What is Bookkeeping?
Bookkeeping is the practice of recording and tracking the financial transactions of a business and summarising this activity into reports that show how the business is doing.
As a subfield of accounting, many people will question the difference between bookkeeping and accounting, so let’s explore this further.
Bookkeeping traditionally refers to the day-to-day upkeep of a business’ financial records or transactions. A bookkeeper will gather and quality-check the information from which accounts are prepared.
Accounting refers to the analysis and summarising of the data that a bookkeeper gathers and condenses the financial information into a report which provides a picture of the business’ financial health and determines how much tax is owed.
Why is it important?
It’s worth noting that around 80% of businesses fail due to poor financial management and poor cash flow forecasting. Maintaining healthy business finances, therefore, is a crucial driver of business success. While you are more than capable of managing the business finances yourself, we recommend seeking expert guidance and support from an accountant.
Accountants and bookkeepers also provide unique insights to help improve the chances of survival. We’ve found that when business owners do their bookkeeping, it often only happens when they can find the time. Failing to give the financials the attention they deserve could result in data-entry errors, lost documentation, missed tax breaks, and outdated books.
Working with an accountant and their dedicated team will ensure these issues never arise and accurate records will be backed up by documentation.
The importance of Bookkeeping
Bookkeeping can feel intimidating and, as a result, often falls to the bottom of the priority list. However, it does provide the information needed to make general strategic decisions and a benchmark for revenue and income goals. With income and expenses properly organised, it’s simple to review the business financial resources and costs.
Get a head start
As annoying as it is, businesses have to file their taxes at the end of the tax year. With a solid bookkeeping process in place, you’ll have the necessary financial information ready for the tax season.
Every business wants to grow; however, poor financial records can prevent that from happening at the desired speed. With no accurate figures or data to analyse, it’s not easy to set any growth goals. Guessing the way to growth is not a long term or even a short term way to survive. By staying on top of the books and keeping regular financial records, it is easier to map out business goals more accurately and achieve the growth required.
Making Tax Digital (MTD)
Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their taxes right and keep on top of their affairs. So despite the recent announcement to postpone the rollout for specific sectors, we would suggest that you get ready now so that you’re ahead of your competitors when it does become a reality.
Extra peace of mind
Unorganised books, HMRC breathing down your neck and those looming tax deadlines can all contribute to plenty of stress and panic. The last thing a business owner wants on top of the day-to-day tasks is bookkeeping issues weighing on their mind.
When the books are up to date, it is easy to rest knowing that the business’ financial information is ready to be reviewed without HMRC creating any anxiety. Your mind will be at ease, and you can focus on other areas of your business.
Therefore, that bookkeeping is essential for any business. Not everyone is an expert in maintaining records, but it’s there for a reason. We can help you set up from an internal point of view and also help you when you wish to outsource.
Goals for Bookkeeping
1. Keep a record of every payment
Use your books to track every payment and make it clear when they were made or received so you can easily find them if you need to refer to them later.
2. Choose an accounting method
Your bookkeeping will underpin your accounting, so decide at the start which method you will use. Traditional accounting records income and expenses at the date of the invoice. Cash accounting records them on the date when you actually receive or pay the money. Cash accounting reduces the risk of having to pay tax on the money you haven’t yet received but is only available if your turnover is £1.35m or less.
3. Be strict with deadlines
Never make late payments (especially to HMRC) and give your clients a payment deadline so you can chase them effectively. Take note of any late payers and consider not working with them if they keep missing payments. This is called credit control, and the aim is to keep your cash flow healthy.
4. Keep track of expenses
You can claim tax back from lots of expenses directly related to your business which will help reduce your overheads. You’ll need receipts to substantiate your claims from HMRC, so keep them stored somewhere safe and organised in different business categories.
Be sure to keep business expenses separate from personal ones, so you can quickly identify which ones can be claimed against profit to reduce tax.
5. File bank statements and invoices in order
Ensure all bank statements and invoices (purchase and sales) are present, correct, and, more importantly, in date order. Otherwise, you’ll be spending more of your precious time hunting these documents. Worse still, if these documents are missing, you could end up facing a fine for late filing.
We recommend purchasing invoices (i.e. money that you owe), keeping separate files for paid and unpaid invoices, and filing both alphabetically by supplier name. Always remember to move invoices over once you’ve paid them.
Then for sales invoices (i.e. money owed to you), number them sequentially to determine when payment is due so that you can chase them effectively.
6. Choose suitable software
To start with, you may not need specialist bookkeeping software – However, as your business expands, you may want a more specialist package. We recommend using a cloud-based solution such as Xero; we can help you get set up and provide training to help support this move.
7. Produce monthly reports
Generating reports at least once a month is the surest way to stay on top of your business finances and ensure you don’t get caught out by nasty surprises. Your monthly reports should include a profit-and-loss statement and the balance sheet, as a minimum. Now you have a running commentary on how well your business is performing.
8. Know when to outsource your bookkeeping
If your business starts small, it may make sense for you to handle the bookkeeping yourself. However, as your business grows, you may find yourself in the position of spending less and less time on bookkeeping duties, which is when you could start falling behind on those essential record-keeping tasks.
At this point, we recommend that you outsource this function to an accountant so get in touch and we’ll do the rest.