For many people, bookkeeping is seen as a tiresome grind, rather than a key part of running a small business.
But like it or not, no matter how talented and hard-working you are in other areas, you won’t be able to run your business for very long without a sound knowledge of how your finances are doing. Plus, staying on top of your small business taxes from the offset will prevent headaches further down the line - especially if you're in your first year of trading.
In this article, we’ll be looking at ways to ensure that bookkeeping is less of a mind-numbing and time-consuming chore. We’ll explore how good bookkeeping practices can make your life much easier.
Why is bookkeeping important?
If you’re self-employed in the UK, you need to file a Self Assessment tax return every year. This is used to declare your earnings from employment and other income to HMRC, and calculate how much tax you’ll need to pay. In order to do this effectively, your bookkeeping must be properly organised.
If you have aspirations of expanding your business, good bookkeeping practices can help you prove its profitability to investors, new partners, and banks.
Even if you have an accountant, they’ll still need you to keep on top of your bookkeeping (such as recording your invoices and expenses) as they simply can’t do their job without knowing your income and outgoings.
Keeping on top of your bookkeeping
Like any task, bookkeeping is far less time-consuming and confusing if it’s done regularly.
Of course, this advice doesn’t stop many hundreds of thousands of self-employed individuals from submitting their tax returns on deadline day every year.
How much time you deem sensible to get all your paperwork in shape is up to you. A quick few minutes every day, or a designated time-slot each week is good practice. Failure to sort it out in a timely fashion could result in you paying more tax than necessary, or even worse, being penalised for missing a deadline.
Tracking & recording your expenses
One of the first things any bookkeeping expert will tell you is that, where possible, it's better to use a debit or credit card for transactions rather than cash. You can examine your bills to keep track of when, where, and how you’ve spent, making logging your expenses much easier.
It’s absolutely essential to make sure you have a dedicated bank account for your business. You don’t want to be dipping into your own money to pay for company expenses, or vice versa.
Of course, it appears easier and more convenient at first to use one card for both work and your personal expenses, but as you get busier, it’ll definitely get a lot more bothersome having to rummage through and decipher all of your bank statements, trying to remember whether the £3.99 you spent in Tescos the evening of the fourth at 7:23pm was a business or personal expenditure.
With that said, for some items, paying personally can save you a lot of time. When an item is paid on the company account, the expense recorded in your company accounts needs to exactly match the amount and date for the transaction on your bank records. Personally paid-for items can be lumped together, and the expense entered once per month, rather than multiple transactions.
For example, personally paying for train tickets means you can add up the total for travel and claim this once per month, whereas paying with the company card would mean you need to add a separate transaction in your accounts for every payment.
HMRC may ask to see receipts, and you’ll be in seriously hot water if you don’t have anything to provide, so make sure you’re keeping evidence of all your business expenses.
Printed receipts get lost or worn out easily, so it’s a good idea to scan and back them up. HMRC accepts digital copies, so take a snap of the document and file it on your computer or online drive with the date clearly labelled. This will greatly improve productivity and speed for when you have to find the proverbial needle in the haystack.
Tips to help you manage your bookkeeping
Update your accounts whenever an invoice is paid
You can avoid chaos by separating your invoices into four date-ordered sections when filing them:
- Sales Paid
- Sales Unpaid
- Purchase Paid
- Purchase Unpaid
This will help you avoid desperately shuffling through an unorganised pile later on.
Put money aside
Completing a last-minute tax return only to discover you don’t have enough cash to cover your bill is a classic error, and one that can be easily avoided by making sure you have the right amount of cash in a savings account at all times. Be sure to divert a percentage of every invoice into a savings account when your clients pay and you’re ready to rock on tax payment day.
Beware of changing currency rates
If you need to record an invoice or expense in a foreign currency, be aware that foreign exchange rates fluctuate all the time. So make sure you record the amount that arrives in your bank account, and if you’ve been abroad, be sure to keep all your receipts from the trip.
If you’re VAT registered, you must submit information about the VAT your business pays and collects to HMRC using MTD-compatible software. Some accountants will need you to record everything using online accounting software like Crunch Free.
The greatest selling point when it comes to online accountancy software is how easy it is to enter and access information about how your company is performing. Of course, your software won’t be able to do it all by itself – you’ll need to keep things up to date, but this usually only requires small, regular efforts from you.
As with anything, you’ll get out what you put in – for those dedicated to keeping everything updated, you’ll be rewarded with simple, clear, and accurate information regarding your business finances and tax obligations.
With your business information stored neatly and accurately online, you’ll be able to quickly work out exactly what your tax liabilities are and how much you need to set aside to pay HMRC.
This is an invaluable asset for a lot of small business owners – with a clear idea of how much you’ll be expected to pay in Corporation Tax and VAT for your business, you’ll be able to budget with absolute confidence.
Bank reconciliation is an important part of life as a small business owner. It’s a small, simple job that can have a big impact on your records and tax liabilities.
To reconcile your bank statements, you need to get all your bank transactions and match them against your recorded expenses and sales invoices. This can be frustrating work, especially since even a single missing penny can cause disarray. With online accounting software, the job becomes far, far simpler.
At Crunch, we have secure links with a number of banks, so you can have all your business banking transaction data imported straight to your accountancy software, which then intuitively suggests a match in the expenses you’ve recorded or highlights any discrepancies. There’s no need to dig around for paper records and drawers of receipts – you can just rattle through your bank reconciliation in a few mouse clicks, safe in the knowledge that everything is accounted for.
Choosing an accountant
When your bookkeeping is in good shape, your accountant can help you with things like making tax-efficient decisions such as how much to pay yourself, what business structure is right for you, and whether you should register for VAT.
It makes sense to consider appointing an accountant the moment the toiling over your paperwork costs you business. By putting an expert in charge, you’re freeing yourself up to run your business how you imagined it would be without all the complicated number-crunching getting in the way.
While this post will have given you a few things to think about, bookeeping for your small business need not be a chore - and we're already debunking this with our top 10 tips on simplifying your small business accounting. Crunch’s expert accountants are always on hand to provide support tailored to your small business, from answering questions on business expenses to proactive advice on getting the most out of your accounts.