How to manage your accounts as a small business

Craig Upton | 7 April 2021 | 3 years ago

How to Manage your Accounts as a Small Business

Small businesses are rapidly increasing, especially with a surge in the number of people choosing to become self-employed following the recession and, more recently, the Coronavirus. With many people venturing out on their own it is important to know the basics of business.

Without effectively managing the accounts and financials of your business it is likely that you could run a deficit rather than a profit. You could also find yourself facing fines and charges if you haven’t properly recorded your accounts for tax purposes.

Although the accounts may be the most difficult and tedious task for many entrepreneurs, it is a vital part of business. Keeping good accounts not only keeps you compliant with legislation, it also provides you with valuable information for the successful running of your business.

Setting the tone for good small business accounting from the start of the venture will help you to maintain higher earnings and focus on what is really important to you.

A lot of new business owners are concerned about what it means to handle their own accounts. There can be a lot of confusion around taxes and finances and many people find themselves in the difficult position of trying to pay extra for an accountant.

The good news is that you don’t need to be a maths genius to handle the basic financials and accounts of a small business. A basic understanding of bookkeeping is really all you need when you are first starting out.


Can I do my own small business accounting?

Yes. There is no legal requirement for a small business to use accredited accountants or professionals to handle their accounts. As long as you accurately report your business finances and handle your taxes, you can do all of your own accounting.

You will need to set up systems early on in the life of your business to properly record and monitor all capital, debts, incoming and outgoing cash, and credit. Depending on the type of business you own this could end up being very simple or it may require more complex systems. Start by considering what type of business you have and what your cash flow generally looks like to get an idea of how comprehensive your accounts need to be.

Generally freelancers, hobbyists, and businesses with no additional staff (or very few) can succeed quite easily without any formal accounting assistance. As your business grows, you start to employ others, or you amass debtors or creditors, it becomes more difficult to handle your accounts as well as all the other responsibilities that come with running a business. At this point you may need to start dedicating more hours to maintaining your accounts or even consider hiring someone to handle your accounts for you. This can be on an hourly arrangement and doesn’t need to be expensive, but it may free up time and complication for you if you find your accounts are becoming too big a task.

Bear in mind that regardless of the size of your business there are certain tasks you must complete. These tasks are either legal requirements or are simply essential in helping you to maintain and grow your small business.


What small business accounting is essential?

Essential small business accounting can be broken into two categories: accounts that are essential for business health, maintenance, and growth, and accounts that are required by law.

Essential accounts for your business’s health, maintenance and growth include basic bookkeeping and annual reports or accounts. Legally, the only accounts that are essential are your annual tax returns. Larger businesses have more requirements imposed on them, so make sure you know the size of your business, your annual income and profits, and if your tax bracket has changed. There is a chance you will need to prepare a cash flow statement along with other financial documents to be operating legally.

Even if you are a small business or self-employed, maintaining accounts throughout the year is invaluable when it comes to taxes and monitoring the health and feasibility of your business.


How do small businesses manage accounts?

Most small businesses who have a good handle on their accounts have turned to software that helps them keep track of their finances. There is a lot of good software available with free, subscription, and once-off payment options to suit your needs and business. The software is often linked to your business account and you can handle most of your transactions in one place, simplifying your business finances.

If you would prefer to keep things simple, many self-employed and freelance workers still use spreadsheets and find them sufficient for handling smaller business accounts.

Regardless of the size of your business or your preference for software, there are a few steps you should take to ensure you fully understand your accounts and are able to control them well:

