Every business regardless of size needs to keep accounts and file tax returns. Without any training how do you know where to start, what system to use and what bookkeeping routine you need to follow. This article guides you through some basics and provides you with a routine to follow to keep your business finances on track.
Doing the books, also known as bookkeeping, is the expression given to recording the financial transactions associated with your business. Back in the day this would take ages with the writing up of all invoices and receipts into old fashioned ledgers along with ticking these off to the transactions through the bank accounts known as reconciling the bank. Luckily much has changed and with readily available, easy to use systems and tools the whole process of doing the books is much easier and quicker than it has ever been.
Get a system
However to get your bookkeeping and accounting on track it is absolutely essential to have a system. Without one you will get in a muddle, forget to claim for amounts that you’ve spent on the business, not have a clue of how much you should put aside for tax and, probably most importantly, have no idea if you can take any money out of the business. All in all you’ll be in danger of spending more than you should and developing a lifestyle which is beyond your means funded by money that should be set aside to meet your tax bills. It’s simply not a sensible option to be without a system! You will also pay more in accountancy fees as the job of filing the tax returns and accounts will be harder if you are systemless.
In addition setting up a dedicated business bank account which feeds directly into the system, via what is known as a bank feed, will make your record keeping so much simpler.
Whilst this all sounds a bit complicated it really isn’t. Yes you will need to invest a little bit of your time in getting this all set up – probably no more than a couple of hours or so. But if you make that investment you will more than get that time back as well as save yourself a fortune in accountancy costs for work that you do not need to get your accountant to do as it will be taken care of by your accounting system and processes.
Old fashioned accounting systems used to consist of massive ledgers written out by hand using a quill pen usually by chaps sitting at a very high desk. Think Bob Cratchit in Dicken’s A Christmas Carol. Luckily those days have past and it would be a very rare occurrence to see the use of manual handwritten ledgers.
So what are the options when it comes to selecting an accounting system?
Unless you’re a whiz at spreadsheets then these should be avoided as there’s much better options around which will give you all the functionality that you need without having to code it into the sheet.
However if you do want to use a spreadsheet as the basis of your system of accounting then do follow a few rules:
- Keep it simple – avoid lots of tabs, repeating data, things out of view that can be missed, colour coded items that only make sense to you and unwieldy sheets that cannot be easily understood
- Future proof it – make sure that the sheet can be used for the current as well as future accounting years without too much effort to amend and with any formulae that can easily be amended for future rates of taxation. Make sure there’s enough space built in for an increase in data to be recorded as the business grows
- Check the sums – use simple formulae making sure that the cells holding the sums are easy to see and locked to avoid them being overwritten or amended
- Test it – test out the spreadsheet with a few weeks of live data to make sure that everything works, it all makes sense and the sheet is usable on all of your devices
- Back it up – get your spreadsheet hooked up to your back up system, assuming you have one and if you don’t get one. Make sure that the sheet is backed up after each and every change that you make
- Dashboard of important information – the Dashboard is covered in more detail later but do make sure you include key performance indicators in your spreadsheet such as turnover, profit, estimated tax due and amount available to take out of the business
These days a spreadsheet should only be used as a tool to catch up and get on top of your accounting as you plan your move onto a more modern, function rich and reliable system.
Desktop accounting systems
A desktop system of any kind is one that sits on one device – you would have loaded it onto that device and will need to get updates applied to the system to keep it current. Like a spreadsheet, you will need to back up the system and its data on a regular basis.
The best example of a desktop accounting system is Sage (although they also have web based systems too) which is a fully functional although complex to use system more suited to larger organisations.
Again things have moved on and there are much simpler and better systems suited to the freelancer or small business owner. So, with that in mind, lets not dwell on a desktop accounting system as being a viable option for your solution of choice. They are too old fashioned to consider.
First introduced around 2007 these systems are now in their maturity. A Cloud Accounting system is one that is not on your laptop or own device but hosted elsewhere on IT infrastructure set up and managed by the supplier of the system. You access it via the internet from any device, anywhere making it something that you can use on the go as well as in your business location or at home.
