Why your small business needs basic bookkeeping principles

Keeping the books accurate is non-negotiable for running any business venture. Thankfully, it’s never been easier to learn the basics of accounting yourself, meaning you don’t have to fork out large fees to hire an accountant.

What is basic bookkeeping?

Basic bookkeeping involves recording all of your business transactions in order to produce a set of accounting records. Fortunately, you don’t need to be an accountant to be able to effectively practice the basics. As a freelancer or small-business owner, it’s relatively simple to manage the books yourself – particularly with the wealth of bookkeeping software applications available. These applications are usually run on a subscription service and can help you learn the fundamentals without too much expense.

What are the benefits of good bookkeeping?

Managing the accounts is a critical part of running a successful small business that allows you to easily see whether you are spending too much and ensure that you are not eating into your profit. Bookkeeping makes it simple to see the cash flow of your business at a glance. If you run a medium-sized or large business with multiple employees, doing your own accounting can become complicated and tedious – in this scenario, it’s recommended you seek the services of a professional accountant.

Failure to keep clear and accurate books makes it difficult to manage the finances of your business. Also, it can cause problems when trying to report your income to HMRC. This can result in you not paying enough tax and being issued with a fine, or alternatively, paying too much.

What are the basics of bookkeeping?

At first, doing your own bookkeeping can seem unachievable for a layman. However, learning simple bookkeeping is not difficult and is more than enough for any small business or a freelancer. Here are the five most important points:

• Open a business bank account, to track the expenses and income from your business and make it easy to get a good overview of your finances. In the UK, more or less every bank offers a business-specific account so it’s recommended that you compare each account to get the best perks and rates.
• Budget for tax: A financial budget is important for any business, for obvious reasons. However, it’s critical that you factor tax into your budget. If you make over £12,500 (from April 2019) then you will have to pay income tax, along with National Insurance. You can use this tool to easily budget how much you need to set aside for payment of tax. Some business expenses will be free from VAT, so by keeping your bookkeeping up to date, you can save yourself some money that would be spent on tax.
• Track all of your expenses: It’s paramount that you track anything and everything you spend. You can either do this by keeping paper receipts, or by keeping your digital banking tidy with descriptions of each invoice. It’s important to differentiate between business and personal expenses. A flight to a business conference is clearly a business expense, but a new Rolex is likely not.
• Pick a bookkeeping system: Double-entry bookkeeping is the industry standard method. This format means that all business transactions involve two accounts (or more). For example, if a company borrows money from its bank, the company’s cash account will increase but its liability account will also increase due to money owed for the loan. You can download a free template, create your own in a program like Excel, or even use cloud-based online accounting software programme to speed up and simplify this process. The latter allows you to access your books from any computer, by logging into your cloud account. This also keeps it safe in the event that your computer is damaged.
• Pay yourself and your employees: If you are a freelancer or self-employed, it’s worthwhile paying yourself a salary so you’re not taking too much money out of your business. If you have several employees, it’s important to set up a payroll system that will track how much your employees earn and pay them for you.

The above steps are the main bookkeeping practices that any self-employed person or business owner ought to know about and follow. It doesn’t matter if your business is on a tight budget, as you can practice all of the above steps without paying for professional help. However, if doing your own accounting is overwhelming, it would be wise to seek the advice of a professional accountant.