As a small business owner, one of your most important tasks will be to keep track of your finances.
In some cases, you may be legally required to do so, but it is also a fantastic way to work out where you can cut costs and increase profits.
Many businesses prefer to concentrate on making sales and opt to outsource their bookkeeping to a specialist, which can be a cost- and time-effective investment.
However, if you’re intent on taking the DIY approach, then you will need to know where to begin.
Understanding the essentials
Firstly, you need to understand exactly what bookkeeping is and build from there.
Bookkeeping is the process of recording all financial transactions, including sales, purchases, receipts and payments.
It is essential that you accurately record your finances as you may need to submit your tax return to HMRC on a yearly basis. Furthermore, if HMRC need to check your tax return for any reason and you cannot produce the records that you used to complete the return, you may face a penalty.
In addition, if you don’t pay HMRC the correct amounts due in tax, you may also be charged penalties, or even interest on the amount you owe.
Finally, accurately recording your financial transactions will also allow you to see if a venture is profitable or not and if you have a healthy cash flow to be able to pay your staff, bills, and taxes on time.
h1 style=”text-align: left;” align=”JUSTIFY”>Recording your transactions
Before recording anything, you will need to decide which method of documenting your transactions works best for you.
There are three main options to choose from: manual, by spreadsheet or through accounting software.
Manual bookkeeping is a paper-based form of accounting, in which you record your income and expenses by hand. Specially-designed books for this purpose are available to buy online and on the high street.
If you find it difficult to use computers, this method could work well for you. However, the chance of human error occurring is higher and it can be time-consuming – not ideal for a small business owner.
Your second option is to record your transactions on a spreadsheet such as Microsoft Excel. This is a much quicker method than manual bookkeeping and it’s easy to create basic calculations to track your finances.
Your final option is to use accounting software. Doing so can make it much easier to manage your finances and there are many designed specifically for small businesses.
Accounting software — including mobile phone apps — can be connected to a business bank account and a payroll system, which means you can automatically track and match incomings and outgoings. Many pieces of software can also generate automatic reports for business owners if needed.
Cloud-based accountancy software packages, such as Xero, Quickbooks, FreeAgent, or Clearbooks, have the benefit of being accessible wherever you are, allowing you to track your finances on the go.
Plenty of software providers will also give you a free trial, so test out a number to see which one will suit your business best.
Or why not speak to your accountant and see which one they would recommend? It could save you plenty of time and energy, particularly as HMRC are looking to make the submission of tax returns, fully digital.
What data to record
Now you know which method of documenting your transactions works best for you, you will need to know exactly what to record.
You will typically need to keep three sets of financial records: the sales ledger, the purchase ledger and the cash book.
The sales ledger is a record of all your sales, both paid and unpaid. Make sure to keep track of all your unpaid sales invoices by keeping them separately.
The purchase ledger is a chronological record of all the purchases you have made as a business, paid or unpaid. Each purchase should be allocated to a specific category, for example motoring, lighting and heating etc. You should make notes on how they were paid, for example by cash, through a bank transfer or by credit card.
For sales and purchase invoices/receipts, you should record:
Date of the invoice/receipt
Name of the supplier/customer
What the invoice/receipt was for
Amount paid – if you are VAT-registered, also record the VAT paid and charged too.
The cash book is a record of all your actual income received and payments made. This is not just cash — as the name suggests — but can also include payments and receipts through other methods such as bank accounts and credit cards.
Keeping on top of your bookkeeping
Now the majority of your preparation is done, you are ready to start making your entries.
It is absolutely essential to stay on top of your bookkeeping, because playing catch up can be time consuming and lead to mistakes.
Some top tips include:
Introducing your bookkeeping system as early on as possible. As your business flourishes, you will find it more and more difficult to go back and catch up.
Regularly asking for and storing all receipts and invoices. If you can do this on a daily basis then you will save yourself a lot of hassle in the future.
Issuing invoices and statements to clients on a monthly basis. Not only will this look more professional to the client, but it will also help you to keep up with your transactions.
Hasib Howlader is the director of Howlader & Co, as well as a chartered accountant, chartered tax adviser and licensed insolvency practitioner.