Tax

A new study by FreeAgent has shown that around 20% or one-fifth of micro businesses have no idea about the government’s Making Tax Digital scheme, despite the government publishing further information about the plan at the end of January.

Lack of information

According to the research, some 84% of respondents thought that the government had not provided enough information about either the digital tax plans or how this new legislation would affect business owners around the UK. But on the positive side, 41% said they were aware of the plans and that they felt positive about them. A further 27% thought that the legislation would make running a business easier than before.

Changing tax system

According to Ed Molyneux, CEO and co-founder of FreeAgent, the Making Tax Digital scheme will see one of the biggest changes to the UK’s tax system for generations. Businesses could also see the start of the changes as early as next year.

Yet despite positive responses from some micro-businesses, it is also clear that others have little idea about what the scheme involves. And even those who are aware of it don’t fully understand how it will affect their business. He went on to add that the Making Tax Digital scheme is a great way for businesses to gain clarity over their financial position as well as being better equipped to calculate and pay tax bills.

For the micro-businesses surveyed who did know about the scheme, there was generally a positive attitude to the changes with only a small number saying that they felt the changes would make things harder. But FreeAgent also urges the government to keep these businesses up to date with the changes and ensure they were fully aware when the changes are implemented.

The scheme

The scheme was announced in the March Budget in 2015 but the 2017 Budget saw the government give small businesses another year to institute the changes. It will involve keeping digital records and sending HMRC quarterly updates with every business having their own personalised digital tax account.

What does Making Tax Digital for Business really mean?

For SMEs, entrepreneurs and sole traders, there are a few major changes that they need to be aware of that will be introduced over the next few years. Here we take a look at the most relevant changes that are planned to happen:

The end of annual tax returns

The Making Tax Digital (MTD) programme is designed to make the reporting of your business’s financial data to HMRC more straightforward through eliminating the need for an annual tax return. Instead, you will be required to send your financial updates to HMRC digitally via your online tax account on a quarterly basis. Rather than being asked to complete a new tax return four times per year, you will only need to submit financial data online without the need for any complicated paper form filling.

MTD has already begun

The initial consultation period for Making Tax Digital has already ended and we can expect to see the new legislation being announced at some point this year. The new MTD requirements will be operated through your existing digital tax account that you will already have with HMRC.

The MTD pilot scheme has already started with volunteers who have signed up to test the system. We can expect changes and tweaks to the system as their feedback is received. Hopefully this will make the system as user-friendly as possible to take into account those with minimal computer skills.

From July to December 2017, the online digital tax accounts will be able to give taxpayers an overview of their standing and what tax they will be liable for.

In 2018 it is expected that all businesses, landlords and self-employed people that have a turnover above the current VAT registration threshold will be able to start updating HMRC for income tax and NI on a quarterly basis using simple accounting software.

If the roll out continues to be successful, it is then hoped that in 2019 all businesses with a turnover falling between the current minimum threshold and the VAT registration threshold will also start to update HMRC on a quarterly basis too. This will also be done through their accounting software and submitted online.

Possible Software Issues

While it will be necessary to keep HMRC updated with your business finances digitally, HMRC have so far been pretty vague about the details. They will expect you to use a form of accounting software to submit your figures and have said that using spreadsheets is fine as long as the spreadsheet package you use will be able to connect to your digital tax account. This may be possible through some sort of software, but looking ahead it may be easier to simply use a digital accounting software package to compile your figures rather than rely on spreadsheets alone.

Real-Time Tax Information

By going digital, HMRC say that your business tax position will be reported to you in ‘as close to real-time as possible’. This will help to avoid you having to wait until the end of the year before knowing exactly how much tax you have to pay. This can help you to budget and set aside money over the year to pay your tax liabilities without the worry of being landed with a huge tax bill at the end of the year.

At the moment, the threshold for meeting the MTD requirements currently stands at £10,000. However, for those who are exempt because their annual sales fall below this figure, there is an option for them to opt in if they so choose. There are other groups that will be exempt from MTD and these will include charities and those deemed to be 'digitally excluded' for whatever reason.

