What is a Directors Loan Account?
What is a Directors Loan Account?
A director’s loan account is an account that deals with transactions between a director and their company. What this means is that if the director pays an expense on behalf of their company, the company owes them this money. The reverse can also happen, if the company pays an expense on behalf of the director they then owe the company this money.
Over the course of the year there will be many transactions that will be included in the Directors loan account. When you pay something on the company’s behalf you are owed money, if the company pays something for the director then the company is owed money.
The balance of this account will be shown in your accounts at the end of the year. This will be shown as a creditor or debtor depending on the final balance.
Why is my Directors loan account overdrawn?
Your directors loan account will be overdrawn if you have borrowed money form your business or your company has paid for expenses on your behalf.
There are a number of ways that you can clear this overdrawn director loan account.
You can pay the money in to the company bank account and repay the money that you owe. This is maybe the easiest way to do this.
You can declare a dividend for the value of the directors’ loan account. When you declare a dividend the value of the dividend is credited to your directors’ loan account ready for you to take payment. If this is overdrawn it will reduce the amount. In this case you would not pay the dividend to yourself you would use it to reduce the amount owed on the Director loan account.
If this is not possible your company will have to pay S455 taxes on the value of the directors’ loan account. To avoid paying taxes under s455 the directors loan account will need to be repaid with 9 months and 1 day of the company’s financial year ending.
What is S455 taxes?
Using the information in your accounts and finances is an amazing way to motivate you staff. Getting them to buy in to the project that you are doing will mean that they are more engaged with the work and what they need to do each week and each month.
If you had access to the amount of money each month that you had to earn to make the profit that you want. Not just a number that you have in your mind but the number each month that you have to earn with the expenses that you are paying out and the projects that you had ongoing that you will be able to invoice in that month.
If you had that would you be able to prioritise your work to know what you had complete that month? Yes of course, you would be able to see what work you need to get done that month and the money that you need to be able to get paid.
Knowing that you can then give your staff the priorities for the work that needs to be done. You can see what work you need to get done to pay your staff at the end of the month and pay all your bills.
When you have your planning meetings you can use this to allocate the work through your team to make sure it gets done, giving each team member a goal and target that they need to complete. To explain to them where you are with the business and where you need to get to. You get them to ‘buy in’ to what you are trying to do with your business.
Isn’t that what you are trying to do with your staff, to get them to really get behind what you are trying to do with your business?
What do I need to do for my Director’s Loan account?
You need to know what you need to earn each month. If continually fall below this number your business will really struggle to make a profit. When you know this you can make decisions of what work needs to be done and who can do the work. You make the decisions based on the needs of your company and allocate them to your staff.
If you need to adjust the timescales of the projects that you are working on you can see if you need to move other work around to compensate. If you do need to move a project to the following month, how does that impact the cash you have coming in this month and do other projects become more essential to complete to make up the shortfall in money?
You will only know this when you start to use the finances of your business to make these decisions.
Giving these clear instructions to your staff will help them concentrate their efforts on the work that they need to do and how they should work during the day. It shows to them that they are all a valued and important member of your team when you give them responsibilities and deadlines to work to.
Can you help me?
Your director loan account with your company needs to be constantly monitored to make sure it is not going overdrawn and that you are owing the company money. You need to know what you can take out of your bank account and if anything needs to be refunded.
Generally keeping your business and personal expenses will help to keep these separate.
Keeping in control of your business as it grows will be a constant challenge unless you get professional help to keep you on track. Our virtual finance function will help you do just that.
It will help you keep in control of your finances as your business grows, relieving you of the stress that you do it yourself and will give you periodic meetings with your team so you can discuss any problems that you have. It will give you access to a team of bookkeepers, accountants and finance directors that can help you and your business get to grip with your finances so you can move forward with confidence.