Such systems are often referred to as SaaS which stands for Software as a Service; a term used to describe a system that you make regular payments to use with someone else managing the set up, maintenance, security and upgrading of the system.
The supplier of the system is responsible for the hosting of the system as well as keeping it up to date. This means that you do not have to take back ups. As soon as you add data it will be backed up by the system’s provider.
You may of course want to take a download of your data from time to time just in case you decide to stop using the system. It is still your legal responsibility to keep accounting records for the statutory period of time. So if you stop paying for the use of the system and the supplier archives or deletes your data you may have an issue if for example HMRC bring a query and you cannot access what you need to answer it.
Most reputable Cloud Accounting systems will allow you to take a download for storage on your local device (remember to back this up too). You just may need to search around or contact their Support Function to locate where this menu option is to be able to do this.
Best practice – Make a diary note to do a back up on a monthly or quarterly basis. If you do stop your subscription to your accounting software make sure that you have all of your data downloaded before you end your account.
The supplier is also responsible for the security of the system. In the early days there seemed to be unfounded fears about the security of Cloud Accounting systems. In the same way that most of us are used to online banking, the security associated with such systems should be viewed in a similar way to accessing your bank account online. As a reality check just think about how secure is the data residing on your laptop or other devices. Perhaps secure as long as you don’t lose it, leave it in a coffee shop or have it stolen. So, as with anything electronic, a common sense approach to back up and security should be employed.
Cloud Accounting options
There are many Cloud Accounting systems around now with three names dominating the self employed one person business owner market. Other systems do exist of course but the main players are:
Now owned by NatWest bank FreeAgent is a really easy to use system utilised by freelancers and one person business owners. It is function rich with excellent help, guidance and support provided online with many videos and guides or from their super friendly support staff. FreeAgent even allows users to file tax returns (VAT, Self Assessment, Corporation Tax and monthly PAYE real time information) directly from the system; useful for those who know what they are doing although dangerous in the hands of the amateur who can get things wrong. With ignorance not being an acceptable excuse with HMRC for making a mistake this type of functionality should be avoided by the inexperienced.
If you have a NatWest business bank account or a Mettle (the Challenger banking arm of NatWest – see below) account then you can get FreeAgent for free. Otherwise the monthly subscriptions start at around £10 per month for the first six months and £20 a month thereafter for sole traders.
Recommendation – to save money on hefty monthly subscription fees get access to FreeAgent free by opening a Mettle account which you can use as a subsidiary bank account if you’re wedded to your existing business bank account. A Mettle account can be quickly and easily opened online through the App. If you want a more robust bank account then switch business bank accounts to NatWest using the switching service to reduce the hassle factor.
A system favoured by many accountants being similar in functionality to FreeAgent although slightly more complex to use. You may have seen TV adverts for Xero featuring an archaic robot creating free time for the business owner.
Prices start at £12 per month for a starter plan and increase for volume, functionality or add ons.
QuickBooks is owned by Intuit who are based in the US and brand their software under their company name there. In terms of functionality QuickBooks ranks alongside FreeAgent and Xero. They too have run TV adverts featuring “teeny tiny” QuickBooks people taking care of the accounting!
Prices start from £4 a month rising to £8 after 6 months for a sole trader.
Challenger Banks and Accounting Apps
As like any other use of technology, times have changed in the world of accounting. Leading on from the development of Cloud Accounting systems the next big revolution in accounting was the Challenger Bank and the Apps that drive them.
A Challenger Bank is a new, small retail bank formed to compete with the large “big four” banks (Barclays, HSBC, Lloyds Banking Group, and NatWest Group) in the UK. Challenger Banks avoid the large overheads of traditional banks by operating online without the usual complexities.
Of particular note is the fact that most of these Challenger Banks offer small business owners an App where they can categorise all income and costs directly in the bank account – i.e. doing the bookkeeping. They use machine learning techniques to remember how to categorise things meaning that if you have the same regular transactions the system remembers where you posted them to on previous occasions and would suggest this as the posting for any future transactions. Using technology in this way removes much of the grunt work associated with bookkeeping allowing business owners to better manage their business finances on the go in the banking App especially if they follow the best advice below to pay all costs and receive all income into the business bank account.