Because setting up a company can be such a quick and painless process, it is easy to forget that there is more to it than just registering your business name with Companies House. Whether you do the job yourself or use a company formation service, once the business is established, there are other responsibilities that the company director has on a regular basis. Fail to comply with these and you be facing an unpleasant encounter with the business bogeyman – HMRC.

Company formation basics

When you decide to start a business, then you have different formats to choose from, depending on the nature of the business. For some, setting up as a sole trader is the ideal solution but for many businesses, being formed as a limited company is the best option. There is a process to follow to set up a company that involves both Companies House and HMRC and a series of information that is required to create the company.There are some rules about the name you can give your company to start with – Companies House website has a page that tells you all about this here and includes things like not using the word ‘royal’ or ‘queen’ as it hints at a connection with the royal family. Once you have a name that is acceptable, you need at least one director and one shareholder. All of this information is submitted to Companies House and you can do this yourself or simplify the process by using a company formation service.

Annual responsibilities

Once the company is set up and you have a Certificate to prove it, then that stage of the process is complete. But there are also a number of other responsibilities that business owners have during the course of the year. Firstly, there are the annual tasks that need to be done.Each year a Confirmation Statement needs to be filed with Companies House. This is an overview of the company including the shareholders and directors and confirms that all the information held on the business is correct. It needs to be done once a year and can be done online or on paper, though the latter is more expensive.Annual accounts are required to be filed with Companies House, although this only needs to be an abbreviated version. HMRC will require a full set of accounts including profit and loss accounts and a director’s report. These need to be filed separately as the two don’t pass papers between them. Along with this, form CT600 needs to be completed and this is usually done by the company’s accountant as it is quite a complicated form.Every company director must also complete an annual self-assessment to declare the income they have receive from any source including from the company. Any businesses that have staff are also required to report their annual employer returns, although most of this is now done through the PAYE system in real-time.

Quarterly responsibilities

Any business that earns more than the stated threshold must registered for VAT and it is important to remember that when you register, the accounts for the previous 12 months must be taken into account. Being VAT registered means you need to complete a quarterly return on your VAT which can be done online. It is due by the end of the month following the end of the quarter.While you only file one form, both HMRC and Companies House will fine you if you don’t complete this information so it is very important not to miss this.

There are many things to remember when you form a limited company and during the course of trading as a business. One of the most important ones concerns tax and top of the list of taxes to be paid is corporation tax. But what is it, when is it due and how to do you know how much you will need to pay?

Who pays corporation tax?

When you register a limited company, you will be due to pay corporation tax. Any foreign company that has a branch or office within the UK will also be required to pay this, as will any club, cooperative or unincorporated association such as a sports club or community group. The thing to remember about corporation tax is that you don’t get a bill for it – the responsibility is on the director to work out, report and pay this tax.When you start as a limited company, the business is also registered for corporation tax. Within a few weeks of doing this, a letter will be sent to the business’s registered address that contains a form called CT41G. If this hasn’t appeared within three months from the formation of the company, you need to contact HMRC or use their website to note this. Once you have complete this form, you are considered ‘active’ for the payment of corporation tax.The only way to avoid paying corporation tax is if your company is registered as ‘dormant’ with HMRC. This means you have formed the company but have not started trading yet and therefore there are no profits to be taken into account. As a result, you will not yet be liable to pay corporation tax.

Preparing for payment

In order to know how much you will need to pay, you are required to keep accounting records and to prepare a Company Tax Return. This will include information about the profit and loss for corporation tax and will often be completed by an accountant, though you can also complete the process yourself. Paperwork will also need to be registered with Companies House at the same time. If you are looking for professional accounting, take a look at our Business Accounting service for an affordable way to keep on top of your accounts.The deadline for these returns is 12 months after the end of the accounting period that it covers. So, for the year April 2016-17, you would need to submit the return by no later than April 2018. If you go over this period, you will face a financial penalty.

