In a smaller business you always need to be in control of the money. You need to organise a system to help you keep track of it so that your business doesn’t fail simply through lack of cash. You can only achieve this by keeping good records – otherwise known as the art of book-keeping.

Many business owner-managers find the concept of keeping books daunting. But by failing to address this issue they put themselves in an unnecessarily weak position (because they don’t know if they have enough money to pay themselves, let alone their creditors) and they waste money. Handing a shoe-box full of receipts to an accountant once a year with the instructions ‘Sort this out’ is an expensive and dangerous option.

In fact, keeping good accounts is far simpler than most people think. You don’t need any special knowledge or qualifications to keep your books straight. All it requires is some planning, some organisation and some regular time. If you keep on top of it, it may only take you minutes a week. Actually, the hardest part is often being disciplined about doing it regularly.

This guide shows you what is involved in setting up a simple system. The concept will work whether you are turning over a couple of thousand pounds a year, or running a much larger business. The guide also outlines what to look for in computer accounts packages and when to outsource the function altogether.

Why keep records

There are two main reasons to keep accounts – to grow your business soundly and to keep the Inland Revenue happy. Let’s look at these reasons in more detail:

• You need to know how well you are doing. Are you making or losing money? Even if you are making a profit on paper, have you enough hard cash to continue in business? What money do you have in hand, and what is owed to you and by you? Only by keeping your records up to date will you have a good idea of your business’s financial health.
  
• You can analyse your expenses and may be able to find ways to operate your business more cost-effectively.
  
• You can analyse your customers to see who is most profitable and to find ways to sell more/other products and services to them, more often.
  
• If you budget you can compare your forecasts with actual monthly figures and take appropriate steps to keep you on course.
  
• Book keeping gives you early warning when you might be straying into cashflow difficulties, so you can act decisively to avert a crisis.
  
• You need to be able to show the bank manager, investors and the Inland Revenue how things stand in the business.
  
• All businesses that have a turnover over a certain threshold must register for VAT purposes. Businesses below this turnover threshold need not register, but there may be advantages in doing so. Failure to register in time will attract penalties. Customs & Excise may also ask you to pay the VAT due on all sales backdated as appropriate. If you didn’t collect any, you would have to find it out of profits.

Book-keeping options

There are several ways to keep financial records:

• Keep books manually. This is easy and you can do this anywhere. You can buy inexpensive book-keeping systems from most stationers. You simply write down the money flowing in and out of your business, analysing this under different headings. The downside is that adding up columns with a calculator can be time-consuming and it is not good for producing analysis or management reports.
  
• Use a spreadsheet. The downsides of this are that there is no cross-checking and it is hard to produce analysis or management reports. This option is probably fine for a small business with few, non-cash transactions.
  
• Hire a freelance book-keeper. This saves you time as well as having to learn book-keeping. The downside is the small expense involved.
  
• Give it to your accountant. This can cause delays – some people end up seeing their books only once a year, long after their year-end – so they are working in the dark most of the time. The result is that they may never get to grips with the dynamics of their business. It is also an expensive solution – you are paying an expensive professional for a task that an office junior could accomplish.
  
• Use a personal finance package on a computer. Some have facilities for business book-keeping, but possibly important functions, such as handling VAT, may be basic if they exist at all. Nor is there much scope for analysis.
  
• Use a dedicated computer accounting package. There are various levels of these from the small, inexpensive package to a fully-fledged accountancy package. All but the easiest require some knowledge of accounting. However, while the easiest are designed for people without accountancy training, they are powerful enough to give a good financial picture of your business.

No matter how you decide to keep your records, there are some simple things you can do to make your life easier.

• Keep all your invoices and receipts in two sets of files, one for sales and one for purchases. Allocate a unique reference number to every invoice in and out and note it in your books or on your computer system. Then file the invoices in that order in the relevant folder. That way you can quickly locate paperwork should you have a tax or VAT inspection.
  
• Money out. You can only offset expenses against profits that are wholly and exclusively related to the business. So ask for and keep receipts. When you are VAT-registered, it is essential to keep VAT receipts because without these, you cannot reclaim the VAT element. Log the money you have paid in one section of your cashbook. Assign columns for:
  
  • the supplier’s name, or employee’s name if you are paying wages,
    
  • the transaction date,
    
  • the amount,
    
  • your own reference number,
    
  • the cheque number.
    
• Money in. Establish another section in your cashbook for the money you receive.
  
• Note, too, the details of each transaction. Divide expenses up into columns with headings such as cost of sales, rent and rates, utilities, insurance, wages, marketing expenses, telephone, stationery, travel, postage and so on. If you are VAT-registered, you will also need a column for VAT inputs and outputs.
  
• At the end of each month, tot up the totals of each column. Then start a new page for the new month by bringing forward last month’s totals into the columns for this month. At the end of the tax year, you will have a breakdown of your income and expenses for the Inland Revenue.

Petty cash

There is a simple way to keep petty cash records straight. Keep the float at a constant level, say £100 either in cash, or cash plus receipts. When you need to top up the cash, only put in as much as you need to return it to the £100 mark, and remove all the receipts to enter into your books properly.

