fail because they fall short of money to pay for their bills, staff, or suppliers.

Managing sales pipeline and performance tracking

Full transparency is needed in learning if the sales team is doing good or not and whether the conversion rate is high or not. And who is the best performer and why. If it is known what is to be improved, then you need to have a clear action plan to do so.

Show potential investors

It is important for investors to make an informed decision. Gaining funding is directly proportional to a robust financial planning. If the financial planning has a higher accuracy, then the chances of gaining funding increases.

Many things, regarding budgeting and forecasting, need to be understood clearly. The first thing to remember is that the budget should be put in place before the start of financial year. And it should be fixed for at least a quarter and no revision of it should be ideally done before the end of that quarter. The smaller businesses may update and rewrite their budget quarterly and the bigger businesses are the ones those usually maintain their annual budget intact.  The whole point of this is to provide sales targets and restrict expenditure, to keep one sincere while spending money for business growth.

Running a Budget Variance Report needs to be done each month to determine the actual outcome against the targets and the various results from the numbers need to be discussed and considered. For example, when there is a discrepancy in the sales as one team might be performing well and the other might be underperforming and hence have to be focussed more upon. Thus, it will help us to find out areas that require immediate attention as well help us to trace underperforming or overspending areas and assist in rectifying the issues before they blow out of proportion.

Forecasting too is similar to that of budgeting that is done at the beginning of the year but are open to revision as things alter. They are modified throughout the year as and when the understanding on the business function and channel changes. For example: When a big client is won then the sales pipeline is amended to show extra amount of money coming in each month for 12 months. Then the cost associated with discharging that work is updated and thus a renewed forecast is now available. The budget however remains intact.

Cash Flow

Cash flow is the flow of money in and out of business as income and expenditure. Everyone wants a positive cash flow that is more money should be coming into the business than going out. Positive cash flow helps settle bills and can be used to invest in business growth.

Risk of ignoring Cash Flow

• Piling up too much of stock
• Payment terms might get longer
• It could lead to overspending
• One could end up overtrading

Monitoring Cash Flow

• Important to know where one stands with a cash flow statement that shows the movement of money in and out of a business over a period of time
• Understanding the reasons behind cash flow problem
• Keeping the cash flowing
• Having an alternative fallback plan to offset any financial crunch
• By managing growth

Management Reporting

Management reporting is a detailed report of the actual year to date position and a full year forecast. It includes a Profit and Loss statement, cash flow statement and Balance Sheet.

Usually the business owners struggle to come up with non complex templates that are relatively simple to manage and maintain. Also, many a time business owners desire to review monthly budget variance report and amend the forecast and maintain proper cash flow. However due to their limited understanding they are not in a position to revise and hence concentrate their focus somewhere else. To have an effective and efficient functioning of business finances it is relevant and appropriate that this important feature of budgeting and forecasting, cash flow and management reporting be outsourced to professional experts in accounting. The UK has many such accounting professionals whose services can easily help in predicting the cash flow and the owner will never run out of money.

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Though accounting might sound a little monotonous yet it plays a pivotal role in monitoring and maintaining money productively so that the owner of a business can gain understanding on which section of business to outsource, which element to automate and which professionals to contact to take right advice pertaining to business performance and success.

There are accounting services for small businesses in the UK available that assist in training on various accounting methods, developing apps etc. and help in building up an organised financial health of the company.

Accounting services provided by firms in the UK and specifically in London for small businesses are:

1. Business bank account opening

Once business is registered, it is essential to know where to keep the income.

Although It is not legally required of the owners of limited companies to have a separate business
account, it is highly recommended that they have one.

Separating personal bank account from business account smoothens work during tax filing. One doesn’t have to worry how to clear up personal and business finances during tax season as these would be accurately placed in separate accounts. Apart from this, such separation of accounts helps the owner, the bookkeeper as well as the accountant to track the growth of business.

When setting up business for the first time, it is recommended that one should opt for a bank which caters to specific needs of the owner vis-a-vis availability of local branch, easy accessibility both online and in person. One should also figure out if the bank’s software would seamlessly assimilate with the online services and apps that are used for business finance management of the company. Having two separate business accounts, savings and current, will assist set up company’s money like keeping revenue in current account and keeping a part in savings account for tax purposes.

And once the business starts functioning well, one could think of taking a business credit card. This
will not only boost the business credit rating of the company but also help in getting other benefits like accrual points, cash back bonuses, rewards etc. that which can further be utilised in other sectors of business.