The payment

The current rate of corporation tax is 20%, though there are some changes to this for companies involved in oil rights or extractions. You are required to make this payment within nine months of the end of the accounting period to avoid receiving penalties.You will have to pay corporation tax on money the company makes from doing business (trading profits) as well as investments and selling assets for more than they cost, known as chargeable gains. Tax is also paid on profits from outside the UK if the company is based within the UK. If it is based elsewhere, then the payment is only made on the tax made within the UK.

Getting advice

Tax is a complicated area and there can be financial penalties as a minimum if things aren’t done correctly. Therefore, if you are in any doubt about the amount of tax or information required for corporation tax, you should always seek expert advice as quickly as possible. If you cannot make the required payment, contact HMRC at the earliest point to discuss the matter and try to avoid hefty fines being applied to your account.

If there’s two things that are a certainty in life it is that we die and that we pay taxes. In fact, the idea of income tax has been around since 1798 when a prime minister brought in the measure to raise money for the country, originally in the short term. But it was so useful to the government that they kept it going and today, it is a big factor in our lives.When we own a business, we have to pay taxes on what we earn and are also responsible for reporting this profit to make sure we pay the right amount. So here we look at the basics of income tax and how HMRC works out what we owe.

What you are taxed on

HMRC counts the following as income that you are liable to be taxed on:

• Money earned from a job
• Money earned from a business
• Being self-employed and earning money through a job, including selling services online
• State benefits
• Pensions including state and person pensions
• Rental income
• Benefits from a job
• Income from a trust

However, there are some things that you aren’t required to pay tax on including:

• Interest on savings under the savings allowance
• Income from tax-exempt accounts such as ISAs
• Company shares dividends up to £5,000
• Some state benefits
• Wins on the National Lottery or premium bonds
• Lodger rent if your house is below the rent a room limit

Personal allowance

Let’s start with the good news – you don’t pay tax on every penny that you earn. In fact, everyone gets a ‘financial personal allowance’ which is a figure that is revised on an annual basis and is the amount of money a person can earn before they start paying taxes. For the 2016-17 period, this amount is £11,000 so until you reach this figure, you don’t have to pay any tax.Once you have earned £11,000, you are then what is called a basic rate income tax payer. So, for every £1 that you earn above this threshold, HMRC takes 20p and you retain the other 80p. This rate continues until you reach the current figure of £31,786 at which point you are considered to be on the higher tax rate. This means you will pay 40p in every £1 and retain 60p yourself.Should you find yourself earning more than £150,000 then you will be in the additional rate for tax group and the amount take will be 45p in every £1. Should you earn over £120,000 a year, you do not get a personal allowance either.

How to pay tax

When you are employed, your tax is paid through the Pay As You Earn or PAYE system. This also collects National Insurance contributions and a code supplied by HMRC tells an employer how much they need to deduct. This code takes into account state benefits if you have to pay tax on them.When you are self-employed, you need to complete a Self-Assessment tax return. Everyone who earns more than £2,500 needs to complete this and people who earn a high income through their job may also have to complete self-assessment forms.

How much tax?

When you are self-employed, the big question is always how much tax you will have to pay. While the tax rate does give you an idea, there are other things that can offset this amount and reduce or increase the figure.Whatever the case, the process starts with accurate record keeping. There are no set rules about how you keep records – they can be recorded on paper, digitally or on a software program. They must be accurate and readable and you can be fined if they are not.Financial records should include any income you have made from your job. But it should also record expenses that you have paid out which can include:

• Travel costs such as parking or bus fares
• Office costs including stationary and telephone bills
• Staff costs for salaries and subcontractors
• Clothing expenses where uniforms or specialists clothing is required
• Items bought to sell, such as raw materials
• Financial costs including insurance and bank charges
• Costs of the business premises including heating, lighting and business rates
• Advertising or marketing including website costs

Another type of cost is known as capital allowances and this is where you buy something to use for your business. Examples include machinery, equipment, and business vehicles such as cars, lorries, or vans.Some costs need to be broken down into personal and business if the item is used for both – a mobile phone is an example. If your bills are £200 for one year and one third of this was for business while the other two thirds were for personal purposes, then you can only claim for the one third that related to the business.If a business has no premises, for example if you work from home, then there is an option to claim for a proportion of things such as heating, electricity, mortgage or rent and the use of the telephone or internet. This is worked out on how much of the home is used for business – so if there are eight rooms and the business uses one, it can claim for one eighth of the yearly bills based on you working there full time.All details of expenses must be kept but only the figures are required to be submitted as part of the self-assessment tax return.

