As an entrepreneur starting out and running on limited financial resources, it is understandable that you would be looking for ways to cut costs. Downsizing your team, of course, will save you a lot in terms of salary and benefits – and according to a recent poll, 61% of business owners opt to do their accounts rather than hire a professional bookkeeper.
On the surface, this seems fair. Professional accountants do not come cheap, and with the growing plethora of online resources, it is certainly possible to pick up business accounting rules and handle the job on your own.
However, an accountant does not simply hit ‘Send’ on tax returns. They also advise you on ways to save money and claim benefits while ensuring that your accounts are consistently up-to-date and in the appropriate format. Why would you not want that
Entrepreneurs attempting their accounts often end up overpaying/underpaying tax or making other costly mistakes that could get them into hot water with the HMRC simply because they do not have the industry knowledge of accounting that a professional does.
Nonetheless, you can do your accounts if you are committed enough. A good accounting software will automate much of it for you anyway, and the rules are out there on the internet for anyone to learn. To start you off, though, we have compiled a checklist of the basics – have this on hand as you get your new business up and running:
1. Choose the right business entity
There are three main types of business entities – sole trader, partnership and limited company. How you categorise yourself will heavily determine how you are taxed, your potential liability, what salary you can pay yourself and so on. Choose carefully.
2. Select your accounting method
There are two accounting methods you can pick from:
Cash basis accounting – where you record income when it is received and expenses when they are paid
Accrual basis accounting – where you record income when it is earned and expenses when they are owed
The former is simple to start with and easy for everyone to understand. The latter is more complex but is a better way to get an idea of the long-term picture for your business.
3. Keep complete financial records
We can sum this up in two words – keep everything. Every bit of documentation about income, expenses, bills receivable, bills payable, financial statements, tax deductions, cancelled checks and so on needs to be on file for a minimum of six years, and sometimes longer. Use Dext to scan receipts and manage them in one palace.
Subscribe to our newsletter
4. Update your books regularly
If you only get around to updating your business books before your tax return, you will have a mammoth job on hand. Instead, get into the habit of weekly and monthly bookkeeping to maintain tidy, complete records:
Weekly – Enter your transactions into your accounting software, categorise them correctly and keep all receipts and invoices on file.
Monthly – Pay off your bills, review your outstanding invoices, reconcile your bank statements and check your financial standing.
5. Prepare and examine your financial statements
Your financial statements are an invaluable source of information about how your business is doing. As long as you maintain your books regularly and accurately, the financial statement presents an all-in-one snapshot that helps you make better decisions going forward. Two of the most critical metrics it can give you insight into are:
Runway – This measures how much cash your business has on hand versus how much you spend per month. So if you have £5,000 in the bank and spend £1,000 monthly, you have five months of runway. This helps you see how much cushioning you have to run your business even if you are not making money, which could very well happen in the initial months.
Net profit margin ratio – This measures how much profit your business makes for every dollar of revenue. Based on this, you can decide whether to cut costs or raise prices.
Plus, by examining the statement carefully, you can get insights on:
Where your customers are – The geographic location of your customers can influence important decisions about marketing. For instance, if most of your customers seem to be in one or two specific cities or towns, you might want to design ads targeted to those states or give them special local offers.
Who your best customers are – Identify the parties buying from you the most often and in the most significant volumes. Then, figure out how to retain them better and attract more buyers like them.
Who your top vendors are – If you are a frequent buyer from a vendor, you can potentially use that to negotiate volume discounts or a longer credit period.
6. Consider outsourcing your bookkeeping
As your business grows and your duties expand, you will likely find it harder and harder to keep track of your books. At that point, it makes sense for you to outsource to a professional bookkeeping services provider.
They will ensure your accounts are continually updated, handle tax returns and audits, give you financial advice and more. And while they come at a price, you will find that the time you save and the benefits you get from their advice will be very much worth it.
Over to you
In conclusion, handling your books when you starting out can be a great way to grasp all the ins and outs of your financials and talk about your business more confidently. Therefore, be sure to invest in good accounting software and to set time aside every week – no exceptions – to reconcile your accounts.
The more diligent you are about regular bookkeeping, the easier your job will be on tax returns, and the likelier you will make smart financial decisions for your business. Doing your books on top of running your business can get overwhelming – do not hesitate to, therefore, consult a professional if you have to!
Even if you are not hiring one full-time, having a consultant on hand with whom you can check in every month can ensure that your books are shipshape and identify any mistakes early on.
Besides, Bradleys Accountants can guide you on benefits and deductions you may be eligible for – well worth the consultant fee, we would say!