If you own and operate a small company, you are required to be responsible for its bookkeeping. There is no way around this requirement. When you’re not absolutely certain of what you’re doing, this might feel like an extremely difficult and time-consuming task at times.
You didn’t start your company so that you could look through boxes of receipts, enter data into spreadsheets, or go through bank statements until eleven o’clock at night, so you probably find it to be a bit of a pain as well.
The good news is the following. You can ensure that all areas of bookkeeping related to your small business are thoroughly taken care of if you use the appropriate approach and utilise the appropriate tools. This can be accomplished without causing undue stress or devoting an excessive amount of time each month.
In the following paragraphs, we will demonstrate how to do that.
- What is bookkeeping?
- Can I do my own bookkeeping?
- How to make bookkeeping easier
- Which software features to look out for
What is bookkeeping?
People often use the terms “bookkeeping” and “accounting” interchangeably, but they do mean different things. You’ll need to know the difference because accounting is not something you can really do on your own, though you’ll still need to be very involved in it.
So, what’s the difference?
Bookkeeping is the process of recording all the money that goes in and out of your business
This involves collecting and storing financial information such as receipts, invoices and bank statements. You need to do some bookkeeping practices by law, and accuracy is essential for paying the right amount of tax to HMRC each year.
Accounting is the process of interpreting financial data and creating reports and forecasts
This lets you know how your business is doing financially and how well it is doing. There is a lot more to this, which is why you should work with a certified accountant to get the most out of your financial data.
Still, you might not have to do this right away. If your business is still small, you should put bookkeeping at the top of your list.
- To make sure you’re following the law and lowering your chances of getting fined,
- Because if you don’t keep good, accurate books, any accounting you do will be based on data that is wrong or incomplete. This means that you can’t trust any insights you try to get.
Once you’ve gotten the hang of bookkeeping and have a solid foundation, you may want to think about how an accountant could help you grow your small business by giving you more information about its finances.
Can I do my own bookkeeping?
You absolutely can. And it doesn’t have to be hard, dull, or take a lot of time. Even though bookkeeping includes a lot of tasks, there are five things you must do to keep things running smoothly and legally.
In the beginning, you won’t have too much trouble with any of these. But as your business grows and the amount of financial activity increases, it will be cheaper to hire an accountant or bookkeeper to take over so you can focus on tasks that add more value.
In the meantime, here’s what you need to do on a regular basis to keep your books in order:
#1 – Record everything
The main responsibility of bookkeeping is to record all cash inflows and outflows, as this is required by law for any business. Meaning, the data, including the monetary value, must be saved after every single transaction, be it a purchase or a payment.
Eventually, you’ll be using these receipts and other financial documents to file your tax return, so it’s crucial that they’re accurate. It’s also a good idea to keep your receipts for up to six years.
#2 – Reconcile transactions
You may be familiar with the term “bank reconciliation.” This is a crucial bookkeeping procedure that entails comparing your bank statement to your financial records. Ensure that each debit and credit on the statement is reflected in your records, line by line.
This procedure enables you to identify problems such as inexplicable expenditures or charges, duplicate payments or record entries. This allows you to investigate and make corrections before they cause problems in the future.
#3 – Monitor cash flow
Cash flow is the quantity of money that enters and leaves an organisation. “Cash in” includes all client payments and any government handouts, whereas “cash out” covers everything from supplier payments and employee wages to rent and utilities.
It is crucial to maintain a tight check on cash flow, since if it stops, your organisation would cease to exist. By monitoring available funds on a regular basis, you may better control how you pay suppliers, invest in inventory, and extend credit as needed.
Remember to consider more than simply your bank account balance. Consider how much you presently owe, how much your customers owe you, when payments are due or expected, and how much VAT you owe.
#4 – Watch out for late payments
At some point, every company will have to deal with customers who don’t pay what they owe on time.
There are many reasons why this could happen, but from your point of view, it can’t last too long. If you have to wait for money to come into your business, it can limit how flexible you can be and even keep you from buying basic things.
To keep getting paid, you need to go after customers who still owe you money. Be clear about when you want to be paid, but always be polite and professional.
Also, it’s a good idea to ask what you can do to help them get it done, like letting them pay in a different way or letting them pay in smaller chunks.
#5 – Pay tax
No matter what kind of company you have, you have to pay taxes on the money it brings in. There are a few different kinds of taxes, and each has its own requirements, rules, and ways of doing things.