There are a huge number of such banks that have sprung up with the major players being:
Of the Big Four Banks notably NatWest have formed their own Challenger Bank under the trading name of Mettle www.mettle.co.uk.
Where to start finding the right system for you
An accounting system will only work if you find it simple and easy to use. Otherwise it’s just going to be ignored, put at the bottom of the long to do list to get around to some time never!
As everyone is different it’s impossible to suggest the best solution as there is not a “one size fits all” ideal option. The best advice for getting the right system for you is to sign up to a free trial and give the system a go. There will be a bit of set up to do but once you get passed that into the nitty gritty of the day to day record keeping you will soon work out if the system is for you.
Once you make the leap and get into it you will wonder why you never did it earlier. There’s nothing to fear – let’s face it why would any supplier design an accounting system for small business owners that was hard to use! So just do it and get started with a system today.
Business Bank Account
There is no legal requirement to have a separate business bank account especially if you operate as a sole trader. However as a Limited Company is a separate legal entity then by definition the bank account needs to be in the name of the legal entity i.e. in the name of the company. So a separate business bank account is mandatory by implication.
Of course it makes complete and utter sense to operate a business bank account whatever your business structure is. That way you can keep the business finances separate and account for things at an arms length from your personal finances.
All too often business owners find themselves in an accounting mess because they have mixed up their business and personal costs. The best advice is to keep your business costs and personal expenditure completely separate from the outset – start as you mean to go on.
Top Tip – another good reason for having a separate business account is that HMRC can ask to see the documentation relating to business finances. If you have transacted through your personal accounts they can then ask you to provide access to the statements for these accounts. If no business transactions went through your personal accounts they generally do not automatically get access to these bank statements.
It’s much easier to get your business finances organised if you have a business bank account with a debit card that can be used for ad hoc costs. Your record keeping will be quicker and easier. You should be able to reduce the time that you or your accountant spends on your bookkeeping if you only put business transactions through the business account; no time will be wasted analysing your personal bank accounts looking for business transactions!
Putting your private costs through the bank account of a limited company can have serious tax problems (Director’s Loan account and additional Corporation Tax) so should be avoided.
If you do pay for business expenses out of your own pocket then, of course, you are entitled to reclaim these costs back from your business and reimburse the money to yourself, just like making an expenses claim if you were an employee.
If you do have to claim funds back from your business by way of an expenses claim don’t forget to attach supporting receipts (and a mileage log if you are claiming business miles) and file it safely in your accounting paper work or take a photo and store the paperwork electronically which is perfectly acceptable. Try to do an expenses claim at least once every month so you don’t forget costs, lose receipts or miss out on claiming a legitimate expense against tax.
As a business owner you will need to take money out of the business for yourself and your living expenses. Money taken from the business should be recorded in the accounts; the amounts are known as drawings for a sole trader, and normally a salary and / or dividends are taken by the owner of a limited company.
Do make sure that you ask your customers to pay for your goods or services into the business account too using your business trading name so the name on the invoice exactly matches to that on the business bank account.
Business Bank Account Names Top Tip – When it comes to business names it is worth knowing that banks have introduced a fraud prevention measure to ensure that scammers cannot make people pay them instead of a genuine supplier. This banking change has come about due to the increase in a very simple invoice fraud. A scammer would find out, via an active marketing or PR campaign, who a company had won a contract with. They would then contact the customer often by email, pretending to be from the supplier, to advise them of a change in bank account and for any new payments to go to the new account which is in fact the scammers own bank account. Little in the way of checking was done to validate the change to the bank account. Money would flow into the scammers bank account with them taking off with the funds before the supplier kicked in their usual credit control and debt chasing activities. To prevent this from happening banks have introduced an account holder name checking measure which validates the name of the account holder against the name that you enter as the payee when you make a payment via online banking. If the names don’t match the bank asks you to review the details and confirm that this is the right account and a genuine payment. So if you expect to pay XYZ Limited but the account name shows as Mr A S Cammer then you should know that something isn’t right and not make the payment. This is a brilliant fraud prevention measure that will work in many cases but scuppers many a sole trader who may not have a business bank account or do have a business bank account in their own name but not in the trading name of their business.