When is the payment due?

The deadline for tax payments is 31st January for tax owed for the previous tax year, known as a balancing payment and the first payment on account. If there is a second payment on account, this will be due on 31st July. You can also use a budget plan to pay at intervals during the year to avoid having a single bill.If you don’t pay on time, HMRC can take various steps to collect the money, will add interest onto the account and may also add penalties. If you think you cannot pay a bill when it is due, contact them immediately here to discuss options.

National Insurance or NI is the system where a person pays in money in order to receive certain benefits if they qualify for them. One that we all eventually receive is the state pension while others could be unemployment payments or payments when you are on a low income and have children.Everyone over the age of 16 who earns more than £155 a week is liable to pay NI.

How much you pay

National insurance is split into two sections – the part an employee pays and the part that their employer pays. When you are self-employed, you have to pay both sections. Class 1 is the rate that is paid by an employed person earning more than £155 per week and is made up from the amount they pay and the amount their employer pays. A letter will designate how much this is.An example would be someone who is a category A. They would pay nothing for the first £155 per week that they earn and would pay 12% of any payment between £155 and £827 per week. If they earn more than £827 a week (£3583 per month) they would pay a further 2% on this extra amount.For that same person, the employer would pay nothing for the first £156 per week then 13.8% for payments between £156 and £827 a week and the same amount again for payments over £827 per week.

Category letters

So how are we allocated a letter that defines what we should pay? The system is worked out on a number of details. For example:

• Category B – married women and widows who pay a reduced NI
• Category C – employees who are over the state pension age
• Category J – employees who don’t pay it because they are paying through another job
• Category H – Apprentices under 25
• Category M – Employees under 21
• Category Z – Employees under 21 who are paying through another job

Everyone else is a category A and would come under the above example as to what they would need to pay apart from those who are classed as Category X and are under the age of 16, so therefore do not need to pay national insurance.

National Insurance rates for the self-employed

If you are self-employed, you pay two types of national insurance, depending on your income. These are classed as Class 2 and Class 4 payments. You pay Class 2 payments on profits over £5965 each year and you pay Class 4 payments on profits over £8060 a year.The amount you pay for Class 2 is worked out as a flat rate of £2.80 per week. Class 4, however, is worked out based on your profits. If you earn between £8060 and £43,000 you will pay 9% NI while if you earn over £43,000 you will pay a further 2% on your earnings. Both classes of NI are paid through the Self-Assessment system.There are a few jobs that aren’t required to pay NI but agree to pay on a voluntary basis. These include people who run businesses involving property or land, those who make investments for themselves or others without a commission or fee and those who work as examiners, moderators or set exam questions. Also exempt are minister of religion who don’t receive a salary or stipend.There are calculators available online that will help you work out how much NI and tax you will be required to pay on your earnings. National insurance payments will be due at the same time as tax revenues for that period.

VAT is a tax levied by the government on all sales of goods and services and stands for Value Added Tax. Any business that earns more than the set threshold, currently £82,000 per annum, must register for VAT and complete a return each quarter.

Understanding VAT

VAT forms something of a circle once you register for it. Your business must charge VAT at the stated rate of 20% (or whatever it is at the time) on any goods and services that you sell to customers and to other businesses. Your business will also pay VAT on all goods and services you buy from another business. Finally, your business must submit a quarterly VAT return to HMRC.The idea is that with the VAT you charge on your goods or services as well as the VAT you pay, the two balance each other out quite evenly. If there is any different between the two, this is either paid to HMRC by you or paid to you from HMRC.Businesses with an annual income of less than the currently stated threshold figure can still register for VAT but it may not be beneficial, depending on the nature of their business.