In the end, it’s up to you to figure out which ones apply to you and how and when to send your tax return to HMRC.
You can do this yourself, and software makes it easy, but if you’re not sure, you might want to pay a bookkeeper or accountant to do it for you.
Main types of tax
|Value Added Tax (VAT)
|This is paid by landlords and sole traders using a system called Self Assessment
|This is paid by limited companies, foreign companies with a UK branch or office, clubs, co-operatives, and other unincorporated associations
|VAT is a tax charged on most goods and services sold by VAT registered businesses. If this is you, you’ll need to charge the applicable tax rates on whatever you sell and submit returns to HMRC
Pro tip: There is a new scheme being rolled out by HMRC called Making Tax Digital. This brings new requirements for you to keep all accounting records digitally, use compatible software to submit your tax return, and more. This is already in place for VAT, and will be launched for Income Tax Self Assessment in April 2024.
How to make bookkeeping easier
These five bookkeeping tasks may seem like a lot to think about, but if you follow three golden rules, things will be a lot easier. If you use these with good accounting or bookkeeping software, you’ll be able to keep track of your finances every month without much trouble.
Take a ‘little but often’ approach
One of the main reasons why bookkeeping is a time-consuming, stressful, and boring job is that many people let the small tasks pile up. By putting it off, you only make it bigger and more likely to go wrong.
It’s better to be proactive and work on things more often for shorter periods of time. Set aside time on your calendar for each task and set them to repeat at the times they need to be done (monthly, weekly, and daily).
The more you do this, the faster you’ll get at it, and it’ll become a habit eventually.
When it comes to keeping books, paper can cause a lot of trouble. Hard copies of things like scribbled notes, bills, and receipts often get lost or damaged. You can be sure that the ones that go away are the ones you need the most.
The more you can put on a computer, the better. Your records will be kept much more accurately, you’ll be able to find, access, and share the information you need almost instantly, and everything can be backed up safely.
Any kind of digitalisation will help you, but using bookkeeping software makes it a lot easier because so much of it can be done automatically (more on this below).
We’ve already talked about why it’s so important to have a good cash flow. Make sure you set up a billing system that works as well as possible. You should send an invoice as soon as the work is done and accepted, and you should keep after late payers (but nicely).
Try to think of other ways to improve your process, like breaking up big jobs into multiple stages of invoicing, using templates that can be changed, automating tasks as much as possible, and setting up rolling invoices for customers who buy from you again and again.
If you follow these three golden rules, you’ll cut down on the time it takes to keep clean books, save yourself a lot of headaches, and keep the money coming in.
Which software features to look out for
To truly empower your bookkeeping abilities, you should be using a quality accounting or bookkeeping software solution. Why? Because all five of the tasks mentioned above can be at least partially (if not fully) automated.
Yep, that means:
- Reduce hours to seconds for many individual tasks
- Ensure more accuracy in record keeping
- Make earlier discovery of errors and correct them sooner
- Make compliance effortless
- Have secure, frequent backups of all your info
- Get real-time visibility of cash flow
There are many high-quality ways to help you do all of these things. When you think about how much time you’d spend doing bookkeeping on paper or with generic tools like spreadsheets, software is often a very cost-effective option.
When deciding which software to buy, think about how much support it comes with. If you’re new to bookkeeping, this will be very important.
Once you know which service provider will be easy to reach, keep an eye out for these important software features:
Digital record capture: With some solutions, you can use an app on your phone or a desktop scanner to take pictures of anything from documents to receipts, and the system can pull the information right in.
Automatic reconciliation: Software that connects directly to banks can match up transactions with the digital records stored in the system and do this automatically. This means that you don’t have to do a key bookkeeping task.
Mobile functionality: If you can use the software on your phone or tablet, you can keep up with your bookkeeping even when you’re on the go. So, you won’t have extra work to do just because you couldn’t get to your computer.
Tax automation: Software from reputable companies automatically calculates your tax based on the latest law, even if it changes, and makes it easy to send it to HMRC.
Secure cloud storage: Software that runs in the cloud will store and back up your data in a safe way, so if something goes wrong on-site, you can rest assured that your information is still safe and accessible.
Take control of your financial records
When you first get started in business, looking after the financials can seem a bit intimidating.
But by taking the time to fully understand the five main bookkeeping tasks, you can take control of your financial records and build a solid foundation for any future accounting activities.
Stick to the three golden rules and consider using a quality software solution that can automate much of the work, and you’ll be able to keep accurate and compliant books with only a few work hours a month.