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Going self-employed is one of the most exciting things a person can do professionally, but some of the most important aspects – like taking care of your small business accounting – can be a little daunting for complete newcomers.
Thankfully, the process isn’t as scary as you might think. We’ve been helping people get to grips with their new responsibilities as a small business owner for over a decade, and we’ve broken down the 10 key steps you need to take to successfully take care of your small business accounting.
We’re assuming that you’ve already made the decision about how to structure your business, so you’ll know whether you’re a sole trader or a limited company. If you’re not sure which is better, we’d suggest starting by reading our article: ‘Sole trader vs limited company: which is best?’.
The first and most important step is setting up a dedicated business bank account. Organisation is vital to managing your business finances, and muddying the waters by mixing up business and personal transactions in your bank account is only going to make your life harder.
Which bank you open an account with is entirely your choice. It’s always a good idea to shop around for the best value, and compare the newer challenger online banks as well as the traditional High Street banks. If you become a Crunch client, you can enjoy exclusive benefits and discounts from our banking partners at Barclays and Metro Bank.
You’ll also want to make sure that you have a business debit card (or at perhaps a business credit card) as paying by card helps build up your credit profile for your business and means everything is recorded in the bank’s online records.
As we go on, the benefits of setting up a dedicated business bank account will become clearer and clearer, but if you’d like more information on opening a business bank account, check out our dedicated “Opening a business bank account – How and why you should do it” article.
Establishing a system to record your business expenses is another key step in keeping your business finances organised. In fact, one of the most important reasons to set up a separate business bank account is to help keep track of your business expenses.
HMRC’s general rule of thumb when it comes to determining what does and doesn’t qualify as an allowable business expense is simple: is the purchase made wholly and exclusively for business purposes? As you can imagine, with parameters that broad, any number of items can be claimed as a business expense, including uniforms, laptops, furniture, and industry equipment.
Managing your expenses is where the old stereotype of a shoebox full of receipts came from, but thankfully, those days are long gone. We’d recommend either using dedicated, online accounting software, such as our very own Crunch packages that combine software, service, and accounting advice for sole traders or limited companies.
If you’re just starting out as a sole trader or limited company and only want simple bookkeeping software, our free Crunch Free bookkeeping software is the answer – it even allows you to issue invoices and record expenses.
If you’re not ready to start using online tools to make your life easier, then we recommend that you at least use a spreadsheet – we have a free business expenses spreadsheet that can get you started on this vital practice. We’ve got an article with some great tips on how to keep your records secure and backed up in case you ever have to prove your records to HMRC.
Whichever method you choose, it’s vitally important to keep your records up to date and make sure you claim all of your business expenses to stay as tax-efficient as possible.
You can read more about the expenses you can claim as a sole trader or as a limited company in our two dedicated articles, and if you’re looking for a simple, affordable solution, you can find out more about Crunch Free on our bookkeeping software page.
Bookkeeping is all about recording your incomings and outgoings. It’s one of the most important financial management tasks you’ll have to undertake as a small business owner – play fast and loose with your bookkeeping, and you’ll lose track of how much cash your business has to pay your taxes or to keep your business going.
Bad bookkeeping has spelt the end of many a small business in the past, so learn from the mistakes of your peers and get into a bookkeeping routine early. Whether you decide to spend half an hour each day updating and balancing your books, or whether you choose to block out an hour or two at the end of each week, establish a routine and stick to it. You’ll thank yourself in the long run.
Once again, setting up a business bank account will help you enormously here, as will dedicated online bookkeeping software like Crunch Free, which can help you keep track of your finances in a secure, stylish, and simplified online cloud storage system. You may even want to look at getting yourself an accountant or bookkeeper to help you with your business finances, but we’ll get to that in just a little bit.
This is the exciting one: paying yourself! Deciding how, and how much to pay yourself will depend heavily on whether you’re setting up as a sole trader or a limited company, so please check out our “How much should I take as a salary from my limited company?” article and “How to pay yourself as a sole trader” for full details.
In short, though, as a sole trader, you can simply take money from your business account as ‘drawings’ to pay yourself. This is, once again, where a separate business bank account for your sole trader business comes in handy. You need to make sure you keep records of what you withdraw from the business while remembering you also need to put money aside for the taxman!
As a limited company, the most tax-efficient way to pay yourself is usually by taking a combination of salary (below the relevant National Insurance threshold) and dividends. The salary will be paid to you as a director, in the same way as if you were a regular employee of your company.
This means you’ll need to set a payroll scheme (or use accounting software like Crunch that does it for you), but we’ll cover that in just a second. Salaries are an allowable business expense for limited companies, meaning they’ll reduce your company profits and therefore the amount of Corporation Tax your company has to pay, so paying yourself a salary is usually a good idea!
Managing your bookkeeping and understanding your cashflow will also play a huge part in determining how much you can afford to pay yourself without leaving your business short. You can also check out our handy “How to pay yourself” business guide for all the information you need.
If you’re a company director looking to pay yourself a salary, or you have employees (even as if you’re set up as a sole trader), you need to think about the best way to set up a payroll system.