What is VAT charged on

VAT is charged on a wide range of goods and services though there are some seemingly quite odd rules about what is exempt. Generally, it is charged on things such as:

• Sales of goods and services
• Hiring goods to someone or loaning if a payment is involved
• Selling assets from the business
• Commission payments
• Staff sales such as canteen meals
• Any business goods used for personal purposes
• Bartering, part exchange, gifts, and any other type of ‘non-sales’

The standard rate of 20% is charged on these goods and services but there are two other rates used for certain things. A reduced rate is applied to things such as children’s car seats as well as domestic fuel or power payments. Mobility aids for older people are another example.The other rate for VAT is the zero rate and this means the item is due for VAT but that the government have set the payment amount to zero. It is still recorded in VAT returns. Examples include items such as books and newspapers, children’s clothes, goods exports to non-EU countries and goods supplied to a VAT registered EU business as long as they have a valid VAT number.

Showing VAT charges and payments

In order to complete your obligations regarding VAT, you must show the VAT payment made during any transaction in your business, even if the item is a Zero rate. VAT needs to be shown on the invoice while the transaction needs to show on the business’ VAT account. It is then recorded on the VAT return.If an item is returned, then a replacement invoice or a credit or debit note is then issued to counter the original VAT payment. This should show the reversed VAT information as well as the reason why it was issued.

Discounts and free gifts

There are different ways to deal with discounts and free gifts from a VAT perspective to ensure the payments are recorded correctly. For example:

• A discount = VAT should be charged on the discounted rate
• A free gift = VAT should be charged on the value of the gift
• Multi-buys = VAT should be charged on the combined price of the items, assuming they have the same VAT rate
• Vouchers = No VAT if they are given away free, if not then at the price charged
• Free samples = No VAT due if they are for marketing purposes and to test a product so a small quantity

Submitting a VAT return

The three months accounting period for VAT means that returns are submitted every quarter. The information that must be provided includes the total sales and purchases for the period, the amount of VAT the business owe, the amount it can reclaim (what it has paid out) and what refund you expect from HMRC. Even if there is nothing for you to pay or to claim back, a VAT return must be submitted.You should check your VAT Return and payment deadlines in your VAT online account and make sure your finance department or accountant are fully aware of these deadline dates.Your VAT account will tell you when your VAT Returns are due, and the date which the payment must clear HM Revenue and Customs’ account. The deadline for submitting your return online as well as paying HMRC anything owed are usually the same - 1 calendar month and 7 days after the end of an accounting period.The only exception to the above rules is if, for example, you use the VAT Annual Accounting Scheme.If the VAT returns is not filed by the deadline or the full payment is not made, then HMRC can make a penalty charge, usually a percentage of the outstanding amount. This percentage figure increases based around the annual turnover of the business.

There are a number of forms that a business is required to complete on an annual basis, and there are some that are required more often than this. These forms are issued by HMRC and need to be completed accurately or the business could face a penalty in the form of a fine. The good news is that there is also guidance available for each form to help you know what you need to complete and when.

CT14G – Corporation Tax

The CT14G form is sent when Companies House notifies HMRC that a new company has been formed. This form collects all the information that HMRC requires to get tax affairs into order for the new business and all relevant sections of the form are required to be completed in full. The form is completed if the business has had any activity and can also be used to notify of a dormant company that has been formed, but it is not yet trading. If the company is using an agent, this can also be advised on the form.

Information you will need to complete the form:

• Date of company formation (this is the start of the first accounting period for the business)
• Company name
• Reference from Companies House when company formed
• Address of the principle place of business if different from the registered address provided to Companies House
• What the company does
• The date the company draws up its accounts
• Details of the person the business was bought from if relevant
• Name and address of all directors
• Details of an agent if one has been appointed
• PAYE office and reference number if relevant
• Copy of Memorandum and Articles of Association
• Details of Charity Commission registration if the business is a charity
• Corporation Tax - Dormant Company

If you are submitting form CT14G and stating that the company is to be held dormant and therefore not making any income at this stage, then you will need to complete the Dormant Company Section of the CT14G form. This takes down information such as when the company will become active if known, if the company is a shelf company and if the company was formed to protect a company name with no intention of becoming active etc.

