Small business bookkeeping tips for success

Get to grips with bookkeeping with our guide to setting up a system and using bookkeeping to keep track of cash flow, profit and loss and expenses.

If you're starting your own business chances are you'll be handling the day-to-day bookkeeping yourself.

While bookkeeping can feel like a mundane distraction from the excitement of running your company it's essential to the success of your start up.

Keeping on top of small business bookkeeping when starting up will save you time and money, and be less stressful in the long run.

Accurate bookkeeping provides a clear picture of how your business's finances are performing and flags up early signs of cash flow or revenue problems.

Without a finance or bookkeeping background, small business accounting can seem daunting but our small business bookkeeping tips will make it easier all round.

Keep business and personal finances separate

With any start up it's best to keep business and personal finances separate.

This is particularly important for limited companies.

A limited company is deemed a separate legal entity so you can't simply use its money for personal reasons even if you own the company outright.

There are also strict rules governing how you report its financial activity so it's best to have dedicated company bank and credit card accounts if setting up a limited company.

Even for sole traders, whose personal and business affairs are treated as one for tax purposes, a separate business bank account makes life easier.

Not only does it make your business appear more professional, there's no need to wade through personal finance statements to find the business-related items and expenses come tax deadline times.

It's also easier to prove to HMRC that any expenses you claim are purely business related - which can be tricky for home or hobby-based businesses.

If employing an accountant to complete your annual tax return, a separate bank account will make it easier and faster for them, which in turn may cost you less in fees.

When looking for a business bank or credit card account shop around for the best deal.

Banks typically charge a fee for business current accounts but many high-street banks offer up to two years' free banking for new business accounts or waiver the charge as long as you pay in a regular amount into the account.

Bookkeeping systems for small businesses

It's worth spending time developing a bookkeeping system to keep track of your business's finances.

This shouldn't be limited to keeping a ledger of income and outgoings.

You can use bookkeeping to monitor money owed to the business, money the business owes to others, staff costs and payroll, VAT and expenses.

Set aside a regular time each week for bookkeeping.

An hour or two once a week will pay off in the long run and give you a clearer picture of the financial health of your start up.

Over time successful bookkeeping helps you to make decisions such as the viability of expanding the business.

Choosing a small business accounting method

Before you start you need to choose a small business accounting method - either traditional accounting or cash basis.

With traditional accounting you record income and expenses by the date you invoiced or were billed, not when you paid or received the money.

Many small business owners prefer to report on a cash basis instead as this means you record income only when you receive money rather than when you issue an invoice.

Similarly you only record a business expense when you pay a bill.

The benefit is that you won't have to pay income tax on money you haven't yet received in your accounting period.

Basic bookkeeping tools to get you started

To get started with bookkeeping you can use a spreadsheet with columns for income, expenditure, VAT, payroll and so forth. There are lots of free or cheap online bookkeeping systems available:

  • Microsoft Excel - Powerful spreadsheet software is that costs around £80 per year as part of Microsoft Office 365, which also includes Word and PowerPoint.
  • OpenOffice - Free alternative to Microsoft Office, and includes a spreadsheet package called Calc, as well as presentation and word processing software.
  • Google Docs - Free online spreadsheet that has limited functionality but can be accessed via a web browser.
  • KashFlow - Subscription-based online accounting system that includes additional extras such as payroll tools, invoice submission and direct links to your business back account.
  • Xero - Online and mobile service that offers bookkeeping tools suitable for small businesses, including the ability to reconcile bank accounts with your ledger.

Keep accurate records

Creating and managing a spreadsheet or signing up to an online bookkeeping solution is only half the battle: staying on top of paperwork is every bit as important as actually running your business.

You'll need to be disciplined when it comes to organising your company's finances:

  • Keep a paper record of every business transaction - This includes invoices issued to customers, payments into and out of your bank account, receipts for business expenses and PAYE records if you employ people. If using traditional accounting methods, keep a record of the money that you're owed along with money that you've committed to spend but haven't yet paid.
  • Create a filing system for your paperwork - File paperwork as you go rather than hunting for pieces of paper when it becomes time to submit your annual self-assessment or company accounts.
  • Keep your records safe - As a sole trader you must keep your paperwork for at least five years after the 31st January submission deadline of the relevant tax year, as HMRC may ask to see it to check you're paying the right amount of tax. As a director of a limited company you can be fined £3,000 for not keeping adequate business records and even be disqualified. Records should be kept for at least six years from the end of the last company financial year which they relate to. In both cases, if paperwork is missing, be sure to inform HMRC that you're using estimated or provisional rather than actual figures.

