Few people start a new business so that can do paperwork or fill in forms. For many keeping up to date financial records falls into this category of seemingly unnecessary bureaucracy, a waste of time which detracts from the main job of running the business. However, this is not the case. Whilst it may be regarded by some as a necessary evil, the wiser will realise that being on top of your business’s finance is vital if you are to understand trends and identify problems before they occur. Ignoring the need to keep your business records up to date can have serious consequences for both you and the business. So, whether you tackle it yourself or choose to delegate it to a qualified professional, make sure your book-keeping is up to date.
Apart from the fact that any small business will have regular statutory reporting requirements – ranging from VAT and tax declarations, to social security returns and annual accounts and audit requirements – being on top of your book-keeping is important so can manage your business properly. It enables you to identify trends in your business early, and ensure that you have a good handle on your cash flow. Thousands of new businesses are started each year, and thousands fail, not because of flaws in the business concept or idea, but because the owners could not manage their cash flow or company’s finances. Don’t be one of them.
Book-keeping should be a regular task so make sure time is set aside for it. Leaving it too long to update your books or trying to squeeze this in at night when you are tired invites mistakes. Either you will be tired or not remember the details of important transactions after the fact.
Use a spreadsheet or consider investing in an appropriate accounting software package for your business. There are a lot available on the market, but you may want to take advice from an accountant or financial adviser as to the best solution for your business.
Alternatively, and for many a better option, hire a book-keeper or accountant to help you with your business finances. Not only will they help get your books up to date and make sure that you are compliant with local laws and statutory requirements, but they will help save you money as well. By identifying trends, potential cost savings, and providing broader financial advice, they should certainly save you more money than they cost. Plus, employing them just on a freelance basis to look after your finances frees up your time so you can do what you do best – running the business itself.
Irrespective of whether you choose to do it yourself, or hire qualified help, there are some basics that need to be followed to get your book-keeping right.
As a general rule, get an invoice or receipt for everything you buy, and issue one for everything you sell. Statistically, the longer you are in business, the greater the chance of a VAT or tax inspection. These should be nothing to worry about if you have all the paperwork to hand and employ the services of a good accountant. If you have neither, they can be a nightmare. While the cash economy – the use of cash to avoid VAT and other taxes – remains in force in many countries and industries, successive national governments and agencies are attempting to crackdown on such practices. Don’t be tempted to make sales or purchases “off the books”. It may help you in the short-term if you get away with it, but long-term you will get found out. The consequences, both for the business, and yourself, can be severe.
Cash is king is an oft-quoted expression. The maxim is true for many small business owners because cash flow management is a vital component of business survival. Monitor all payments and receipts into and out of your bank account, and remember to take into account scheduled payments like standing orders, direct debits and subscriptions, as well as bank charges and interest. If you are still using cheques to pay suppliers, take into account any unpresented amounts when assessing your cash position at any point in time.
Don’t wait for monthly bank statements but get online banking facilities in place so you can monitor cash movements and payments in real time. By the time the statements arrive, you could find yourself in cash flow difficulties, struggling to make payments. Better to have an ongoing record of your cash position at all times.
Remember, if you run a limited company, even if you own it 100%, that the money of the business is not yours – it belongs to the company. That means that, unless you have a legitimate business expense, you cannot spend the company’s money on your own purchases. Sadly, this is where many well-meaning small business owners get into trouble. By failing to maintain accurate, up-to-date accounting records, the personal and the corporate get confused. The result can be not only higher tax bills, penalties and fines (both for the business and for the individual), but also more extended consequences such as disciplinary action for professionals such as lawyers and accountants who conflate client monies with their own.
Make sure that all the sales invoices you issue are recorded. A major cause of many small business failures is poor management of accounts receivable – the issue of sales invoices to customers, and the subsequent monitoring and collection against those invoices. With a well-maintained set of books and accounting records, it is easy to identify what has been invoiced to what customer and at what price. More importantly, it is easy to identify what invoices are outstanding, enabling you to initiate appropriate follow-up action. This could be vital for business survival.
While many small business owners may resent the need to maintain accurate accounting books and records, and regard it as a waste of their valuable time, it is a vital part of running any successful business. Not only does it help meet your statutory and other legal reporting requirements, but, more pertinently, it provides an essential guide and insight as to the health of your business. With so many new businesses failing due to poor cash flow and inability to manage their finances, the need for good accounting records should be self-evident. So whether you decide to do it yourself on a spreadsheet, invest in an accounting software package or outsource to a qualified book-keeper or accountant, don’t neglect the book-keeping. It might make the difference between going out of business and longer-term growth and prosperity.