Filing Dates

Companies House and HMRC set the due dates for filing in different ways. You will have an 'Accounting Reference Date' given to you by Companies House, which is normally the last day of the month in which your company was incorporated. So for example if you formed your company on the 6th August, your Accounting Reference Date will be 31st August the following year.HMRC will give you an 'Accounting Period' for your company tax return and corporation tax. This usually begins when you start your business, and will end on your Accounting Reference Date.As a director of a limited company it is your job to legally submit a Self Assessment of your personal finances to HMRC on an annual basis. Your self-assessment return will be due by 31st January each year, but you can choose to file once you have your p60 from the previous tax year. Most tax advisors will recommend that you submit your self-assessment sooner rather than leaving it until closer to the deadline. HMRC are well known for being very busy during tax season, so if you have any queries regarding your self-assessment, it will be more difficult to get through close to the submission date.

P60

Your P60 is a summary of what salary you have paid yourself through your limited company. It will also show what tax has been deducted from the previous tax year. Your P60 is an important piece of information that you should keep secure. You may find your will need your P60 for completing the following paperwork:

• Completing a Self Assessment
• Loan or mortgage applications
• P11D form
• Reclaiming overpaid Income Tax or National Insurance
• Tax credits applications

A P11D is a form that list the details of any benefits and expenses claimed during the past tax year between 6th April – 5th April. You are required to submit this form to HMRC each year for the following people:

• All directors and employees of the company who earn over £8,500 per year
• Any director own owns more than 5% of shares in the company
• Even if your company only has one director (i.e. you) you still have to file a P11D.

Annual return/Confirmation Statement

Your annual return/confirmation statement is separate from your annual accounts. Your annual accounts contain mostly financial information, but your annual return/confirmation statement is more like a snapshot of your company that contains more general company information. As of the 30th June 2016, all registered companies are required to submit an annual confirmation statement – a new submission that has replaced the annual return.

CT600

You must file a CT600 return to HMRC once a year. This form contains details of your company’s income minus any tax allowances and expenses. The remaining figure after deductions will be your profits. Once your profits are known, HMRC will then calculate how much Corporation Tax your company owes. Your first Corporation Tax return is due 12 months after your first year end. There is a very useful guide to help you complete your Company Tax Return here.There is a full list of HMRC Corporation Tax Forms and associated guides here:https://www.gov.uk/government/collections/corporation-tax-forms

Having decided to be your own boss, you have to do away with the job search and all the stress that employees undergo. This kind of thought brings out the entrepreneurial spirit in you. However, the decision is yours when it comes to the kind of business you want to go into. You can choose to set up a limited company or to register as a self-employed sole trader. Here are some questions you need to answer to help you with the kind of business that is best for you.

What industry will you be working in?

The industry you get into plays an important role in how clients view your business. In some industries, it`s very common for freelancers to be sole traders. On this basis, clients are usually very happy to deal with them. For instance, writers or artists may decide to form limited liability companies. Clients prefer to deal with bigger organisations that are registered. The main reason for this is due to their transparency as the details of the company is displayed publicly in the company house.

How much paperwork do you want to do?

Whether you are a sole trader and the owner of a Limited Company, or you are a director of a Limited company, you`ll have to complete a self-assessment tax return with HMRC every year. The difference is that there will be extra paperwork for the director of a Limited company. The penalties for wrong filing of paper work are usually higher for the directors of a company than it is for sole traders. Limited companies must produce Year End Accounts (also called statutory or annual accounts) and also send HMRC a Company Tax Return and Companies House an annual return.Both limited companies and sole traders must register for VAT if their estimate for annual takings is estimated to be up to £81,000 at the year.