2. Expenses Monitoring

There are several business expenses that are tax deductible. However to avail this facility a company is required to document its expenses properly:

The following documents are to be kept accurately:

• Bills
• Bank and credit card statements
• Invoices
• Receipts
• Cancelled cheques
• Proof of payments
• Financial statements
• Previous tax returns

Expensify app allows taking pictures of the receipts and stores them without having to worry about
losing information during tax filing time.

Large volumes of digital receipts could be stored online with full security in Google Drive, One
Drive, Evernote, Box etc.

3. Building bookkeeping structure

Bookkeeping must be done religiously at least every month even though it might seem tedious and
boring.

Usually the following methods are adopted for bookkeeping:

• An accounting software or excel spreadsheet could be used to do bookkeeping all by one self if the company is a small startup with limited expenses every month.
• One could outsource the bookkeeping task to a service provider so that the owner could focus on other important concerned areas of business.
• Bookkeeper could be hired to work in house if the business could actually sustain it where the owner seems to be investing extra time on bookkeeping each month.

4. Collaborating with an Accountant

One of the accounting services in the UK is availability of an accountant who can provide his expertise to small businesses with negotiations on lease, managing cash and treasury and ongoing cash reporting.

Accountants usually provide free consultation and hence there should not be any hesitation on part of the owner to meet him personally so that the exact business needs could be addressed. Accountants generally charge on hourly basis. However some take monthly fees.

5. Payment Mode

All the transactions are not done in cash these days. Hence a proper channel of payment either online
or in person has to be decided upon.

• Payment through Point of Sales (POS) system and in-person: Mobile system like Square could be
  used to make a mix and match payment as this does not involve processing of in-person payment in
  large number.
• Payment only through POS: For such payment, a POS system that does transactions side by side a
  cash register or a standalone credit card reader could be adopted. For this the owner needs to have a
  merchant account with his bank. This account acts as a mediator between the business account and
  the payment system both while depositing as well as withdrawing money.
• Online payments only: Stripe is a great platform for online transactions and Shopify works best for
  transactions based on ecommerce.

6. Payroll system set up

Hiring contractors and employees increases with the growth of business. Payroll is an important job that can consume a lot of time, money and energy and could divert attention from running business. There are many great platforms that come with several advantages related to payroll taxes, integration of worker’s compensation and benefits etc.

7. Tax Accountability

Sole proprietors, directors and partnerships and Corporations all are independent entities and have different modes of filing their taxes. Whether they are to file taxes quarterly or not and if any other tax obligations and compliances are to be met are some of accounting services available in the UK.

8. Refining methods

A business model needs continuous growth and a regular review, particularly of accounting jobs. Long term success of business can be maintained only when an effective and a competent system is in place that takes care of profitability and the bottom line.

When a proper accounting system is in place, it saves time, money and energy and a sustained growth can be realised without having to bother about the unnecessary workload which otherwise comes due to lack of a proper accounting procedure.

The post Organised Accounting and Bookkeeping: Key to Sustained Business Success appeared first on Spherical - Chartered Tax Advisers.

Ineffective accounting is a major reason for the failure of many big and small businesses. Absence of bookkeeping is like driving business in blind alley.

Hence bookkeeping services in London have seen a tremendous growth in the last few years and in fact have brought around a paradigm shift in business operations.

Here are a few features and benefits delivered by bookkeeping service providers in the UK.

1. Budget allocation

These bookkeeping service providers help in properly organizing income and expenses and hence assessing financial resources and expenses becomes simpler. It supports budgeting.

Thus budget gives a blueprint to the business. It helps in formulating strategy for future expenses and for the expected funds to take care of those expenses.

2. Tax filing

Filing tax every year is messy for most of the business owners as it involves scores of paperwork. This important act could be made a lot easier by delegating this job to an efficient bookkeeping service provider.

Bookkeeping services are also employed to file personal tax returns. As major chunk of the owner’s income comes from this business, it is equally important to keep a track of the business earnings.

Thus, bookkeeping services help in collating all receipts and invoices as well as in organizing every financial information in one centralized system so that tax filing becomes a smoother process.

3. Organising skill

Organising financial information is an important task of bookkeeping services. This in turn helps to exactly spot where the financial files related to customers, employees, auditors, investors, lenders are present so that they could be provided in due time when asked by relevant parties so as to avoid penalties and obstruction of cashflow. Any disorganized act with respect to bookkeeping could strain business relationship with the relevant parties.

4. Business Analysis

Business performance is gauged through business analysis by Bookkeeping service providers in the UK.