  1. Open a separate account for your business. A lot of people will skip this step, especially if it is a new venture. But having a business account will help you properly monitor your cash flow. It will also give you a bit more security as many business accounts now come standard with some form of business insurance of protection. Shop around at different banks and see what is suitable for you. You could also choose to open a separate current account to start with, just make sure your business accounts are not combined with your personal accounts.
  2. Decide if you will record transactions when the documentation is issued or when the money changes hands. If you choose to work on a cash-basis the books may be a little simpler to handle, but it can get tricky keeping track of your actual financial standing because you won’t have recorded outstanding invoices or debts.  The accrual system works by recording money that will be changing hands regardless of when the transaction is made. So if an invoice is issued that transaction is recorded even before the money is received. The accrual system requires a double entry system (recording when the invoice was issued as well as when the payment was received) but it can work out a lot more secure and orderly in the long run.
  3. The natural next step is to use step two to help you record your transactions. Include all business incomes and expenses, keeping scans, digital copies, or physical copies of all the relevant documents. Keeping track of all your transactions is an easy way to see where there might be unnecessary expenses, interest charges on late payments, or problems with debtors.
  4. Build your systems. If you have decided not to use integrated software, then you will need to build templates for all your business documents as well as choosing a way to efficiently store documents. Remember that as your business grows you will want documents that are easy to find as well as easy to read. Creating simple and professional financial documents at the outset can help you save time later on.
  5. Finally, make sure you understand how you are taxed, when you need to pay, how you can pay, and what information or documents you need. “Tax season” is typically a stressful time for a lot of businesses who have failed to adequately prepare. If you have calculated your taxes in advance and kept consistent accounts, then taxation won’t be stressful or problematic and filling in the relevant forms should be a relatively straightforward procedure.
Depending on the size and type of your business there will be other things to consider as well. If you employ workers, you will need to factor in PAYE and contributions. If you are an import or export business, you will need to consider additional taxes imposed by other territories or border forces. Be sure to factor in any other financial needs your business has.


What software is best for small business accounts?

There is so much software available to help small businesses, picking the best can be a daunting task. Although you will find plenty of lists with the best software, at the end of the day you need to decide exactly what your business needs and how much time and money you are able to invest in your software. More expensive packages may offer more features, but if you have a small business then you may not need the features and could end up paying for unnecessary extras.

The main things to consider when choosing your software are:

  • Do you need multi-user software? If you are the only one using the software, then paying for multi-user is a waste. However, if you have multiple people updating or using invoicing systems then having the multi-user option could be essential to optimum running of the business.
  • Do you run more than one business? If you’re an entrepreneur with fingers in lots of pies, then you may want to look at software that supports multiple businesses. This can be a great way to save time and money as you will have one portal for all your business accounts, neatly separated and easy to use.
  • Do you need to work on the cloud? Most businesses are now cloud-based. If you work from different devices, work remotely, or need to make sure everything is backed up for you, then cloud software is the best way to go. As long as you have a good internet connection, you will be able to access your finances from anywhere. Some people prefer software downloaded and secured to their own computers, however, so you will need to decide what is best for you.
  • Do you need mobile access? If you conduct most of your business on your phone then having a mobile app for your accounting can make life that much easier. If you work primarily from a desktop, however, a mobile app feature is just another pointless expense that you’re better off avoiding.
There are plenty more features to consider when choosing your software. Be sure to consider exactly what you want and need from your accounting software before making a decision. It is also helpful to know what features you would prefer to avoid.

If you are unsure or want clarity, remember that hiring an accountant to advise you as you are setting up is always an option. You can pay someone an hourly rate to help you set up your accounts, so they are professional and consistent. Hiring a professional will also give you a chance to ask any questions you might have about your business’s accounts and give you insights into why accounts need to be kept a certain way.


How does a small business create a cash flow statement?

You will often have heard the saying “cash flow is king”. Understanding your cash flow is essential in understanding the success and stability of your business. A cash flow statement will only reflect activities dealing with actual cash exchange and will exclude all debts and credits. This gives you a good idea of your business’s risk management as well as general cash health.

Creating a cash flow statement is fairly straightforward and requires records from all cash income and expenditure. You can complete cash flow statements monthly, annually, or in shorter cycles, depending on the size and type of your business and how much cash is changing hands. Your cash flow statement will look a bit like a bank statement when you are finished with it. Remember to record any petty cash you may keep on hand as well.

  1. Start with your opening balance. This is the amount of money that was physically in the bank at the start of the period. Don’t include any assets, investments, or outstanding invoices.
  2. Record incoming cash, including loans, payments for goods and services, sale of assets, and interest on investments.
  3. Record all outgoing cash, including rent, insurance, overheads, general expenses, and payments on loans.
  4. Calculate the final figure by adding all incomes and subtracting all outlays.
It’s that simple.

It is also useful for businesses to create projected cash flow statements to help handle large payments. For example, if you pay business insurance and income tax for the whole year in a single month, that month will have much greater outlays than the rest of the year. Knowing this, you can plan your cash flow in advance to make sure you still have enough operating cash in months with higher outlays.

Knowing the state of your business’s accounts can only empower you to make wise decisions about your business. Keeping accurate records and updated projected cash flow statements, even if you don’t legally need them, can help your business grow and thrive.




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