Bookkeeping is a vital aspect of managing a business. It is a legal requirement for all companies, big or small, to keep accurate records of their financial transactions. As a small business owner, you may initially handle bookkeeping tasks on your own, but as your operations scale up, it may become challenging to keep up with the workload. Fret not – it is OK.
In this blog post, we will shine a light on the bookkeeping best practices and also discuss the fundamentals associated with the function, which will come in handy to you whether you choose to handle it yourself or hire a third-party expert.
So, what is the difference between bookkeeping and accounting?
The two terms are frequently confused. In reality, bookkeeping is a smaller but essential element of accounting. While accounting uses data to determine a company’s financial situation and make management choices, accounting cannot happen if bookkeeping has not been undertaken properly. They work symbiotically.
In a nutshell, bookkeeping is the keeping and reporting of financial records, whereas accounting involves creating and analysing financial plans based on financial data. What are the essential activities in bookkeeping, you ask? Well, it typically includes:
- Reconciling bank accounts
- Managing payroll for the staff
- Tracking payments from customers and clients
- Reporting on the company’s financial status every month
- Data entry for recording financial transactions and balancing the books
Seven bookkeeping best practices for small businesses
Bookkeeping can be daunting for anyone, especially if you do not have a financial background. But it is not as terrifying as it initially appears. Here are seven solid best practices to help you master bookkeeping for your small business in no time:
1. Keep a record of every business transaction
From customer invoices and bank transactions to business expense receipts and PAYE records, if you hire employees – keep a record of everything. You should also know how much money others owe you and what you owe others.
Keeping paper records can be difficult, so store them safely and securely in a digital format. There is a choice of software available to help you to do this.
Moreover, be organised. Instead of searching for documents for your yearly self-assessment or company accounts, file papers as you go.
As a sole trader, HMRC may request your documentation five years after the 31 January filing date of the relevant tax year to verify your tax payments.
As a limited company director, you can be fined £3,000 if you do not retain business records. You have to be prepared. Ideally, you should maintain the records for six years after the end of the company financial year they relate to.
2. Choose a small business accounting method
Before diving deep into bookkeeping, please select an appropriate accounting method because it affects how you record transactions.
You can either go for traditional accounting or a cash basis. In traditional accounting, you keep track of income and expenses based on when they were invoiced or billed but not when they were paid or received.
However, in cash basis accounting, you record business expenses when you pay bills. It means you will not pay income tax on the money you have not received in the accounting period. Many small business owners prefer cash basis accounting to traditional accounting.
3. Schedule regular bookkeeping times
It may be tempting to postpone your bookkeeping as a small business owner. However, to stay on top of your finances, you must schedule bookkeeping regularly.
An easy way is to set aside time when your credit card statement is due to check that month’s transactions. Done regularly, it should not take too long and will save you plenty of time in the long run. It also means you always have a good top-level view of how your business is doing, and who does not want that?
4. Track your revenue and expenses
Regardless of the business size, each transaction matters. When you track your revenue and expenses, you get an idea of the overall financial health of your business.
Based on this recorded data, you and your financial advisors may discover strengths and growth opportunities by regularly tracking and categorising costs and revenue sources.
Accounting software can benefit on this front as it handles one-time and periodic expenses. The tool can help you automate recurring revenues and expenses and save time.
However, many small-business owners prefer Excel or a pen-and-paper ledger. Find a system that works for you!
5. Maintain invoices and paperwork in order
Take note of paid and unpaid sales invoices (i.e., the money you owe) separately by supplier name and file them alphabetically if you are not maintaining them on accountancy software.
Remember to change the status of the invoices once they are cleared and maintain a record by numbering them sequentially by the due date. Check bank statements regularly and ensure they match the income and expenditure you expect to see.
6. Move to suitable software when the time is right
What are the basic bookkeeping practices principles? To start with, use a spreadsheet with columns for revenue, expenses, VAT, payroll, and so on. Microsoft Excel or a similar tool can effectively handle your bookkeeping in the early days.
However, over time, you will want a more specialised app. Some cost-friendly bookkeeping solutions like FreeAgent, QuickBooks, or Xero can help you keep your books in order and dramatically cut down on both time and inaccuracies in your reporting.
The majority are paid for, but some are available linked in with your bank account or other business service provider. Check out what is available, and be clear to match your requirements with the software.
7. Create monthly reports without fail
Monthly reporting can efficiently help you stay on top of your business finances and avoid unpleasant surprises. As part of your regular bookkeeping tasks, ensure you are giving yourself an overview of your business – this could be a profit and loss statement or balance sheet. And maybe, if you are unsure what you are doing, consider getting a specialist accountant.
Over to you
If you are doing bookkeeping, schedule periodic check-ins with your accountant to ensure you are on track. It will also help you avoid nasty surprises during the tax season.
However, if bookkeeping stresses you out and you do not have the right support system in-house, you should consider hiring a professional. By doing so, you can focus on the creative and strategic aspects of your business.
Leave the tiresome job to qualified specialists and be good at what you do! Let Birdfynn’s expert accountants organise your business transactions and keep your accounts up-to-date, empowering you to make smart business decisions. Please fill out the contact form to get in touch with us.