Routine generation of financial statements for analysis is done by these service providers to record inflows and outflows of cash.

Bookkeeping informs on business lines which are doing well and which are flops. This analysis helps to enhance strengths of the company and correct its weaknesses.

5. Profitable Decision Making

Profitable and better decision making abilities are the result of better analysis which in turn is brought about by bookkeeping services as organised data and information are readily available.

6. Strategic Business Planning

Bookkeeping services in the UK help in strategic business planning as they assist in providing absolute clarity about the past performances of the company and thus help in finding out what is profitable and what is not for the company.

Bookkeeping plays a pivotal role in tax planning by providing tax advisers the desired information that could be properly classified into revenues and expenses.

With bookkeeping one can arrange specific expenses to one’s own advantage. Expenses on providing lunch to clients in meetings could lead to favourable tax benefits for the business.

7. Investors’ Guide

Bookkeeping avails the investors to access up-to-date information and financial statements like balance sheet, income statement, cash flow statement helping them to know the financial health of the business. These equip the investors to make better decisions. Organised information through bookkeeping generates prospective investors too.

8. Monetary Management

Bookkeeping keeps a track on how one has spent money. Money owed by the owner or the customers can be seen. On time payment or receipt of money will benefit the business and keep it running. Bookkeeping helps in regulating the finances of a business.

9. Tranquillity

When all the financial instruments are made ready and up-to-date because of bookkeeping process anxiety gives way to peace when auditors or banks ask for any information. Focus could be shifted to core business area.

10. Tracking Profitability

Bookkeeping helps in generating income statement that describes the profitability of business and thus tracks growth. The collated data over a period of time shows business trends and gives a better insight of business cycles and helps in comparing periodic results.

11. Cash Flow Policy

Regular documentation of revenues, expenses, receivables and liabilities will ease out customer and vendor invoice payment in due time.

As bookkeeping gives details on names of customers and vendors, payment amount and dates a better cashflow policy could be realized.

12. Attention to Strategy

Short and long term goals can be achieved by making the best of information offered by bookkeeping so that one could concentrate on strategies to grow and develop business. The result can be duly tracked and the goals can be reset likewise.

13. Provides bird’s eye view of Business

Bookkeeping services provide a summary and an overview of the company’s financial information in the form of balance sheet, income statement and cash flow statement for a fixed time period. These together present the performance of the business in a nutshell.

14. Simpler Auditing

Business owners would like to ensure that the auditing of their business should not be a bumpy one due to disorganised and improper books. Penalties are levied in case of outdated and faulty books. It is safer to provide the auditors with materials in due time to avoid any hassle.

15. Law Abiding

It is of utmost importance to keep financial records of company in a proper manner as per the law. The law also necessitates separating the financial records of business from the personal expenses. Any mismatch in this regard could lead to discontinuation of the business.

Conclusion

Bookkeeping thus is a very important part of a successful business venture. This not only saves precious time but also frees one from unnecessary hassles.

Many bookkeeping services in the UK for small businesses are currently available that provide value for money service.

One such bookkeeping service in London is provided by Spherical Accountants. With faith on us, be stress free as our expertise in bookkeeping will broaden the horizon of your business performance and give you peace of mind.

The post Bookkeeping: A Fundamental Business Growth Stimulator appeared first on Spherical - Chartered Tax Advisers.

Follow a well planned process to chase outstanding invoices.  If you are using one of the cloud based software for issuing invoices like, Xero, QuickBooks, FreshBooks, Free Agent, Sage One, you can use automatic invoice reminders function.  Do not hesitate to send a personal email requesting payment for an outstanding invoice.

It is important that your invoices are properly branded and contains all the important information like, invoice number, invoice date, due date, VAT number, description of product or service provided, quantity, unit price, total amount and VAT breakdown.  It must also clearly state your bank details and other payment methods.  If you use cloud based software for invoicing, you can integrate payment buttons like, PayPal, Stripe and GoCardless on the invoice.  This will make it easier for your clients to make a payment.

If you have specific terms agreed with your clients where your clients pay multiple invoices on a weekly or monthly basis, send them an account statement.

When a project lasts for a longer period than your usual service standards, ask for an initial deposit.  Agree payments terms which can spread payments throughout life of the project.  This will help you meet project related expenses without having to dip into other cash reserves.

Finally, be fair and respectful to your clients.  Maintain a fair, personal, and professional relationship with them and value their feedback.

Following the above advice will help ensure that your cash flow cycle works better for you.

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