How to keep track of business expenses

In the midst of running a new business, keeping on top of everyday business expenses and costs can be overlooked.

However, not keeping track of expenses can be costly and you could end up paying more tax on business profits as you haven't accounted for legitimate costs.

Tax is payable on the money a business makes after all allowable expenses - this is known as taxable profit.

The more expenses you record, the lower the tax liability as the less taxable profit your business will make.

Knowing what you can claim as expenses is tricky as different rules apply for different types of expense.

In general any costs directly involved in running your business are an expense.

This covers salaries including your own, payments to suppliers and for materials, outsourcing, marketing costs, travel and overheads.

If you use a car, van or other vehicle for your business, keep a record of when and why you used it for business, and the mileage of each trip.

If you work from home you can claim for a proportion of your rent or mortgage and domestic bills including telephone and internet charges, as well as gas and electricity.

You can also claim for capital allowances for buying equipment or vehicles.

A complete guide to expenses is published by HRMC.

How to monitor cash flow

Late or unpaid bills can dramatically impact cash flow and ultimately threaten your business' ability to stay afloat so it's vital that you keep on top of invoicing.

A good bookkeeping system will help alert you to potential cash flow problems such as late paying customers or invoices that haven't yet been issued.

Schedule invoicing as part of your weekly business finance routine and make it easy for customers to pay promptly with information on how to pay by cash, cheque, bank transfer or PayPal - and remember to include when payment is due.

Offering a small discount or other early payment incentive may see bills paid sooner which in turn helps boost your cashflow.

Monitor invoice payments, send regular reminders and have an action plan if invoices are left unpaid for more than 90 days, such as using a collection agency.

Ensure you have sufficient business funds to cover non-payment and late payments of invoices for at least three months.

Plan ahead to help business finances

Financial forward planning will help you avoid some cash flow and solvency problems, especially if your business is subject to seasonality or overly exposed to external factors such as international supply chains or currency movements.

Use your bookkeeping system to examine the liquidity of your business over time and use this to forecast its potential monthly profit and loss position over the coming 12 months.

This will help you to avoid taking money out of the company when flush only to find yourself short during leaner months.

Things you may need to consider include the costs of replacing business assets such as computers, machinery and vehicles (assess the lifespan of equipment) as well as increases in rents, production costs and stock inventory.

You'll also need to ensure you have sufficient cash to pay tax when it becomes due.

Unpaid tax incurs hefty penalties and interest.

Make a note of the tax deadlines, keep track of your likely profit for the year and put aside some money each month to account for projected tax liabilities.

Work with your accountant to schedule realistic tax payments and pay money on account so you can avoid sudden and unpleasant tax demands.

When to hire bookkeeping help

If you're struggling with bookkeeping it may be necessary to get professional help.

A good bookkeeper or accountant should save you more money than they cost and you can claim back their fees as a legitimate business expense.

Then you can get on with what you do best - making money for your business.

Looking for an accountant for your small business? See our free guide to hiring an accountant.

Expect to pay at least £200 for an accountant to help fill in your tax return but their up-to-date knowledge of tax laws and what can be claimed as expense can reduce your overall tax bill significantly - and you're saved the headache of completing tax forms yourself.

Of course, the more thorough your record keeping, the less work your accountant will have to do so the fewer billable hours you'll have to pay.

Remember a good accountant can do more than just file tax returns and accounts.

They can help you set up a good bookkeeping system and payroll scheme, advise on all aspects of your business's finances and help you raise capital to expand your business.

Want to learn how to manage your start-up’s finances? Check out our free online courses in partnership with the Open University on being an entrepreneur.

Our free Learn with Start Up Loans courses include:

Plus free courses on finance and accounting, project management, and leadership.

Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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