Track your cashflow

At least once a month, but every day if cashflow is tight, reconcile your bank account. This involves taking the previous balance as shown in your bank statement, adding all payments in and subtracting those you have made. The new balance should reflect your new bank balance. If it does not, either you or the bank have made an error.

Make allowance for delays – for example, if you post a cheque to someone, it might take a few days for them to pay it in. Similarly, cheques you pay in usually take three days to ‘clear’ through your banking system, although they are shown on your bank balance before this. You could become overdrawn simply by spending money before these have cleared. For example:

Balance on your last bank statement £2,359.90

Add payments into your account +£1,935.64

Less uncleared incoming cheques -£1,000.00

Less outgoing payments -£654.23

Reconciled bank balance £2,641.31

This amount does not equal profits, nor is it money that you can spend on a spree. It simply tells you how much money you have in your bank account and that you can write cheques to the tune of £2,641.31 without becoming overdrawn.

Computer accounts packages

A computer package will not make up for lack of understanding of the basics of book-keeping – you must know what you are trying to achieve. However, some packages are far easier to set up and use than others.

Packages each have their pros and cons. Some have more features than others, but you may well find that ease of use, good support and comprehensive documentation may count for more than price and features. Equally, market share is only a guide to marketing muscle, not necessarily to suitability. To choose the right package for you, start by assessing your needs.

Action points

• Consider your own skills. How experienced are you? If you are a novice, ease of use and setting up are extremely important. How much help do you need to get started? Where will you get it? What will it cost?
  
• List your essential requirements. For example, you may need to use: multiple currencies including the euro; multiple bank accounts; multiple business entities; significant cash transactions (eg in retail); several levels of VAT; concurrent users with access across a network; sales order processing and stock control and integrated payroll.
  
• Next, list functions you would like to have. For example, how much automation can you set up for regular payments or repeat orders?
  
• Network. Ask colleagues about the software they use, and benefit from their hindsight and insight. Also ask them what they dislike most about the package they use.
  
• If you have one, ask your accountant for advice. They may be able to recommend, and possibly even help you set up, a suitable system. However, don’t allow them to persuade you into buying an over-complex system simply because it would be more convenient to them. If necessary, they can input your data manually into their system for analysis and tax returns.
  
• Check out the software packages on the market for your computer. Use the Web and magazines to help you shop around.
  
• Make a short list, then find out the following:
  
  • Are training and telephone support available? If so, how much is it? Pay-as-you-go telephone support can quickly mount up.
    
  • How much is ongoing support?
    
  • How much do upgrades (eg for changes in legislation or tax rates) cost?
    
  • Call the helpline. Is the line constantly engaged? Can they give an adequate answer on the spot? Do you understand them, or are they talking over your head?
    
  • Is there reasonable room for growth? For example, what if you later decide to go into exporting and need to be able to handle multiple currencies? Is there a suitable upgrade path should you grow significantly?
    
  • Check how easy it is to enter everyday transactions. How much does it automate or speed up entries? How easy is it to find individual transactions or drill down through reports or journals?
    
  • Check the manual. Does it cover things like refunds, correcting mistakes or year-end procedures in language you can understand?
    
  • Does the program give you the kinds of report you need to manage your business? How easy is it to link or export data to a spreadsheet for further analysis?
    
  • How easy is it to customise? For example, can you choose which accounts and periods you want to see, or change the layout? Will you be tied to using their stationery or can you design your own invoices, including your own logo?
    
  • Do you need to import transactions from a previous system? Will your chosen package allow this?

Outsourcing

Outsourcing your book-keeping requirements can free up valuable time and save you money by allowing you to grow without hiring more people. Ask colleagues and friends you respect for recommendations for a book-keeper.

Qualities to look for when outsourcing:

• Personal compatibility – do you trust and respect the book-keeper? Remember, they will be privy to the inmost workings of your business, and they may have to tell you things you would rather not hear. Can you take it from them? Can you work with them or do they irritate you?
  
• Location – do you want them to work on-site or at their own place? While most of the work can be done remotely, the ability to arrange a face-to-face meeting remains an advantage.

• Whether computerising your records in your choice of package is a requirement.
  
• How you will get the paperwork to them and how often.
  
• What kinds of reports you want and how often.
  
• How they will handle your year-end.
  
• An idea of the quantity of purchase and sales invoices they will have to handle a month.

When you have selected someone, you need a contract for the services you want (rather than those that they would like to supply). Elements to include in this are: the volume of work (what if it doubles?); turnaround time; seasonal swings; cost; what expenses are included and excluded; and performance criteria.

Also, you should consider an exit strategy should the relationship unravel. What notice must either side give to terminate the agreement and is there a cancellation fee? Make sure they return all documents promptly each month (along with a copy of the computer files on disk) so you cannot be held to ransom should a dispute arise.

When they are working for you, monitor the quality of service you receive. If they are consistently late, is it because you are consistently slow in forwarding material to them, for example? Also, ask them if they have any problems in dealing with you, and address issues that arise in their dealings with you. Monitor costs.

Be prepared to change book-keepers if your first choice does not work out – keep a list of suitable alternative book-keepers on file.

Whether you keep your books on paper, computer or outsource them, it pays to keep them straight. The information in your books can help you save costs and make more money.

Back