Whatever type of business you are operating, from freelancing, running an online store through to a simple side hustle to make ends meet, you need to keep on top of your business finances, pay yourself from the profits and, of course, set aside enough to settle your tax bill.
To be able to do all of this the stark reality is that you need to know a bit about accounting and tax. Keeping the books and filing tax returns are never going to be the most thrilling of tasks. It’s something that just needs to be done! There’s no magic tricks to make it interesting but there are many things that can be done to make it quick, simple, easy and less of a burden.
The thing about accounting and tax
During our lifetime most of us will pay tax. In the UK our tax system is one of self assessment which means that the responsibility of all this falls upon the shoulders of the individual. Of course someone can appoint an accountant to help them with their obligations but ultimately the individual remains responsible for anything which is filed.
So in reality, with ignorance being no defence, this means that the individual must have at least some idea of their accounting and tax responsibilities.
The problem is that looking after the finances of your business is something which is not taught. Anyone can set up a business – it’s very quick and easy to do so. Once that’s done there’s no training given on the responsibilities that you’ve just signed up for. You’re just expected to know this stuff.
Of course the internet is full of articles, guidance and advice; much of it useful but some full of errors or out of date. So unless you have deep pockets to pay for an accountant to do all this for you it really is important to have at least a basic understanding of what is required. Once you start in all likelihood, you’ll surprise yourself as it will be easier than you thought. It really is just a matter of being shown what to do, how and when to do it.
You don’t need to know the history of accounting or even how the system of double entry bookkeeping invented by the Italian mathematician, Luca Pacioli, works. Certainly for some the world of accounting seems to be shrouded in secrecy with grey suited accountants weaving some magic over your invoices, receipts and bank statements which you drop off at their offices sometime between the end of the tax year and when your tax return is due. This is swiftly followed by the shocker of their invoice and the tax bill along with the realisation that you have been spending beyond your means for ages and haven’t got enough left to pay HMRC. Luckily that approach is being well and truly confined to the past. Accountancy is no longer purely left to accountants nor is it done months and months after the fact. The use of technology has made plenty of easy to use tools available for business owners so that they can keep on top of their business finances as they go. Not only do these tools allow you to easily capture your transactions but they also provide a dashboard overview of the financial position of the business including an estimate of the taxes which will need to be paid at some point.
What is accounting?
Put very simply accounting records the monetary value attached to your business transactions – the very things that you do in the business with the intention of making a profit.
In reality accounting is straightforward because it’s made up of just a few types of transactions – capital, assets, liabilities, income and costs.
When you start your business you may put some money into it for your start up costs – this is known as capital introducedor you could loan money to the business with the intention of it being repaid at some point once the business has generated some funds.
You’ll probably buy some things for your business paying for these items from the business bank account or your personal funds, bank or credit cards. These are known as costs or assets for things that have long term use.
In reality most straight forward businesses and certainly freelancers will just record their outgoings as costs having little in the way of assets.
If you pay for your costs later you will create a liability (a creditor) which is cleared when you settle the amount owed. Costs also include your out of pocket expenses which are usually incidental costs that you may incur as part of doing business such as mileage and small items paid for from your own funds. When referring to total costs this will also include expenses.
You’ll sell something – either products or services. Sales are generally known as turnover, sales or business income. If you allow your customers time to pay you have a debtor which is someone who owes you (the business) money.
TURNOVER LESS YOUR BUSINESS COSTS = PROFIT.
Tax is paid on profits – anything left after that is the amount that you can take out of the business for yourself.
For a sole trader amounts withdrawn are known as drawings whereas amounts taken out of the business in a limited company would need to be done by way of dividends & salary. It is important to remember that additional income tax, such as dividend tax, could be due on the money taken out of a limited company.
That’s all there is too it really!
OK there are a couple more rules to follow and things can get slightly more complex but for the vast majority of straight forward freelancers, creatives, contractors and self employed one person businesses this really is as hard as it gets.
There’s simply no need to make things any more complicated.
The right tools for the job
Of course getting the right tools for the job, such as an accounting system like FreeAgent (which you can get free with a Mettle, NatWest, Royal Bank of Scotland or Ulster Bank NI business bank account), helps enormously. After a tiny bit of set up it will mean that your accounting is literally done in moments. It really will be simple and something that you just incorporate in your day-to-day business activities.
Just 5 things
There’s just five things that you need to crack to get your business accounting on track:
- Use a system
- Get a business bank account and only put business transactions through the business account – no personal stuff
- Avoid paying for anything for the business out of your own funds – use the business bank account
- Be organised and do the books regularly – a few minutes a couple of times a week will be enough in most cases
- Don’t spend your tax money
Dispelling the myths
Over the years accounting has been enveloped in myths most of which are simply not true. So let’s dispel a few of them right now:
- You DON’T have to be good at maths to do accounting – all of the sums are done by your tools (bank account and accounting system) and in fact accounting and tax only require a bit of adding up, subtraction and a percentage for your tax bill
- There’s no need to know double entry bookkeeping – again your tools take care of the technical entries done behind the scenes
- Tools, systems and Apps make accounting simple and carried out as part of your usual business routines being done on the go rather than once a year in the offices of accountants
- Your tax bill isn’t something you think about once a year – you set aside money for it as you go the same as would happen if you received a salary or wage slip with the tax deducted out of your gross pay before your money arrives into your bank account
- Not all of the cash in your business bank account belongs to you – some of it needs to be set aside to pay people that you owe money to like suppliers and HMRC
- Profit after allowing for all taxes is the most important figure you need to know – this is what you can take out of the business. Anything else is “borrowing from the tax man” and spending money that isn’t yours!
What is the Cheap Accounting Way?
Often in life we search for cheap deals – cheap petrol, cheap insurance or a cheap plane ticket. We still expect the same standard of service. For example we still expect the plane to get us from A to B. We still expect petrol to power the car. We still expect the insurance company to pay out in the case of a claim.
We look for the cheap deal in the sense of it costing little or less than usual.
The way to achieve cheap accounting for your business is via having a basic understanding of:
- What you need to do
- When you need to do it
- How you can do it easily
The cheap accounting way gives you the underlying knowledge that you need to put you in control of the accounting and tax for your business. With that information you can decide how you want to run the finances for your business.
Doing it yourself obviously will be the cheapest option. Paying someone else to do it will cost more – a combination of the two will achieve a cheap accounting way that works for you and your business. Either way you have the choice of where and when to spend your money on professional help to provide the support that you need when you need it.
As a rule of thumb many sole traders can do most of the accounting themselves with perhaps help with the annual filing. A Limited Company will likely need the help of an accountant as the rules and year end filings are more onerous. There are no right and wrong answers but there will be the right solution for you and your specific needs. You just need to work out what that is – what suits you.