This is a guest post by Drew Davies, a London-based accountant who writes for Braant Accounting. All opinions expressed here are those of the author and do not necessarily reflect those of Bitbond.
All businesses need to keep a record of their financial activity that includes details of all transactions and a traceable record of the associated paper documentation. Some bookkeeping systems are more complicated than others, but all play the same role in the financial life of the company.
Keep Good Financial Records from the Start
Easy to say, but what constitutes good financial records? At the most basic level, your records must clearly indicate the movement of money into and out of your business.
So all income, who paid it when, and what it was for, must be noted right down to the smallest amount. Likewise, all business expenditure must be recorded in the same detail. Some businesses like to run a petty cash account to either pay for small daily expenses, or to reimburse staff when they have paid for items on the organisation’s behalf. There’s more on petty cash below.
There are various ways to record business income and expense for accounting purposes, including:
- Manually entering figures into an accounting ledger.
- Running a spreadsheet to keep track of numbers.
- Operating a cloud-based accounting system which normally involves a monthly subscription fee.
Whichever method you choose (and this may depend on the complexity of the records you need to keep, which differ across business models and whether you are a sole trader or a limited company), it’s important to maintain consistency and update the record on a daily basis.
Accounting for Petty Cash
Petty cash accounts are convenient when a business makes regular small purchases or needs cash available to reimburse the business expenses of staff. But petty cash still needs fully accounting for in business records.
You’ll need to have a policy which states what items can be charged to petty cash, then set up a separate section in your accounting system which records the movement of cash. Keep all receipts for petty cash within that system.
- Have a petty cash book and balance it regularly to make sure all transactions are accounted for.
- Whoever authorises petty cash should not be the person in receipt of the money.
- Decide how much petty cash you’ll hold, and then top up from the main bank account when necessary to maintain this amount.
Running a petty cash account can help in some businesses, but in other’s it’s an unnecessary layer of bookkeeping. If you don’t need a petty cash account, don’t have one.
Get Receipts for Everything
Very small expenses often go by the board, but if they’re totted up over a year, can run to surprisingly large sums. Even things like bus fairs and postage all add up. Make sure you get a receipt for everything (or keep your bus tickets and make sure staff keep theirs if you pay their travel expenses to and from work, for instance in the case of volunteers).
HMRC will accept digital copies of receipts, so you could reduce the amount of paper held in records by scanning or photographing documents then storing them in electronic form. Digital records can easily become confusing, so work out a system from the outset that will help you stay organised.
- Define a file naming convention and never deviate from it.
- Organise digital files logically. You may choose by month, by client, or by type, whichever is most useful for your individual needs.
- Backup digital copies to an external hard drive as insurance against computer crashes or cloud storage suppliers going out of business or getting hacked.
Save Time by Grouping Invoices and Receipts by Type
Businesses generate a lot of paper, even in those that take full advantage of cloud accounting. Some business owners just can’t find time or energy to keep the books themselves, preferring the services of a bookkeeper to keep everything in order.
If this is you, it will save time and money if the task of sorting everything out is made simpler for your bookkeeper. Each transaction needs to be fully explained in bookkeeping records, which means categorising each one.
To this end, group all your invoices and receipts by nature of the type of expense. You could, for instance, have separate boxes or folders in which you’ll keep all paper relating to travel, hospitality, rent or any other type of transaction.
Keep Tax Money Aside
Unless the income from a business is very small, there will be a tax bill at the end of the year. If the tax bill is greater than £1,000, there will also be a ‘payment on account’ to be made. This is calculated at 50% of the previous year’s tax and goes towards payment of the tax bill for next year. Payments are made at the ends of January and July. Any sums still outstanding after payments on account are made will fall due at the end of January the following year. Working out exactly what you owe can be a little tricky, which is where the services of an accountant can prove invaluable.
It’s easy to ignore upcoming tax bills, but the amounts owing are much easier to find if you make it a business policy to set aside 25% of all earned income throughout the year.
By the time the bill falls due, you’ll either have money left over or a smaller amount to find if the bill is larger than anticipated. Either way, it will take the terror out of the looming tax bill.
Keep Business and Personal Finances Separate
For sole traders especially, there’s a great temptation to run business and personal finances from one personal bank account. All the money belongs to the business owner (unlike a limited liability company where the company is treated as a separate entity), so why complicate matters by running two bank accounts?
The problem with mixing business and personal finances is that at the end of the year, when the tax return has to be submitted, all the transactions will need separating anyway. It can become a time consuming and costly bookkeeping exercise to go through personal bank statements to pick out the business expenses and transactions. It is much better to treat them separately from the start and set up a bookkeeping system that’s easy to understand and update.
Consider Becoming a Limited Company
Limited companies offer many advantages over being self-employed, although they take more careful monitoring and setting up from the outset.
Some, but not all, of the advantages include:
- Potential tax savings — Limited companies pay corporation tax of 20%, but individual salaries can come partly from dividend payments which are not subject to NICs.
- The business entity is separate from your own, so you are not personally liable for business financial losses if things go awry.
- Limited companies can have a more professional standing in some quarters, depending on the business type. Some larger corporations are reluctant to do business with sole traders.
- A further tax advantage comes from pension funds, since employee pension fund payments are a legitimate business expense.
Choose a Bookkeeper to Update Your Books
People commonly confuse the roles of bookkeepers and accountants:
- A bookkeeper maintains financial records on a daily basis.
- An accountant will take information in the books and records maintained by the bookkeeper, and perform the necessary analysis and evaluation to provide deeper insights into the health of the business and complete your tax return.
The records a bookkeeper creates are the tools the accountant uses to calculate taxes due, areas where savings could be made, or to glean insight into business dealings that could be streamlined or made more profitable. An accountant can gain a deep understanding of the business and from this offer higher end business advice and guidance.
Hiring a bookkeeper makes sound sense for those who find maintaining records a chore. It is, however, important to discuss exactly what the bookkeeper needs from you, and how they prefer you to present the information they need in order to work efficiently. Many small businesses find that hiring part time bookkeeping services is plenty to maintain thorough and accurate records throughout the year.
Keep Key Details to Hand
When you register as self-employed or set up a limited company, you’ll be furnished with some important bits of information that it’s vital you retain. These include:
- UTR — this is your Unique Taxpayer Reference number. It consists of 10 digits and is issued by HMRC when you register for self-assessment tax purposes (meaning you need to fill in a tax return). Once you have a UTR, it’s yours for life. If you stop using it by pausing or closing the business, it will lie dormant but will still exist. Should you start the business again, it will be reactivated. A UTR is also issued to limited companies, and is needed when your accountant files your tax return.
- National Insurance — there are countless times when you’ll need your national insurance number. Keep it safe or learn it by heart. When you register a new business you will automatically register for Class 2 National Insurance.
- PAYE — tax can get confusing if you’re both employed and self-employed, and in today’s gig economy the lines are often blurred. Your PAYE code determines your personal allowance before tax, and you can instruct HMRC to allocate all your personal allowance to your paid employment. This means you’d pay tax on all income earned from self-employment as declared on your tax return.
Take a Course or Hire a Professional
Because bookkeeping is a legal requirement when you’re in business, it’s wise to make sure you know how to do it. Short courses are available in which you can learn the basics, but it’s still a commitment many business owners find cumbersome. Hiring a professional bookkeeper to maintain the daily records, and an accountant to fine tune the details and claim all your deductibles in your tax return, leaves you free to pursue business interests that go beyond the mundane, daily record keeping tasks.