For example, Joe Bloggs the gardener may trade as Sunny Gardens – all perfectly legal. However if Mr Bloggs quotes for a job and raises an invoice as Sunny Gardens when his customers come to pay alarm bells may ring when the bank account shown on Sunny Gardens invoice belongs to Joe Bloggs. For businesses operating in this way the solution is threefold:
- Operate a separate business bank account
- Have a trading name added to your business bank account
- Add your business and personal names to all invoices and correspondence with your customers so they know who they are dealing with
These are just simple solutions that will stop any query from your customers being raised during the sales and payment process and let’s face it you just don’t want to introduce any blockers to getting paid quickly. The best thing is to have consistency in your business name and the name on your business bank account i.e. use the same name throughout. That way any uncertainty is avoided and getting paid should not cause any issue.
Your accounting can become even easier if you use bank feeds. Bank feeds merely mean that your bank account is connected to your accounting system with the transactions being dragged from the bank account into your accounting system every day without you having to do anything. Well except for one thing which is to link your accounting to your business bank account.
All reputable accounting systems and bank accounts have a facility, which includes industry standard security measures, in place to allow you to make the connection between your business account(s) and accounting system. You can link as many bank accounts as you like. There is a defined process to follow to set up a bank feed which will include you logging onto your online bank account to give permission for the data, to pass, through the bank feed, into your accounting system. This bank feed permission does need to be refreshed on a regular basis e.g. in FreeAgent the permission is refreshed every 90 days.
A search on the help section of your accounting system should point you to a tutorial on how to set up your bank feeds. Or contact your accounting system support team if you cannot find instructions.
Once you’ve set up this function, all bank transactions will pass across to your accounting system where you will be able to either explain (provide the analysis of the transaction) or approve (the analysis for the transaction has been remembered or assumed from previous postings) the transaction’s machine based learning posting.
For some Challenger Banks if the bookkeeping (explaining the transactions) has already been done within that bank account this is passed to the accounting system meaning that there is nothing further for you to do. For example if you use a Mettle account for all of your transactions the analysis you make in Mettle is passed into FreeAgent if that’s your accounting system of choice.
In reality this means that if all of your business transactions are made through your business bank account then there is little more to the bookkeeping than to approve or explain the transaction.
All in all this means that your bookkeeping is much easier taking moments rather than hours of manual posting as was the norm before technological advances.
Top tip – do it often e.g. a couple of times a week. By logging onto your accounting system on a regular basis the bookkeeping and accounting becomes much more manageable and not something that is dreaded because it’s got into a muddle or a backlog built up.
Doing the Books
Now that we’ve covered the key tools that you will need for your business accounting let’s summarise what your bookkeeping (keeping the financial records of the business) will look like in reality:
Ins are receipts into your business which can be things like:
- Monies received for sales of goods or services usually known as sales, turnover, business income
- Amounts that you, or others, have paid into the business to help fund it known as capital introduced or a loan to the business. For a Limited Company this can also be the receipt for share capital issued
- A tax refund
Outs are payments out of the business usually for things like:
- Business costs paid from your business bank account
- Out of pocket expenses paid from your personal accounts or funds reimbursed via an expenses claim
- Money that you need to live on paid out by way of drawings (sole trader) or dividends / salary (limited Company)
- Repayment of capital introduced or loans made to the business
- Taxes such as Corporation Tax, PAYE or VAT. Personal Income Tax is not an allowable business expense
Finally let’s explore the business financial dashboard which sounds a lot more complicated than it really is. Within your accounting system there should be a dashboard. It’s much like a dashboard on a car but rather than telling you how fast you are going or how much fuel you have it will show the key figures associated with your business such as, for the FreeAgent dashboard:
- Your cash flow – what is coming in and going out of your business
- Invoice timeline showing which invoices have been paid, what’s outstanding and so on
- Your bank account balances
- The profit and loss for your business (income less costs = profit) with the estimated tax due on the profit and, most importantly, how much you can take out of the business after allowing for the tax which will need to be paid in due course
Getting into a good routine for your business finances will keep you on track and ensure that things do not get into a mess. Once you’ve mastered it, the keeping the books routine can be easily slotted into your daily business tasks and isn’t something that will take up much time or feel like a chore. It should become something that you do because you own a business and that means you need to have financial knowledge and control of it.
