Here are some bookkeeping tips for new business owners who are operating as a sole trader, or in partnership, or running a limited company.
Know your “years”
As a business owner you should know the difference between a “financial year”, an “accounting year” and a “tax year”.
For a new company, the financial year starts on 1 April, when the government typically sets its new tax rates and allowances for the next 12 months, and ends on 31 March the following year.
The accounting year starts on the day of incorporation and ends on the last day of the first anniversary month. For example, if you started your company on 15 June 2018 your accounting year end date will 30 June 2019 and 30 June each year thereafter. In practice many new companies change their accounting year end date to coincide with the financial year. You should speak to an accountant about changing your company’s year end date as it may be tax advantageous and you can do it easily enough using form AA01.
For sole traders, partnerships and employees, the tax year or fiscal year starts on 6 April and runs for 12 months to 5 April in the following year. Many sole traders choose 5th April for their accounting year end so that their accounting year will match the tax year. A sole trader who chooses 31st March for their accounting year end is also recognised by HMRC as having an accounting year that matches the tax year. If your accounting year end matches the tax year end it’s easier to calculate your taxable profit for the year in question. If you started trading before March 31 or after April 5 you can still change your accounting year end date to match the tax year end but you should speak to an accountant first.
Choose an accounting method
Most businesses use traditional accrual basis accounting where you record income and expenses by the date you invoiced or were billed. For example, if you invoiced a customer on 14 March 2018 but didn’t receive the money until 30 April 2018 you will record that invoice for the 2017-18 tax year and you will pay the tax in that year even though you had to wait until the next tax year to receive the actual payment.
The accrual method is more efficient for recording voluminous transactions and will give you a more realistic idea of income and expenses over the long term. However you’ll need to monitor your receivables and payables and cash flow very carefully in order to avoid having a profitable business on paper and a near-empty bank account!
Sole trader or partnership businesses with an income of £150,000 or less can use cash basis accounting. When using this method you only record income or expenses when you receive money or pay a bill. This means you won’t need to pay Income Tax on money you haven’t yet received in your accounting period. For example, if you invoiced a customer on 14 March 2018 but didn’t receive the money until 30 April 2018 you should record this income for the 2018-19 tax year and pay the tax in that year.
With cash accounting you can easily identify income and expenditure items and keep an eye on how much cash the business actually has at any given time – you just need to look at your bank statement to know when the transactions occurred and the exact resources at your disposal.
Keep proper financial records
As a business owner you must keep a record of your business income and expenditure for tax purposes. You need three basic records – a cash book, a sales invoice file and a purchase invoice/receipts file. Maintaining these records will make your business life easier. You’ll be able to monitor and manage your cash flow. You’ll avoid financial penalties and you’ll also reduce your accountancy bill.
Payments into and out of your bank account should be recorded in a proper cash book or onto a computer using software like MS Excel, Sage, Quickbooks or Xero. Keep your cash book up-to-date and you’ll be able to predict the likely bank balance for future months.
Sales invoice file
If you want to get paid for services rendered then you’ll need to send your client an invoice. You can create an invoice with MS Word. Each invoice should have a number and date and details of the service provided. Keep a hard copy of each invoice you send out. Use a ring binder to store them in chronological order. Use a file divider so you can keep unpaid invoices at the front of the binder and paid invoices at the back. That way you can easily identify who still owes you money.
Purchase invoice/receipts file
Make sure to get an invoice or receipt for every business expense. If you buy something online then print off the invoice/receipt. Write a number on each bit of paper you collect (0001, 0002, 0003, etc) and store them all in a ring binder in chronological order. Write a brief note on each invoice/receipt to explain when you paid it and how (e.g. BACS, cheque, cash etc). HMRC could ask you to produce an invoice or receipt at any time so best collect and store these as you go rather than try to obtain a duplicate copy years down the line.
Keep business and personal finances separate
Open a bank account for business use only. Use it to receive your business income and to pay legitimate business expenses such materials, carriage, travel, rent, heating, lighting, rates, insurances, stationery, advertising, phone/broadband, bookkeeping, legal fees, etc. Don’t use the business account for personal use. If you want to use business income to buy personal items then you need first to pay it into your own personal bank and record that transaction in the cashbook as a dividend or drawing.
Check your bank statement
Carefully read through your bank statement every month. You’ll have a better understanding of where the business money is coming and going. You’re more likely to spot potential fraud or banking errors and take fast appropriate action.
Make time for regular book-keeping
The time needed for book-keeping will depend upon the volume of transactions your business generates. Receipts and payments can be recorded in batches once or twice a week and reconciled with the bank statement at the end of each month, but don’t be tempted to do this work when you’re feeling tired as you’re more likely to make mistakes.
Hire an accountant
There’s no requirement for small business owners to use a professional accountant. But are you aware of your legal responsibilities regarding accounts? Are you making the most of your tax allowances? Do you know how to produce your annual Balance Sheet, Profit & Loss Statement, etc.? You may be able to do all of these tasks but a good accountant will still save you time and money in the long run.
Hire a bookkeeper
If you’re struggling to keep your records up to date then you’ll need a bookkeeper to update them on a regular basis. A good bookkeeper will reduce your accountancy bill and enable you to earn more money. For example, if you’re charging £40 per hour for your professional services and you can find a bookkeeper who’ll do your books for £20 per hour you’ll be able to concentrate on earning money instead of worrying about bookkeeping, which is a more profitable use of your time.
If you require an affordable bookkeeping or accounting solution please leave a comment below or email me in confidence via the contact page.
© 2018 Paul J Lockey