How do you maintain bookkeeping?
Few people start a new business so they can do paperwork. Spending time adding up receipts or pushing invoices around a desk is nobody’s idea of fun – unless you’re starting up as a bookkeeper or accountant!
Being on top of your bookkeeping will also help you maintain a healthy cash flow within your business, and allow you to spot trends in your finances early on.
Being able to spot potential financial problems before they become critical is invaluable as you grow your business.
Accounting plays a vital role in businesses of every size. Still, it often becomes a low priority for small business owners, specifically, as they juggle all the other responsibilities of managing and maintaining day-to-day operations. However, accounting should never be treated as an afterthought.
Maintaining balanced books can help financially forecast months into the future and alert you to potential financial gaps. The right accounting insight could even help you save your business in case things get tough.
One reason accounting often gets put on the back burner for small businesses is that it’s tedious and intimidating. 40% of small business owners feel that financial management is the most difficult part of operating a business. When accounting mistakes occur, it can halt the growth of your small business and put you on shaky ground.
In this post, we’re rounding up the best accounting tips to avoid common mistakes that could have a detrimental impact on your business. Once you’re operating with clean books, you’ll reap the benefits that come with it.
Three Steps to Keeping Your Books
The actual process of keeping your books is easy to understand when broken down into three steps.
- Keep receipts or other acceptable records of every payment to and every expenditure by your business.
- Summarise your income and expenditure records on some periodic basis (daily, weekly, or monthly).
- Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you’re making or how much your business is worth at a specific point in time.
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are the same.
Step One: Keeping Your Receipts
Each of your business’s sales and purchases must be backed by some record containing the amount, the date, and other relevant information about that sale. You’ll use these to create summaries of your transactions.
From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you’ll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be.
Step Two: Setting Up and Posting to Ledgers
A completed ledger is nothing more than a summary of revenues, expenditures, and whatever else you’re keeping track of (entered from your receipts according to category and date). Later, you use these summaries to answer specific financial questions about your business, such as whether you’re making a profit and, if so, how much.
Post receipts regularly. On some regular basis — like every day, once a week, or at least once a month — you should transfer the amounts from your receipts for sales and purchases into your ledger. This is called posting. How often you do this depends on how many sales and expenditures your business makes, and how detailed you want your books to be.
Your posting schedule depends on your sales numbers. Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands of dollars every day should post daily. With that volume of sales, it’s important to see what’s happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day’s sales to a computerised bookkeeping system at the push of a button.
A slower business, however, or one with just a few large transactions per month, such as a small website design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.
If possible, use accounting software. You can purchase an accounting software program that will generate its ledgers as you enter your information (and then automatically generate the necessary financial reports from the same information). All but the tiniest new business are well advised to use an accounting software package to help keep their books. Micro-businesses can get by with personal finance software such as Quicken.
Step Three: Creating Basic Financial Reports
Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way: while your income ledger may tell you that your business brought in a lot of money during the year, you won’t know if you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time.
That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business. The key reports you need to create regularly are a cash flow analysis, a profit and loss forecast, and a balance sheet. (Both QuickBooks and Quicken Home and Business, as well as other accounting software, can provide these regular reports.)
Keep proper financial records.
Your accountant will advise about what your business specifically needs. But in general, you should maintain three sets of records. These are:
The payments into and out of your bank account. Keep it up-to-date, and after a few months, you’ll be able to use it as a forecasting tool rather than just a historical record.
Sales invoice file
If you use an accounting package, you can use them to issue and store invoices. If you do them manually using Word, keep a record on file. Store invoices in chronological order. Keep those who haven’t yet been paid at the front of the file to help your credit control.
Online accounting systems such as FreeAgent will upload scanned invoices to ‘The Cloud’, so you have no worries about losing your files if your store them locally.
Purchase invoice file
Get used to making notes on invoices about when you paid them and how (BACS, cheque, cash etc.). File them in chronological order. This will make your life easier and keep your accountants’ bill down.
Get an invoice or receipt for everything you buy
Statistically, the longer you are in business, the higher your chances of a VAT or tax investigation. They’re normally nothing to worry about as long as you have a professional accountant on your side and all your paperwork to hand.
Get used to keeping a piece of paper for every transaction if you buy something online print off the invoice. It’s easier to collect paper as you go along, rather than try to find it years down the line.
Keep your accounts clean – separate business and personal expenses.
If you run a limited company, the business’s money is not your own – even if you own it 100%. As a director, you can’t spend the company’s money on your purchases, unless they are a legitimate business expense.
As a self-employed person, you take drawings from your business, but you should still maintain a separate bank account. Keep your accounts clean by keeping your business and personal finances separate.
Check bank statements
You should spend time checking your bank statement every month. Apart from combating the risk of fraud or a mistake by your bank, you will gain a better understanding of where you are spending money.
Successful businesses have great credit control and are spending money – make this a habit from day one.
Put time aside to do your bookkeeping regularly.
When you are starting, it’s tempting to leave your bookkeeping until the evenings. But if you’re tired, simple tasks will take longer, and you’re more likely to make mistakes.
If you need to tackle a job like this outside of working hours when you could be earning money, then consider getting up early one morning, or doing it on a Saturday morning. Make it a regular day to form a habit.
You may well find that using a suitable accounts software package takes much of the pain away. ByteStart’s Guide to Choosing the Right Online Accounts Software for Your Business will help you to understand what you should look for in an online accounts package.
Get help with your finances – hire a bookkeeper or accountant.
