Money Matters

Carl Reader: How to boss Making Tax Digital

Carl Reader, the serial entrepreneur and author of Boss It, dives into the fundamentals of finance and sheds a light on Making Tax Digital.

Carl Reader

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After all his wonderful words of wisdom, we simply had to pick Carl Reader’s entrepreneurial brains for a part two!

From finding an advisor you can trust to Making Tax Digital, Carl gets into the nitty gritty of finances, cutting through the jargon and telling it like it is so you can boss your small business.

This episode makes money matters look like a walk in the park, so you definitely don’t want to miss out.

What you actually need to know about your numbers

The real difference between balance sheets and profit and loss statements

What does Making Tax Digital mean and how will it affect small businesses?

Is MTD going to cost me more time and money?

MTD is going to happen—but when?

Business advisors: How to know if they are friend or foe

Getting the most out of your business advisor

Human nature vs business instinct: Separating the two

Recruitment: will they do the job, and will they fit into the team?

Bex Burn-Callander:

I’m your host Bex Burn-Callander, and we’re back with Carl.

Which leads me to my next question, which is about being number literate and debunking the myth that you necessarily have to be really great with figures, really great with numbers.

Can you blag it? Can you just rely on an accountant?

Or if you can’t afford an accountant, can you just rely on software to help you if you are no good with numbers?

Carl Reader:

Sure. I’m going to again give a yes and no answer, and then try to expand out on that.

The yes or no answer is, can you blag it?

To an extent yes, however I think there’s some fundamental commercial awareness that a business owner needs that comes back to numbers.

So ultimately as a trader, whether you are trading on a market store or you’re selling your services or whatever, to be a successful business, you need to find something for a fiver, sell it for a tenner, it’s that simple.

If you start finding things for a tenner, selling it for a fiver, you’re not going to be in business for that long.

That 12 months saving pot that we talked about before is going to go even quicker than you could ever imagine, so you need to have a basic commercial awareness of what a profit looks like.

You need to understand if something’s profitable, you need to understand the concept of unit level economics.

Does that mean that you need to understand the ins and outs of your profit and loss account?

Does it mean that you need to understand the detail of your balance sheet?

No, it doesn’t.

But I think it is really valuable for a business owner to have a baseline understanding of what the difference between gross profit margin and net profit margin is, to have a basic understanding of their run rate and how much they need to bring in per month to pay the bills.

It helps them to understand whether their business is solvent or not, so that they can meet their obligations as a company director.

So, a basic understanding of what these reports tell you is important but knowing how to construct them or the detail of them isn’t necessarily the most important task.

So yes, there’s a basic level of knowledge that I believe business owners should have; the rest of it should be filled in through technology and strong advisors.

Now a strong advisor, at the very basic, should prepare these reports for you. But I believe that the stronger advisors would actually empower you as a business owner to take this stuff and understand what it means.

I think that with the tech, now the technology that’s out there is phenomenal, there’s a lot of automation.

There’s a lot of intelligence behind the scenes that helps to make the job easier, but again you need to understand that to get the right information out of it, you’ve got to put a decent quality of information into it as well.

So yes, there is an awareness needed, there is I guess, some basic training, but that doesn’t mean that a business owner needs to be an accountant or to be a mathematician.

Look, the reality is that most accountants aren’t very good at running their own business. The reality is that most degree educated mathematicians won’t be very good at running their own business.

Why is that?

Because they’ll be over obsessing on the details of their plan, and they won’t get out there, meet people, knock on doors and sell their mathematic services.

So we all have our own unique strengths and provided we understand the top layer and the red flags we need to be aware of, that should be sufficient for most business owners.

Bex Burn-Callander:

And commercial instinct, I mean it’s just that, it’s an instinct.

Some people just have a feel for a deal and a great sales opportunity that comes from the gut. It’s like they just know instinctively, margin, meaning how much profit they might make on something, even if they don’t really think about the numbers specifically.

I’m going to go back though, Carl, because you’ve used lots of interesting words in that answer.

And I think some people who are listening to the show are even pre-setting up business, so words like solvency, balance sheet, profit and loss might be a bit alien, so I’d like to just quickly give brief definitions.

Carl Reader:


Bex Burn-Callander:

Balance sheets and P&L, how are they different?

Carl Reader:

Yeah, of course.

Very simply, a balance sheet is a snapshot of what the business is worth at any point in time. It’s what you own versus what you owe, the difference between it is your balance.

And if you owe more money than you own, then you are insolvent, if you own more money than you owe, you’re solvent.