The following can be used as a checklist at the outset with the tasks becoming second nature and familiar.
Regular and ongoing
On a regular basis, being daily or a couple of times a week or a few times a month:
Explain your bank feed transactions – from the automated bank feeds, which regularly and automatically bring in the transactions from your business bank account into your accounting system, explain each amount. This means allocating it to an account code or heading (the term is interchangeable) such as an income category or cost code. This will show what the transaction was for. The heading that the transaction is allocated to should be obvious and if this is done on a regular basis will be familiar and something in your immediate memory. Left too long and there is a risk that you simply will not remember what the transaction was for.
The bank feed will automatically bring in the date, amount and description of the transaction. During the explanation process the system will suggest if the amount has VAT applied to it or not. Do not just assume that the system has got the VAT right. You will need to check the VAT status of transactions as certain items, such as bank charges, salaries, train tickets to name a few, do not have VAT included in them. The system will use the VAT status of the transaction to calculate the amount of VAT. Obviously this only applies to VAT registered businesses. Businesses that are not registered for VAT can ignore VAT incurred on transactions with the amounts being posted to account headings as gross (the full amount). The invoice or receipt that you have from your supplier should show if there is VAT included in the amount that you have paid.
When it comes to posting to the account headings it is best to limit the number of codes that you use. Most accounting systems come with a huge number of account codes. Just because they are there doesn’t mean that you need to use them all. Account codes or headings are there to break down things in your accounts between the five main types of transactions being income, costs, capital, assets or liabilities. These five types of transactions are used to sum up everything for the annual accounts and produce the Profit and Loss account and Balance Sheet being the two main things that make up a set of accounts. Breaking items down between these five types is something which is routinely done – accountants love doing it and often use the breakdown for further analysis and comparison between the business performance between years. However for the self employed one person business owner the usefulness of the analysis to a plethora of account codes is limited as the amount and number of transactions are relatively small in size and number. Using between 6 and 12 account headings is usually sufficient for the needs of most businesses. Select account headings which best match what your business does and be consistent in their use by repeatedly posting the same transactions to the same codes. To get started this may be an area where you ask advice from an accountant about the best account codes to use or even ask them for some training to ensure you get things right.
When posting, also known as explaining or approving, your transactions there are some account headings or codes to avoid using:
- Fixed Assets – these accounts are for large value items (whilst there’s no strict definition use a value of at least over £1,500 or the price of a good laptop as a reasonable guide) which would be used in your business for more than one year. The accounting and tax treatment for these items is different and you would need to understand about depreciation and capital allowances to complete the company accounts if you have fixed assets
- VAT account – generally amounts are automatically posted to the VAT accounts as part of the main VAT inclusive transaction meaning that the need to post directly to the VAT account is limited to paying the VAT bill, receiving a refund or if an adjustment is needed
- Bank accounts – the use of bank feeds ensures that all transactions are brought into the system from your bank account automatically. So posting directly to any bank account should be avoided as this can put the bank balance on the system out of balance with the amount actually in your bank account. This will mean that your accounts are wrong
- Director’s account – If the director loans money to the business then this is where the amount would be posted to. When the loan is repaid to the director the entry would also appear in this account. Other than that and because the accounting treatment of directors accounts can be different in the case of the director owing the company money, posting to this account should only be done if the Loans to a Director rules are followed. When extracting money from the business for your own funds the usual rules of “how to pay yourself” should be followed
- As a rule of thumb avoid posting anything to a balance sheet account unless you know what you are doing. You can see the balance sheet accounts by running the Balance Sheet report
Capture other transactions – add any other transactions that you have not paid for or received through your business bank account. For costs these could be out of pocket expenses for:
- sundry items such as stamps, stationery or a train ticket that you paid via a personal credit card or your own non business related bank account
- your business mileage
- a charge to the business for your use of your home as an office
On the income side this could be where you have been paid by cash or a customer inadvertently paid for your services via a non business related bank account although this should be discouraged and avoided.