If there’s one area you shouldn’t skimp on professional help, it’s with your finances. A good accountant will save you more money than they cost. If they can’t, or they’re not proactive enough, fire them and find a new one through personal recommendation. Professional codes of conduct make it relatively easy to switch accountants.
If you are struggling to keep up-to-date with paperwork, consider hiring a bookkeeper to get your books in order regularly. Not only will they reduce your accountancy bill, but they will potentially help you earn more money.
Prepare Financial Statements
In previous accounting tips, we have looked at the different kinds of financial statements a business prepares. Some examples of this are the balance sheet, income statement, and cash flow statement.
On a monthly or quarterly basis, you should prepare each of these financial reports because they will help you analyse the health of your business from different angles. The balance sheet shows a snapshot of your business’ assets, liabilities, and equity at a specific moment in time. The income statement, on the other hand, shows the income and expenses that took place over a defined period, as well as your business’ “bottom line.” And the cash flow statement allows you to see how your cash balances have changed over a period.
If you were a publicly-traded company, you would be required to produce financial statements on a quarterly or annual basis for your investors. Since you (probably) don’t have this requirement, it is up to you to decide how often this kind of report should be made for your business.
Look to the Future
When you compile a monthly financial report, use it to help anticipate your business’s financial trajectory. This could involve identifying upcoming costs, such as tax payments or legal fees. It may incorporate more nuanced plans for company expansion, including budgeting for new hires and higher rent.
Forecasting, in this way, can enable you to utilise existing assets effectively. It can also help you confidently plan for other significant milestones in your business’s evolution. Forecast effectively by analysing your financial data every month. Data-backed analysis can ensure smart investment moves.
In practice, trying to keep accurate accounts is a complex process. As your business grows, this process becomes even more stressful. A single transaction you make can involve multiple entries into several of your different accounts. When there are hundreds of these kinds of transactions, it can be overwhelming to try to keep a record.
That is where the help of technology comes in. Accounting systems are much easier to use that recording every transaction your business makes into physical ledgers the way things used to be done.
If you decide to use software for your accounting needs, make sure you still keep a copy of all of your receipts, either physically or digitally. This way, you can go back and verify everything if you see any discrepancies when you go to balance your books.
Create a New Business Account
There’s nothing worse than having to search through too many statements to find one small yet vital piece of financial business that you need. That can often be the case if you haven’t split your personal and business funds, so they’re always combining into one account, and it’s easy to lose track.
By opening a new bank account, you can keep your finances, and your business dealings separate, so there’s never any confusion between the two. When it’s time to do your books, you’ll easily know where to find the financial information you need.
Set Budget Aside for Tax Purposes
Rather than facing a major surprise when the taxman comes knocking, it’s a good idea that you budget for tax as you go along, so you don’t have to pay a big chunk at once. If you have a savings account or something similar, then it can be a good idea to set a little bit of your income aside so that you can easily pay off your tax bill with the peace of mind that you have money saved.
Always Keep Your Records Organised
If it’s already a hassle searching through one account where both personal and business funds are coming in, then cluttered records are going to bring you an even bigger headache when it comes to bookkeeping.
With records in good shape and neatly organised, you know exactly what is stored where so you save a lot of valuable time. If you’re too busy and approaching tax deadlines, you’ll be thankful that you took the time to keep your records nice and tidy so that you save time by knowing exactly where to look.
Although, make sure you keep your records organised all the time and not just as a one-off.
Track Your Expenses
It can be difficult to track business expenses, but by using a business credit card, for example, you can make sure that all of your expenses are kept together and tracked. The easiest way of doing this is by categorising your bills into types of expenses to make things a lot easier.
An example can be car mileage. If you’re driving long distances for meetings, then you can keep track of your mileage and log how far you’ve travelled and the costs that go with it.
Maintain Daily Records
One of the most basic tips to follow is that you maintain daily records. If you don’t keep accurate daily records, then it’s a lot more difficult for you to track the financial condition of your business.
Implement a system and stick to it so that you can keep accurate records every day and there won’t be any mistakes when you’re filing your tax returns.
Leave an Audit Trail
If you’re doing your books manually, then it’s vital that you leave an audit trail. Your record keeping will be a lot more effective if you can quickly and retrace your financial activities – which is why software is a good option to consider as it can do this effortlessly.
An audit trail means you’ll have your invoices in order and you can retrace your steps easily if there’s one tiny error.
Stay on Top of Your Accounts Receivable
Late-paying customers is never a good thing, and it can have a negative impact on your cash flow. Make sure you pay attention to when your receivables are due and don’t waste time when they’re overdue – act right away. See if you can work out a plan so you can get the money you’re owed as soon as possible but the longer you leave it, the longer it can damage your cash flow.
Keep Tax Deadlines in Mind
A tax deadline can be stressful for anyone. Take the simple step of setting yourself a reminder so that you have enough time well beforehand to fill out your tax returns without any mistakes. By keeping accurate records, you can make sure the deadline and HMRC send off your returns won’t be chasing you up because of any errors either.
Plus, you avoid any unwanted penalties.
Start Using Software Now
A digital app lets you keep your incomings, outgoings and everything in between properly organised, which makes it simpler to manage your financial records. While it might sound like another burden that you need to get to grips with, on top of doing your books, that’s not the case as some apps have simple and easy to use features that make the entire process efficient and painless.
So, you don’t need to feel overwhelmed as a bookkeeping app will make doing your books a whole lot easier, giving you greater peace of mind.
If you want your business to grow, you need to have a good accounting record. It is also easier for you to get investments and loans.
Effective bookkeeping will also instil confidence among business partners. If there is a problem in your business, you will also know it way before this problem becomes not manageable.