So a really great way of thinking about this is cars, because it’s very rare that houses are insolvent unless there’s a house price crash.

But actually when you’ve just bought a car and driven it off the forecourt, if you’ve taken out a hire purchase, it’s very likely that you owe more money than the car’s worth.

That’s an example of insolvency.

A house where you’ve put in maybe 20% deposit and you’re paying the mortgage is probably an example of solvency.

So the concept of being solvent and making sure that your business is financially secure, is about the principle of making sure that you’ve got a strong balance sheet.

That balance sheet being the snapshot of what you own versus what you owe at any point in time.

Bex Burn-Callander:

And businesses can drift into insolvency and come out again, it just matters how it tallies really at the end of the year, when you’re doing your full accounts, right?

Because you might have a late paying customer for example, and you’ve got bills to pay yourself.

So there can be shifts, but it all matters at accounting end.

Carl Reader:

Yeah. So with insolvency, there’s a rabbit hole that we probably don’t want to go down too much.

Actually, insolvency is not being able to pay your bills they fall due, so it’s not quite as simple as that.

So on the face of it, you could look insolvent, but you know that you’ve got a new loan coming in that can pay the bills for a few months and there’s a plan behind the scenes.

So it isn’t as straightforward as that from the technical legal definition of solvency, but for the purpose of thinking about a balance sheet, the best way to think about it is do I own more than I owe?

Have I got more people owing me money, than money that I owe out the door?

Bex Burn-Callander:

That’s great, thank you, that’s a useful definition.

Bex Burn-Callander:

We’ve been talking a bit about the rising role of technology in managing your figures, your taxes as a small business. And there’s a big push from HMRC to get us all to file taxes online, through Making Tax Digital.

Can you tell us a bit about this push? How are most small businesses going to be affected?

Carl Reader:

I guess the too long, didn’t read answer is every business is going to be affected by this, so we need to understand what’s going on here.

Making Tax Digital is actually something where the UK government is behind the tide, globally.

It’s an initiative that’s been in place, I believe down in Australia and New Zealand, I believe in Eastern Europe they’re quite far ahead with it as well.

What it simply means is that the taxation affairs of a business are to be digitalised.

Now, the reality for most business owners is that they’re probably sat there thinking, “You know what? I file my tax returns online anyway, so what is Making Tax Digital? Why is there such a noise about it? What are the changes?”

The current tax system is based around two different things that we need to think about.

The first one is manual form production, so the current level of digitalisation within the tax offices is just the translation of what were forms but, filled in on pen and paper that have just been moved to online forms.

It is still a manual process and a self-declared process, where the business owner, once a year, once a quarter will log on and put down the details.

They’re moving towards an almost always on process where the data is uploaded, at the moment quarterly they’re looking at, but where there’s a live link between the business’s records and the government’s records.

The second thing that we need to bear in mind is that historically, some of the listeners might remember the days of the Inland Revenue and HM Customs and Excise, the tax office as we call it, HMRC is very disjointed.

It is still a number of different organisations under one umbrella and some of the complications around Making Tax Digital come from the fact that VAT is very different from income tax, is very different from corporation tax.

So, what does Making Tax Digital actually mean in reality?

It means that business owners at the moment, all VAT registered business owners, but ultimately pretty much every business owner will be required to have digital records of their transactions.

These will then be uploaded quarterly so the tax office will have an insight to what’s going on in the business on a quarterly basis.

Then at the end of the year, there’ll be a sweep up where any mistakes are corrected by the accountant, and we get to a final figure.

The reality for most businesses is that nowadays, if they’re VAT registered, they’re doing this anyway. If they’re not VAT registered, then they’re probably waiting until the end of the year to, as we say, ‘do their books’.

To sit back and go through the paper bag of receipts and put them all onto their system.

That won’t be an option going forwards. Business owners will be required to keep a computerised system up to date, so that can be uploaded every quarter.

Now that will be a bit of a cost for some businesses, but I think we need to remember that actually as a company director, you have a responsibility, a legal obligation to keep what is known as proper books and records.

So, actually it is just an alignment of what the company’s act tells you to do as a director. So, in short, Making Tax Digital is bringing the manual once-a-year process and making it a live link from the business’s software to the government’s software.

Bex Burn-Callander:

I get what you’re saying about having responsibilities as a company director and you should be on top of your figures the whole year round.

But given how many businesses in the UK are micro businesses, so like sole traders, who don’t necessarily have any staff, and they’re already pressed for time, as we’ve talked about already.

