Setting up a small business is an exciting time, but there’s lots to juggle. It’s easy in the early stages of your start-up to put bookkeeping to the back of your mind. Many small business owners think it will only take an hour or two to throw together the financial figures required for tax reporting or the year end accounts, but they are wrong.
Bookkeeping per se doesn’t have to be a headache. But it is a legal business requirement and is essential to help you keep up to date with the financial situation of your business, which you will need to know to make informed business decisions. Importantly, bookkeeping is something every business owner needs to tackle and it requires time and organisation.
Here I’ll be taking a look at what bookkeeping is and why it is important, as well as sharing some tips on how to keep your financial records up to date.
What is bookkeeping?
All businesses must keep track of income and expenditure, and essentially keep on top of cashflow. Bookkeeping is the recording of the business’s financial information. Your financial records enable you to see what money is going out and coming in. It’s a good habit to keep on top of your bookkeeping right from the start.
Some small business owners choose to do their own bookkeeping, others employ a part-time bookkeeper or outsource to a freelance bookkeeper or a firm of accountants. You don’t necessarily have to have a head for figures to do bookkeeping, but it helps if you have a basic understanding of bookkeeping and you are organised.
Many people choose to use cloud-based software for their bookkeeping, such as that offered by QuickBooks, Xero or Sage.
Why is bookkeeping important to a small business?
Apart from the obvious reason of having to report to HMRC, bookkeeping is essential for managing cashflow.
Oliver Spevack, chartered accountant and co-founder of OS Accounting, says “One of the biggest reasons start-ups and small businesses fail is because of fundamental shortcomings in their business planning and that includes managing cashflow, which is the lifeblood of any business. Without a positive cashflow, you can’t pay suppliers, staff or operating expenses.”
Up to date bookkeeping enables you to set goals and plan for the future more easily. It also enables you to evaluate the performance of the business and make informed decisions. If the financial information you need to make critical business decisions isn’t available when you need it, it’s much more likely you will make poor business decisions.
On-going analysis of expenditure can also help to make the business leaner and more profitable. Without that financial information effective business decisions can’t be made.
In addition, an investor will want to know how your business is performing and you will need to produce financial statements for that. Keeping on top of your bookkeeping means you will always be able to provide timely financial information.
5 tips for keeping your financial records up to date
1. Get the right advice: if you really aren’t up to the job, it is far better to hire a bookkeeper to do the job for you than fall behind and let your financial records get into a mess. Poor record keeping could cost you your business or a fine from HMRC. Find out more about the financial records you need to keep here.
2. Choose online accounting software to suit your business: there are lots of benefits of using cloud-based software. There are no set-up costs, you simply pay a small monthly fee.
You can also use cloud-based software on any device (computer, tablet, mobile phone) from anywhere with an internet connection. It’s also scalable and generally easy to use. It’s a good idea to choose a software package that is compatible with HMRC and ideally your accountant, as well as being suitable for your type of business.
3. Scan receipts: it pays to put all allowable expenses through your business as it will reduce your tax bill. However, sorting and storing receipts can be a real pain. As you are legally obliged to keep expense records and receipts for up to 6 years, that could mean a lot of filing space!
In most cases HMRC will accept scanned copies of receipts, so it makes perfect sense to do so (exceptions are documents that show tax that isn’t VAT, such as bank interest certificates or dividend vouchers). Most online accounting systems allow you to upload, record and organise your receipts.
4. Keep personal finances separate: keeping your business finances separate from your personal expenditure is vitally important. It helps you to be clear which expenses relate to what and should you ever find yourself under inspection by HMRC, it will make the process much easier.
5. Get into a routine: if you’ve decided to do the bookkeeping yourself, allocate a set time each week to do this and stick to it. It’s really important you keep on top of this task. Little and often is a better approach than leaving everything until the month end. If you notice things are starting to slip, it could be time you hired a bookkeeper or outsourced.