Keeping the accounts
You need to keep accurate records of the money flowing in and out of the business. Some people just throw all the paperwork into a box and give it to their accountant at the end of the year. There are three big reasons why this is a bad idea:
- It takes your accountant a lot of time to sort out – so you have to pay a much higher fee.
- You don’t have the day-to-day information you need to run the business. Cashflow – the money flowing in and out – is vitally important. Even if your business looks profitable in the longer term, you can go bankrupt if the cash does not come in quickly enough.
- HMRC expect you to keep accurate records to prove you are paying the right amount of tax. They can choose to inspect your business at any time.
Book-keeping Basics – the traditional approach
- Choose an accounting system.
- Record every bill you receive and every receipt for cash purchases.
- Record the payment when you settle the bill.
- Record every invoice or cash sales receipt you issue to your customers or clients.
- Record the money received when your invoice is paid.
- Include any other business expenses such as payroll.
- At the end of the month, reconcile all these transactions against the bank statement and against the amount of cash on hand. That means going through the bank statement line by line to check that you have recorded everything accurately.
The cloud variation
Two fairly recent developments make possible an improvement on the traditional approach:
- Internet banking allows you to download a digital file of your bank transactions whenever it is convenient for you.
- Some modern accounting packages provide the facility to upload this digital file into your accounts, so that you can use it to create the payment transactions and to check for errors more often.
Many people prefer this to the traditional approach:
- there isn’t the big workload at month-end
- reconciling nearer to the event makes it easier to correct mistakes
- it feels more like a game – some even find it fun!
Cloud-based accounting systems
Older book-keeping systems, such as QuickBooks and Sage, when used for a very small business, run on a single computer and can only be accessed in one place. Typically they were designed with trained book-keepers in mind, and are not easy for the harassed entrepreneur to deal with. There is now a new generation of cloud-based systems, for which you usually pay a monthly or yearly subscription.
- They are easier to use, especially if they offer uploading of bank tranactions.
- You do not have to do anything to update them if tax changes are introduced.
- Some of them go beyond basic book-keeping to help you prepare your tax returns.
- Competition between them means that they are continually improved.
Next step: choosing your accounting system.