Isn’t the quarterly thing going to be quite arduous and add a lot of extra time and possibly expense, because you’re going to have to pay your accountant perhaps to do four filings, am I getting that right?

Carl Reader:

Yeah, quite possibly.

So it, first of all, depends on how you use your accountant. Do you use your accountant at the moment to do your bookkeeping and your accounts production and your tax return?

Or do you just use them to do your tax return at the end of the year and you give them access to the software?

If at the moment you only use them to file it at the end of the year, then actually as a business owner, you could probably get your software to do it for you.

Now there are some risks of that, which we’ll go into at a moment, and I think that any business owner would be well advised to at least speak to an accountant to get some training on how to do it.

But at the moment and as it stands, and this might change, there is no legal obligation for the quarterly filings to be accurate.

So a business owner can file it every quarter provided it’s to the best of their ability.

If the accountant then goes through and identifies mistakes and makes adjustments for the complicated accountancy stuff, like a clause and pre-payments and depreciation and so on, then actually that’s caught in the sweep up at the end of the period. So a business owner can file these themselves.

That begs the question, and I can’t answer this, what is the point of a quarterly filing that’s inaccurate? Whilst that’s the case today, I can’t guarantee that will be the case tomorrow going forwards. That’s something where if there does end up being an increased obligation, there will be increased costs.

Clearly, for a VAT registered business, you’re already expected to file your VAT returns correctly.

But for the smaller business, for the micro business that doesn’t do any of this stuff, actually it’s just a reporting process for the time being.

Bex Burn-Callander:

I know that it’s quite tricky to know how soon businesses are going to have to start thinking about this, but would you advise that anyone that is still keeping spreadsheets or written notes, transitions to some sort of online system relatively quickly?

Carl Reader:

I think there’s a lot of fear about Making Tax Digital.

I think we’re at the point in the cycle of MTD where most business owners, certainly the ones that I know of and in my community, they know about MTD, they’ve heard of it.

The challenge is that there’s been a lot of resistance to MTD.

It’s going to happen. It’s a can that we can only kick down the road so far.

And I do get quite, I guess, embarrassed actually about my fellow professionals, when they celebrate another delay.

It’s something we just need to grasp and get on with, and whilst there is some negativity and let’s be honest, the tax office doesn’t have the best record and the best reputation for getting things right first time round.

Let’s just get on with it. Let’s just embrace it, let’s just do it.

Because for me, if I was starting a brand-new business tomorrow, I don’t want to be getting bank statements through the post, opening them up, and re-keying in all of those transactions onto a spreadsheet.

Then sending that spreadsheet onto an accountant to then re-key it into their system.

The systems that are available nowadays, the technology that’s out there can link into your bank accounts and can automate all of that stuff.

Now, let’s say I set up a lawn mowing business. Let’s say that I’m charging my time out at, I don’t know, £25 per hour and I’m going out mowing lawns.

For me, it is far more valuable to have an extra hour or two mowing lawns, than an hour or two resisting technology for the sake of keying it in myself.

So actually MTD’s going to happen.

It might happen, at the moment they’re saying for smaller businesses, 2024 [for Making Tax Digital for Income Tax]; it might get pushed back yet again, could be 2030, doesn’t matter.

Put that to one side.

As a business owner, you need to focus brutally on your own efficiency, and if you can mow one more lawn per night, that’s a whole lot more valuable to you than the time spent keying in invoices.

Bex Burn-Callander:

It’s that old adage about short-term pain to long-term gain. It might take you a few hours to get running, but then the long-term time and effort saving, it’s just like a no brainer, right?

Carl Reader:


Bex Burn-Callander:

Oh, great. Carl, I want to talk to you a bit about the sort of business advice universe, and as I mentioned at the beginning, I’ve known you for years.

When I was a small business editor at the Telegraph, I used to call you all the time and ask you to just demystify things for me, so I know that you know your stuff.

But at the moment it feels like there’s an awful lot of people styling themselves as business advisors, coaches, mentors.

How can listeners ensure that the advisors they’re listening to are giving good advice?

And secondly, a lot of these people charge quite a bit of money, they sell courses and get-rich-quick schemes.

How can people who might be a bit vulnerable because they’re terrified, they’ve just started their first business, and they feel like they don’t know anything.

How can they make sure that they’re listening to the right people?

Carl Reader:

Oh Bex you know how to hit the right buttons there, don’t you? I could go off on a massive rant about the whole space.

Look, there are a lot of sharks out there and being brutally honest, there is no such thing as get-rich-quick.

