Why is bookkeeping important for a small business?
Chances are, you’re getting into business to create a useful product or service, to do some good and to make some money. It’s less likely that you’re doing it for the fun of keeping business records and filing tax returns.
The boring side of business means you need to do some bookkeeping. It sounds like an old-fashioned term but it’s an essential activity. (We don’t think it’s boring, but we’re accountants and it’s our job to do this sort of thing all day.)
So, what do we mean by “bookkeeping”?
Bookkeeping means maintaining a record of business income and matching costs incurred in making that income.
Let’s look at some common questions about bookkeeping that we hear from our small business and startup clients.
What records should I keep?
Do you issue receipts or invoices every time you sell a product or provide a service? You ought to! Assuming that you do, you should find it straightforward to keep records for your business income. But what records do you need to keep?
Firstly, all income should be accounted for whenever a business transaction takes place between you and your customers.
It’s often more challenging to remember to log your business expenses – the costs that are incurred in making your business income. Keep all receipts for expenses you intend to claim for and log the mileage rates for your business travel.
Expenses purely related to the business are usually straightforward to claim for, but there are grey areas in cases where expenses have a combined business and personal component (such as electronic devices used at work and at home).
We go into more detail about this in our article Startup expenses: what you can and can’t claim.
Do I need paper records?
No, you can scan copies of any printed materials and keep everything safe in digital form.
From the compliance point of view, paper records are not more important or more valid than their digital equivalents. That’s a win for convenience – and it means you can help to save the trees.
What are the risks of not bookkeeping?
Reliable records mean you won’t have headaches if your accounts are ever inspected or audited. Incomplete or missing records could mean you miss out on being able to claim expenses.
And if your books are inaccurate, that could lead to bigger problems with HMRC, including the possibility of fines. No business wants those hassles, so it’s important to get your books in order.
Good bookkeeping information also provides a useful way of seeing how your business is performing. Accurate records help you understand:
- how much money is coming into your business.
- how much money is going out of your business.
- which areas you’re making money in.
- which areas you’re losing money in.
Is bookkeeping something anyone can do?
While you don’t need to be a maths whizz to manage your books, that doesn’t mean the process is easy or suited to everyone.
It’s common for small business owners to underestimate the work involved, especially when they’re VAT registered. Bigger businesses may be able to justify paying £25K+ per year to hire someone in-house to handle this work, but many small businesses and startups will save a lot of money by passing the task to an accountant.
If your business income falls below the VAT threshold, we suggest you avoid the admin burden of voluntary registration and wait until your business grows to the point where registration becomes mandatory – a good sign that you’re moving in the right direction!
Whether you’re VAT registered or not, we recommend putting good systems in place to avoid the risk of paying the wrong amount of tax.
Automated products can make life easier, and many of our clients have saved time and hassle by switching to cloud accounting software such as QuickBooks or Xero.
Top tips for bookkeeping
Let’s round off with a few more quick bookkeeping tips:
- keep your records up to date – set aside time to do the work each week or month and you’ll avoid backlogs and headaches at the end of each financial year.
- record only valid business incomings, outgoings and expenses – this is the basis of your accounts to submit to Companies House and for corporation tax or personal tax, so you need to get it right (leave the personal expenses out!).
- monitor where you’re not making a profit – good bookkeeping lets you tackle these problem areas to help you maximise your income.
Let’s sum up
Bookkeeping might not be the most exciting subject (although it is to us – we love it!) but it’s important to get this right if your small business is to succeed.
Follow our tips and if you need an expert hand getting your books and accounts right, drop us a line. This is what we do all day for our small business and startup clients, and we’d be happy to help you, too.