You need to make sure your employee payroll system is Real Time Information (RTI) compliant if you want to stay on the right side of HMRC (which, trust us, you absolutely do). If you need any further support with payroll, we provide our very own RTI compliant payroll service for Crunch clients, which you can learn more about on our dedicated payroll page.
Your next big task will be to understand the various tax obligations that come with running your own business. Once again, these will vary depending on your business structure, so we’d recommend taking a look at our sole trader and limited company articles for a more extensive breakdown of your tax obligations, we’ve also got an article on all the Small Business taxes you’ll need to be aware of.
Regardless of your set-up, you’ll need to file a Self Assessment with HMRC every year (the deadline is the 31st January following the tax year end on 5th April for online submission). A Self Assessment is HMRC’s way of finding out how much Income Tax and National Insurance you need to pay on any income which isn’t taxed at source.
We always recommend you file your Self Assessment early, as HMRC are regularly inundated with calls and support requests from people trying to file in the final few days before 31st January.
You may have other tax obligations to consider, such as import tax if you’re bringing in stock from overseas, or business rates if you have business premises.
If you’d like further information on how to file a Self Assessment, check out our jargon-free guide. We even file Self Assessments on behalf of our clients here at Crunch, so if you’d like to explore this option, be sure to give our friendly advisors a call for more information.
This point goes back to our earlier advice about managing your bookkeeping. While bookkeeping is mainly to keep track of your incomings and outgoings, understanding your turnover, profit, and cashflow has more to do with accountancy. We explain the key differences between bookkeeping and accounting in our article “What is bookkeeping and why does it matter“.
Your turnover is your total net sales over a certain period, for example a financial year. Net sales is simply adding up all your invoices and subtracting any refunds or discounts you gave to your customers. One important thing to keep an eye on is if your turnover is getting near or goes over the VAT threshold of £85,000 in a 12 month rolling period. If it does, this means you must register for VAT. There may be good reasons why you might want to voluntarily register for VAT, and an accountant can help with this, as well as advising which VAT scheme you should register for.
As part of analysing your profitability, you might want to keep an eye on things like your profit margin, how much you make compared to your costs (expenses). You could look at how much you’re charging clients, which clients are most profitable for you – and maybe get rid of the least profitable or most difficult to work with, especially if you have any habitual late payers.
You should also periodically take a look at all your suppliers to make sure you’re getting value for money and not still paying for services you no longer need. No one wants to end up as a zombie company!
The third area to keep your eye on is cashflow. At its simplest, cashflow management means ensuring the amount of cash coming into your business is greater than the amount going out. This allows you to build up a cash reserve to see you through a period when your income is reduced.
We’ve got an article with a range of measures you can take to improve your cashflow, along with a handy spreadsheet to help you understand and forecast the cashflow of your business.
You need to be on top of all three of these metrics, although there’s an old saying – “Turnover is vanity, profit is sanity, but cashflow is king.” Running out of cash is never good news for a business!
You may not be aware, but there are a number of grants, loans, and forms of support available to new small businesses that you could be taking advantage of, including a Start-Up Loan or the government’s New Enterprise Allowance.
If you need a little bit of financial assistance to get your new business off the ground, or to fund the next stage of its growth, it’s worth checking out our “Financial help for your business” article for a complete rundown of the support on offer to you. It could be just the shot in the arm your business needs!
Now look, obviously as an online accountancy service we would say this, but we still speak the truth. Getting an accountant is the very best way to set up and keep on top of your bookkeeping and small business accounts.
An accountant will remind you of important tax dates and payments due, show you ways of keeping your accounts in excellent shape, advise you on allowable expenses and how to report them so you’re as tax efficient as possible.
They can help you with things like estimating how much tax and National Insurance (NI) you’ll need to pay every six months, or quarterly for VAT. They’ll also help to ensure you’re not forgetting a payment on account, which catches many people out every year.
Here at Crunch, we combine our bespoke online accounting software with real human beings to give you the best of both worlds. Check out our comprehensive suite of accountancy packages, or speak to one of our friendly advisors to discover which package is right for your business.
As with anything in life, the real key to success is learning and improving. All of the steps we’ve outlined above are hugely important in managing your small business accounting, and some will require a little time and a lot of hard work to get into the habit of. With all of that said, wherever your self-employed journey takes you, there are lessons to be learned and ways you can improve.
If you find yourself falling behind on your bookkeeping, or struggling to make sense of your business finances, or you just want to focus on the things you love rather than your accounts maybe it’s time to get an accountant.
If you’ve left your Self Assessment to the last minute for the second year in a row, learn from the aggro and set reminders for September/October and get it done before Christmas next time.
We could go on and on, but ultimately, as your business grows and you gain experience as a small business owner, managing your accounts will become easier and faster – especially if you laid the groundwork we’ve outlined for you in this article.
Don’t forget, if you need help with your small business accounts, our Crunch advisors are always available to talk you through our suite of online accountancy packages. You can also check out over 450 supportive, jargon-free Knowledge articles (just like this one!) and dozens of free business guides.
You can even join our free, self-employed community, known as Crunch Chorus! As a member, you’ll get access to all those brilliant guides we mentioned earlier, as well as free tools and resources and our monthly newsletter. You can also join our Crunch Chorus Facebook group to start interacting with thousands of people just like you!