If there was, I wouldn’t be doing what I’m doing, you wouldn’t be doing what you’re doing, and the people listening wouldn’t be doing what they’re doing.

If there was some way that we could pay £1 into a cash machine and get £100 out and keep doing it, we would all be queuing up to do it.

So, we need to chat about there’s no such thing as get-rich-quick. But yes, there are a lot of people are out there with varying experiences and quality of advice.

I think putting the experiences to one side, because I think that you might be the least experienced person in a field, but you might be a great advisor.

I like to use the analogy of Arsène Wenger, from Arsenal.

Arguably one of the best managers that English football has seen, and yet arguably one of the worst defenders the preferred division of French football had ever seen.

He wasn’t a great footballer, and he just happened to be a great manager, so you don’t necessarily need to have a great track record in business to be a business advisor.

And on the flip side, some people who’ve had some phenomenal business success and have done superficially very well, actually haven’t got a clue about business, because they were just the front face and let other people do it for them.

So putting that bit to one side, what makes a good business advisor for someone?

The first thing is that you have a strong enough bond with them, so that not only will you listen to what they’re going to say, but you will almost feel an obligation to follow through and act on it.

Because advice that isn’t acted on isn’t worth the words that are spoken or the paper that it’s written on.

There needs to be that trust and that emotional rapport almost, to actually relate to your business advisor and get on and do it.

I think that as a general rule of thumb, if a price ends in seven or it’s presented as a mastermind course or a coaching retreat or so on, you should possibly be a bit more sceptical about it.

Most business education is available free of charge, so my books are at the library, other books are at the library, you can get an MBA from your local library, you don’t need to spend money on this stuff.

But again, sometimes it comes down to the way that things are communicated, and if you feel that a certain advisor, the way that they say things just wakes you up and resonates with you and you think, “Oh yeah, that’s the light bulb moment, I always wondered what that meant.”

Then they’re probably the right person for you. It’s about finding who it is that you can trust, who it is that you understand and that you’ve got that sense of reassurance that actually I can act on this.

Bex Burn-Callander:

Is there a way to approach a relationship with a business advisor where you come into it with clear goals, things you want to achieve, just to make sure that you keep yourself on track, keep that whole relationship on track?

And if so, what are the things that you should be jotting down, considering making sure you bring up in that first conversation?

Carl Reader:

Sure. When you’re finding a business advisor, I mean, I think the first thing that you should remember is that most mentors and mentees actually don’t realise that they’re in that relationship themselves.

And it’s a crazy, crazy situation, but we all have this notion that you would find a business mentor by stalking Richard Branson or whoever your business idol is, and then you’ll sit down for a coffee with them for a structured one-hour meeting.

That’s not how mentorship works.

Your mentor might be somebody you work with. They might be somebody who’s sat on the desk next to you right now. Your mentor could be anyone that you come into contact with.

I actually shared a post on LinkedIn recently about my business mentors and I know that none of them would’ve known that I saw myself as a mentee, and they wouldn’t have seen themselves as mentors.

I just learned stuff from them along the way.

It could’ve been a turn of phrase that they used, all the way through to a more formal… Well not formal, actually, an informal relationship where we saw each other every month and just chatted about stuff.

I think that we need to understand that there’s a wide range of ways that this could be structured.

Presuming the traditional way of booking an hour’s appointment, sitting with an advisor and trying to get the most out of the relationship.

What I would say is that you need to be very clear on what you want to achieve personally, what you want the business to achieve and what their input is.

It might be that their input is just asking the right questions rather than giving the answers.

My business coach, I have a business coach and it’s a formal relationship, it’s a commercial relationship.

The relationship we have is that I phone him, he says, “How’s things going?” I just start talking. He then just asks a question and it’s a really simple question. It’ll be a how or why or what or where? Then I will come up with the answers myself.

That’s a great coach for me.

Other people might want a more prescriptive format, so you need to understand what outcome you want from it.

Do you just want a facilitated conversation, or do you want a specific answer to a specific question?

When you’ve explored what it is that you want personally, what you want for the business and what you want from the relationship, it then makes it very easy to actually objectively review whether that exercise has been worthwhile.

Bex Burn-Callander:

That’s great advice.

And Carl, I’d love to find out, because you are so open and just honest about what it’s like to be a business owner, the hard graph, the highs, the lows.

I’d love it if you would tell us a bit about a dark time that you’ve had in business, a challenge that you thought maybe you couldn’t get past, and then tell us how you did get past it.

Carl Reader:

Yeah, sure.