The date, amount and description of the additional transactions will need to be recorded along with the VAT status in the same way as for the transactions posted up from the bank feeds.
By far the easiest way to capture other transactions is through your accounting system (log on via your laptop) or via an App that comes with the system. For example, the FreeAgent App, which you can download from the App store, has a big green + symbol at the bottom of the screen which allows a quick add of things like expenses or mileage as well as other transactions.
Get into the habit of adding other transactions as they happen e.g. after you’ve completed a business trip simply add the mileage. Relying on your memory to capture transactions at a later date is a sure fire way of forgetting things which will likely result in paying more tax than you need to as paid for costs could have been left out of your accounts.
Raise customer invoices – as needed you may need to raise invoices to your customers, following them up to make sure that you get paid. More on this is covered in the “how to invoice and manage cash flow” chapter.
Keeping receipts – as you explain your transactions then any receipts or invoices that you’ve collected can be electronically attached to the transaction. As a general rule of thumb you should keep accounting records for 6 years from the end of the current financial period. This would also include bank statements as well as your accounting records. So it’s worth remembering to download statements for safe electronic storage as well as to back up your accounting data from your system on a regular basis. If you do move banks, close an account or change accounting systems make sure that you back things up before you lose access to the bank or system.
Paying yourself – each month, following the rules applicable for extracting money from your business, make the necessary payment through the business bank account for your salary, drawings or dividends and out of pocket expenses. For ease, a fixed amount salary could be set up as a monthly direct debit although setting up regular amounts for drawings and dividends should be avoided not least because the figures should be reviewed to ensure that there are sufficient funds available to take money from the business.
Managing finances – on a regular basis and at least once a month it is good practice to monitor the performance of your business. You’ll find useful information about your business finances in the dashboard of your accounting system not least business income, costs and profit as well as how much you have in your business bank account, the tax you will pay and the amount that you can take from the business. The reports available within your system should give useful overviews of things like aged debtors (who owes you what and how long the amounts have been outstanding) as well as your profit and loss and transactions lists. Developing a go to set of reports and numbers that you can quickly review to keep on top of your finances will help you pick up on any issues sooner rather than later when it could be too late to take remedial action to bring things back on track.
The annual tasks for the business will usually be the submission of the accounts and tax returns as well as a Confirmation Statement for a Limited Company. Certainly for a limited company the help of an accountant is usually needed when submitting the accounts and tax returns not least because software is needed to do these things. The Confirmation Statement can be done yourself (watch the Companies House video for this which can be found on You Tube). A sole trader could file their self assessment tax return without the assistance from an accountant although they may wish to use one for peace of mind that things have been done correctly.
- Get a system going from day one or as soon as possible if you didn’t get one set up straight away
- Set up a dedicated business bank account that is never used for personal costs
- Pay for all business costs through your business bank account
- Account for out of pocket expenses, such as mileage or use of home as office, via an expenses claim in your accounting system reimbursing the funds into your personal bank account
- Invoice your customers through your system so that you can see who has and hasn’t paid you & chase the ones who don’t pay promptly
- Ask customers to settle your invoices into the business bank account
- Pay any other business income, such as VAT refunds, into your business bank account
- Set up automated bank feeds to link your business bank account into your accounting system negating the need for manual data entry
- Do the books regularly by following “The Routine”
- Check your system dashboard often to monitor the business performance and get to know your key figures
- Only take money out of the business to live on by way of salary and dividends (limited company) or drawings (sole trader) where there is sufficient profit after allowing for tax to do so
- Live within your means, developing a personal budget, and never extract more money from the business than is available to do so (see how to pay yourself)