How much responsibility do you want?

As a sole trader, you are entitled to all the profits as long as you have paid tax and National Insurance contributions. However, you are responsible for the losses your business incurs. For this reason, you might lose all your assets if you eventually run into debt.If you form a limited company, you will be taxed for any money you withdraw from the business. More so, you have to record what you want to use the money for (e.g. salary or loan). As a director, tax and both employee and employer`s NI contributions will be deducted from your salary by PAYE. This means that you`ll pay more NI this way than you would as a sole trader. However, the benefit is that your personal assets are all protected against any debts your business may incur. Again, your legal liability is limited as well.

How much money do you need?

It is much easier for a freelancer to work for a big organisation or apply for business loans if he chooses the limited liability route. The Limited company gives you an edge due to its legal and financial protection.

Don`t forget you can change your mind.

If your decision is to form a limited company, we can help you with that. You will receive a certificate of incorporation indicating the registration date and the company number.However, if you choose to be a sole trader, you will need to register for self assessment with HMRC by 5th October following the end of the tax year. Contact us if you need more advice or information on registering as a sole trader.It is very possible to shift to the structure that suits you if the nature of your work or that of the clients you hope to attract, changes.For more information on this matter and lots more tax and financial news, see Your Virtual Office London blog today!

While they are two substantially different concepts, many new business owners dont fully evaluate the variances between equity and working capital which could represent a clear financial error.Indeed, according to specialists in the field, stockholders' equity and working capital operate two completely different areas of business.Stockholders' equity, strictly speaking, is nothing more than business assets. That is, the difference between assets and total liabilities of a company.Stockholders' equity, experts add, consists of the capital, which basically refers to the assets assigned by the members to the company in which participants, reserves, dividends, profits and, in general, all assets net for those entitled owners or partners of the company.In simple terms, equity is what actually owns a business.Working capital, on the other hand, refers to the operational capacity of firms, i.e. the implementation of activities that typically allow them to create benefits.While working capital also requires the comparison of assets and liabilities, the analysis has a short-term approach and does not consider the total assets and liabilities.In simple terms, working capital is the difference between assets and liabilities for the short-term flows of your business.

Current assets to consider:

- The cash at hand- Short term accounts receivable- The bank accounts of your business

Within current liabilities, you must include:

- Payable to suppliers- Taxes- PayablesThis working capital is needed to resolve unforeseen events that endanger the operating cycle of your business, such as machine breakdown or replacement of materials.In short, stockholders' equity refers to the actual value of the company, while working capital concerns what it has to remain active.

An essential concept in the financial management of business is cash flow. Financial analysts explain that cash flow refers to the resources generated by companies in a given period from its operating activities, investing and financing. The indicator is the result of the comparison of the financial inputs and outputs over a financial year.The measure of cash flow represents the ideal solution for companies to identify their value, assess their finances and make decisions for the future.Such measurement is the basic substance of cash flows. It portrays the sources and uses of money in circulation by companies, i.e. where it came from and what was used.The cash flow statement includes three types of activities:

1. Operating activities. This is the main source of cash for companies without considering those practices relating to investment or obtaining financing.

Within this category you have to consider:

• Collection of cash from the sale of goods and services
• Cash payments for the acquisition of goods and services
• Collections and payments made to ensure the operation of your business
• Lost income, be it interest or cash payments.

2. Investing activities. These are the activities that relate to the acquisition or sale of fixed assets.

In this category are:

• Payments and receipts inherent in the sale of machinery, buildings, equipment, and in general all those enduring intangible assets and fixed assets.
• Investments in debt management and loans made by your business.

3. Financing activities. These are the practices associated with the hiring of financial obligations.

In this section you should include:

• Obtaining external financing or any other source provided it is not operating an internal financing source.
• Cash payments for the obligations of your business.
• Disbursements, cash reimbursement or distribution partners of your company.

After analysing all these components, your company should know its liquidity. This means its ability to meet financial commitments and generate immediate cash.