God, there’s been so many, and I see these motivational memes on social media where they have this iceberg, where you have the little bit at the top which is the bit that people see and then all of the stuff underneath, which is actually the foundation of it.

I see the squiggly line, where you have an upward line, but actually when it zooms in, there’re loads of ups and downs, and I can relate to all of that stuff.

I do see business as a roller-coaster, and as time goes on and things get bigger, the problems just have extra zeros on the end of them.

Specifically, the ones that I find most challenging, and I guess the darker times for me, are always around people.

I find that for me, and this might be a personal weakness of mine, I find it very hard to detach the person and their family and their own circumstances from the business needs.

A really tricky thing that any business owner who is perhaps listening in and employs people will know, is when you’ve got somebody who is perhaps underperforming and there needs to be some correction with some possibly negative outcomes at the end of it.

But you know them, you know their family, you know their kids, you know their pets’ names, you know where they go on holiday.

And trying to reconcile the wider good of the business, which is ultimately paying for rent and paying the bills for however many people, versus the very specific problem that you’ve got there.

That can be really tough, really challenging.

Unfortunately, and this is going to sound really brutal, you need to almost have a split personality on this stuff.

You need to be able to see the business as a person in its own right and you need to make that objective decision, separating out I guess the complications of human nature and the empathy that we naturally have for each other.

That’s been really difficult.

One of the things that I’ve learned… In fact, there’re two things that I’ve learned from that, is that I didn’t hire properly, and I didn’t fire properly.

I think that with recruitment, one of the issues that leads to these kinds of challenges is that we tend to only recruit when we absolutely need to, even as our business grows.

When we are comfortable outsourcing and delegation and so on, it’s very rare that we employ people in advance of when we need them.

This is madness when you think about it Bex, because let’s say you’re a product business, you wouldn’t order stock without somewhere put that stock.

You wouldn’t order a shipload of product from China without a warehouse to put it in.

Yeah, that just wouldn’t make sense, but we tend to wait till the very last minute to try and find the people that we need.

We tend to wait and then promote internally rather than look at external skills as we’re building additional layers into the team, and we then have to make knee-jerk reactions on hiring.

Add to that, the tendency that we tend to hire on skills rather than personality and cultural fit, and that just gives us a problem down the line.

That’s the recruitment side of it.

When it then comes to the performance management side of things, I think the challenge that we have is that we tend to see the good in the people we’ve recruited, even if they’re no good.

Let’s be honest, some people are no good.

We just have to be honest. Sometimes they just don’t fit.

They don’t fit the role, they can’t do the role, they don’t fit in the team.

I guess we could sum it up by saying that the biggest problem that myself and other business owners have, is that we hire quickly and fire slowly, and it should be the other way around.

Bex Burn-Callander:

I don’t think there’s anyone that employs people that wouldn’t say people, it’s just the biggest problem.

I mean, when it works, it’s amazing, but as soon as something is displaced, that something is out of joint, the whole company suffers.

It’s just so interesting, no matter how much tech you use, it all comes down to the basic human resource.

Carl Reader:

It really does and there was a great lesson that I heard on a Tony Robbins podcast about the questions that he asks in interviews, and I’ve tried to approach recruitment in that way.

What he does is first of all he asks if the person will do the job, so have they got the motivation and the spirit and the energy to do it?

Secondly will they fit into the team?

And if he’s got two yeses on those, that’s the only point that he gets to the third question, which is can they do the job?

The ‘can they do it’ is only to identify training needs, it’s not the critical decision maker. The critical ones are will they do the job, and will they fit into the team?

I just wish with hindsight, I’m looking back, I’ve been owning the business for 14 years now, I think. When I look back with all of my businesses, with all of my experience of recruiting people, I look at it and I think that that is one bit of advice that I wish I had in place from day one.

Bex Burn-Callander:

Because enthusiasm is the one thing you can’t train, like skills gaps…

Carl Reader:

You can’t train the personality.

Bex Burn-Callander:

Yeah personality, the one thing you can’t train.

Oh Carl, thank you so much. I feel like we’ve covered so much ground and hopefully got loads of useful details in there for anyone starting up, people who’ve already started up, so thank you.

As always, thank you so much for coming and demystifying things for me.

Carl Reader:

Thank you. It’s been fantastic speaking to you today.

Bex Burn-Callander:

That’s the end of our mammoth two-parter with the brilliant Carl Reader, so many gems in there. If you loved it, let us and Carl know on social media.

Tweet, post, ‘gram, use the hashtag #soundadvicepodcast. See you in a couple of weeks for more sound advice.

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