Bookkeeping is a chore. No small business owner, I am sure, would disagree. However, it has to be done and it is critical to the growth and indeed the survival of any business to keep their finger on their financial position. In this article I will provide a number of tips that can help small to medium and growing businesses to improve regardless of how they do their bookkeeping.
Let’s get started:
Do it as you go!
It doesn’t matter how you do your bookkeeping, it should be obvious that leaving it until it builds up is a bad idea (receipts in a shoe box or carrier bag is a good indicator that all is not well with the process). Spending a very short time doing it frequently is far better than spending days trying to get it all in order at the end of the year and risking penalties if you put your accounts in or pay your tax late! Like ‘eating an elephant’, you do it best if you do it one bite at a time.
Not only will keeping up-to-date help you avoid stress and penalties, it will give you valuable information that will let you guide your business more effectively. If you don’t know how much you are spending on advertising and how much return you are getting from that investment, how can you work out which advertising is working for you? Simply, you can’t. Therefore you need to be on top of your bookkeeping to get the best out of your business.
Record your Transactions from day one
Keep your receipts and records of all costs from the very beginning of your business, whether digital or physical. You might not necessarily need to physically hand these over to HMRC, but it’s a good habit to get into. At some point you most probably will need to prove something even if it is only to claim under a warranty, and having transaction records available when needed could be a life-saver for your business.
Record absolutely Everything
There are two sides to this one.
Firstly, when making purchases remember that nothing is too small to be worth reclaiming. If you ignore £1 twice a week, by the end of the year that is £104 lost to the business. Remember also that in the UK ALL transactions by Credit or Debit card are notified DIRECTLY to HMRC! If you are spending money but it does not appear in your accounts, that is sure to raise alarm bells with the tax authorities and increase the risk of an investigation.
Secondly, when making sales some people are tempted not to issue invoices or to destroy invoices they have issued. This may seem like a good idea at times, but it is definitely tax evasion and therefore illegal. If you do this you are risking heavy fines or even imprisonment. You may think that if you have not issued any paperwork there is no way that it can be traced, but you would be very wrong.
- Just because you haven’t recorded something does not mean that your customer or supplier has not recorded it and included it in their tax records.
- In the same way that Credit and Debit card transactions you make are notified to HMRC, payments you take in that way are similarly notified.
- HMRC deal with many businesses like yours. They have a very good idea of what your turnover, expenses, purchases and profit margins are likely to be. If yours are obviously out of line when compared to the norm, you can expect an investigation in short order.
- There are bound to be people who have an axe to grind with you, your business, or someone who works for you. Ex-wives and girlfriends, former employees, disgruntled current employees, and so on. There is nothing to stop them reporting you to HMRC whether you are innocent or not. If you are behaving illegally in any way at all that is going to be much worse for you if they investigate!
Keep Separate Bank Accounts
It is pretty much vital to have a separate bank account for even the smallest of businesses. Putting everything into your personal account not only makes it difficult to separate one from the other, but when it comes to any sort of audit or investigation
Keep Business and Personal bank accounts COMPLETELY separate
It’s really important to keep business expenditure and profit separate from your personal accounts. When it comes to doing your tax return, having one account for everything can get very confusing. And if you’re audited, it can be risky.
It also helps with managing cash-flow. You need to be able to look at your finances daily and immediately see what kind of state they’re in.
Even worse, if you use your personal account for business you are automatically granting HMRC the right to investigate your personal accounts any time they investigate the business. Whilst I am sure you will have nothing to hide, having to provide evidence on your personal expenditure which is not recorded in your accounts could be much more difficult than with your business expenditure. On top of that, if they find any indications of error or deliberate evasion they can go back up to 25 years to calculate penalties if they want to!!
Reconcile, Reconcile, Reconcile
Failing to reconcile properly is quite possibly the cause of more micro and small business failures than any other issue. Those who look at the bank statement and think they have £5k to spare and decide to spend it but are not aware that they have £6k in bills are obviously going to end up in trouble.
Failing to reconcile also means that you may not notice if money is taken from your account improperly by the bank or even worse by criminals.
Reconciliation is the simple process of checking off each transaction on each bank statement and ensuring that they are all valid and correct. Any on the statement that are not in the accounts should be investigated and either added or challenged. Any in the accounts that are not on the statement but are in the accounts should again be investigated to confirm if they are incorrect, if a payment has been recorded but not made, or if it is a delayed payment of some sort that will automatically appear in a subsequent statement.
You need to reconcile every account, including bank and card accounts, to be certain that you are not hemorrhaging money you did not expect.
Check your automated payments
Regularly check your Direct Debits and Standing Orders with your bank. Are they still valid? Are you paying for a service or subscription you no longer use? If you cancelled a service or subscription are they still charging you in error?
You can see how this can easily result in a large amount of money being saved. Most businesses will find that there are a number of recurring payments that can be cancelled without affecting the business and therefore automatically improve your bottom line.
Claim for everything you can
The rule is fairly straightforward: you can claim for any expense that is made exclusively for your business.
Given that every single expense can be deducted from your profits – therefore reducing your tax bill – no expense should be left unturned. Claim for stationery, train tickets, even food if you’re away on business – no matter how small the receipt is, keep it.
And if you work from home, you may able to claim for part of your utility bills, rent or mortgage payments.
Plan ahead for tax
Hopefully your business is turning a profit; that is after all why you got into business in the first place!
Still it is very important to always keep one eye on January 31st, and to put a healthy percentage of your profits aside to pay your tax bill. While paying taxes is always unpleasant, paying tax penalties on top is obviously far worse!