What are financial obligations in business?

Running a business comes with many different rules and regulations, as well as financial and legal responsibilities. So what are financial obligations when it comes to business? This article will look at the term and discuss what it means for small business owners, by looking at the following areas:

• What are financial obligations?
• What financial obligations do businesses have?

An obligation is something that you are required to do or a responsibility someone might have. So when it comes to financial obligations, these are the responsibilities company owners have that concern your businesses money.

Generally speaking, financial obligations will have a contract of some form attached. The contract makes it a legal responsibility, and it can be in the form of a physical contract (a signed document), a digital contract (for example, an invoice), or a government authorised responsibility (like submitting your taxes). 

If you do not meet your financial obligations then there could be legal consequences or fines involved. 

Financial obligations in business can mean different things. Here we will look at the most common types of financial obligations that companies of any size will have.

First, the most common type of financial responsibility that businesses have to manage is any debt. 

For example, a sole trader might take on a business loan to finance starting a business as well as purchasing a new vehicle and equipment to be able to start trading. The loan is considered a financial obligation because there will be a contractual requirement to pay back the money. If you do not make your regularly scheduled payments you can incur extra costs, fines and damage to your credit file — making it harder to get another loan or mortgage for a property in future.

Accounts payable also refers to money that your business owes. Accounts payable is an accounting method for totalling up the money that your business owes to other businesses that you haven’t paid yet.

The money you owe to other businesses could be a bill you have yet to pay to your regular suppliers, or invoices to companies you have contracted for work such as electrical maintenance or ad hoc repairs. Or it could be to any creditors you owe, including car agencies for leasing or hiring any work vehicles, Generally, your accounts payable items are things that do not accrue interest, like a bank loan. 

Accounts payable are effectively debts too, but they are not as likely to have a ‘contract’ aspect to them. But, you still are legally obliged to pay invoices or bills within 30 days (unless other payment terms are agreed with the business you owe).

It’s important to manage your accounts payable bills effectively and responsibly, as it could impact your business or your personal credit file. Paying regularly and on time is not only respectful to your creditors, and can help you create lasting business relationships because it helps build confidence in your business’ ability to repay what you owe.

One of the most important financial obligations that comes with running a business is to pay your taxes. Though there is no ‘contract’ so to speak, with HMRC, it is a legal obligation to pay tax on your income as a self-employed person. If you do not accurately declare your income and pay your tax bill then there could be severe penalties such as fines or even criminal proceedings if you’re found to have been avoiding tax.

If you are a sole trader you’ll have to submit an annual income tax return, detailing all revenue made from the business activities, and showing any expenses you are deducting. This means that you will receive an accurate tax bill and won’t pay any tax on items that you need to run your business, and you’ll only pay tax on the final profit you make.

If you are a limited company, you don’t submit a tax return as a self-employed person, but rather as a business owner through Corporation Tax. 

If your business turns over more than £85,000 you’ll also be legally required to pay VAT to HMRC too. Though there is no ‘contract’ involved you are still legally obligated to pay these taxes as an earner in the UK.

Lastly, if you operate as a limited company, you will be required to submit annual accounts to HMRC and Companies House. 

Company accounts are a summary of the business’ trading over its financial year.

The reports you have to submit as part of the company accounts are to show financial performance, and these documents will be made public. You’ll have to include a balance sheet, a profit and loss report, a director’s and auditor’s report, as well as any notes that help explain the financial performance of the business. 

However if your business is considered a ‘small business’ when compared to HMRC’s criteria, then you only have to submit a simplified version of the reports, and won’t have to include a director or auditors report. If you’d like to find out more about company accounts for micro-entities and small companies then use the links to see the government guidelines.

You’ll pay fines if you do not submit your company accounts on time, as this is part of the reporting obligations you must follow if you decide to register as a limited company.

Managing your financial obligations can take up a lot of your time when you’re running a business. Luckily there is software out there that can make monitoring your money much easier. Countingup is a business current account and accounting software in one app that can save business owners hours of accounting and bookkeeping admin. 

The app automates a lot of the time consuming manual tasks associated with your financial obligations. For example, it can help you create invoices in seconds, reconcile invoices once paid, automatically categorise your expenses and total up a tax estimate, so you’ll always know how much you owe HMRC.

Countingup is saving business owners hours of time-consuming bookkeeping admin and helping thousands keep on top of their finances. Find out more here to save yourself hours of accounting and financial admin, and get back to what you do best – running your business.