Being self-employed is an adventure, but managing small business accounting needs is not appealing to entrepreneurs. Small businesses work with minimum employees, owners are responsible for administrative and operational tasks, and handling accounts and taxes is extra stress.
You can hire a small business accountant London to meet your accounting needs or outsource to an accounting firm. But, understanding the basics of accounting in small businesses is essential. It will help you make intelligent decisions related to business operations, growth plans, and creating strategies.
This guide will cover everything about small business accounting, including,
Table of Content
What is small business accounting?
Small business accounting is a high-end process of examining the progress of a business. Entrepreneurs need to keep track of every transaction happening in the industry and generate monthly reports to check where money is flowing in and going out. Plus, accounting ensures you stay prepared for tax and audit and can understand your opportunities and risks.
Accounting helps individuals understand a business’s financial health and value to make better decisions and reach goals.
Before you start with small business accounting, you must do the following:
● Know your business, what you sell, what you need to run the company, and what you expect.
● Understand the legal structure of your business, like a sole trader, partnership, or Limited company.
● Understand the difference between bookkeeping and accounting.
● Choosing a proper accounting system.
Things to know for small business accounting
Every business must have a great plan containing your goals and strategies to meet them. Here are a few tips on how to do accounting efficiently.
1. Open a business bank account
Keeping your business and personal bank accounts separate is good, which helps you organise the revenue and plan for taxes at the year-end.
Having a business bank account is compulsory for limited companies. However, sole traders can open one to save themselves from headaches even when it is not mandatory.
2. Select accounting method
You can choose between cash-based accounting and accrual-based accounting systems for your business. For cash basis accounting, you can record a transaction, be it income or expenditure, when you receive or pay money.
But, for accrual basis accounting, you record the transaction in a double-entry method. You record a transaction when it happens, regardless of money exchanging hands.
3. Manage your cash flow
Business owners failing to pay their bills on time may end in closing the business.
To mitigate the risk, you must know and understand who you owe money and who owes you money, keep your VAT return up to date, and control your costs.
Keep track of where money is coming in and going out. You can take loans to scale up your business but pay them back on time. Sit back and decide how to improve cash flow in the business, but never spend the VAT and tax savings.
4. Be compliant with the local laws
You need time to understand your responsibilities towards the government and comply with the changing laws. It includes tax, VAT, business legislation changes, and others.
It is good to use accounting software that updates your data according to the latest legislation or seek help from accountants.
5. Understand tax obligations
Small business taxes can be complicated if you don’t understand your obligations. You must pay income tax and National insurance contributions to the HMRC annually.
Moreover, you can try reducing the tax bills if you know your eligibility for different tax deductions and reliefs and mention them on the tax return form.
Understand VAT schemes
There are a few methods of paying VAT to the HMRC, like,
1. Standard accounting scheme
Almost every business earning an annual turnover of above £85,000 must register for VAT. The standard VAT rate on most goods and services sold in the UK is 20%. You must submit a quarterly VAT return and pay any VAT you owe to HMRC.
You can reclaim VAT paid on any goods your business owes or use to produce an item you sell.
2. Flat Rate Scheme
It applies to businesses making an annual turnover of less than £150,000 and pays a fixed percentage to the HMRC quarterly. But, you can reclaim only for purchases above £2,000.
3. Annual Accounting Scheme
It applies to every business whose annual turnover is less than £1.35 million and submits VAT returns once but pays VAT quarterly.
4. Cash Accounting Scheme
It applies to businesses with an annual turnover of less than £1.35 million. However, you pay VAT on all sales only when the customer pays you and reclaim VAT when you pay the supplier.
5. Set your goals
You must have realistic and measurable goals for making your business successful. Without targets, you may end up sitting in one place and degrading your business structure. Find out the KPIs or key performance indicators and measure them. Setting targets and budgets can help you identify future opportunities or risks.
6. Stay organised
You must keep track of all business transactions and update your accounting book from time to time. Plus, creating a monthly financial report gives insights into business performance and loopholes and helps make decisions.
7. Use the right accounting software
Opting for automation can eliminate the chances of human errors in recording transactions, preparing tax and VAT returns, calculating your debts, and others.
Cloud-based software is suitable for small businesses as it allows you to access data from anywhere and at any time with a proper internet connection. You don’t need to update them or track reconciliation and other accounting services. Some also come with professional advice and resources to learn about accounting.
8. Develop payroll system
If you are hiring employees in the business, you need to pay them correctly and on time. A payroll system helps determine the tax deductions, National Insurance contributions, employee benefits, and final salary. They also send you a notification to make payments on the date.
9. Seek professional advice
You can look for freelancers or accounting firms who provide small business accounting services to avoid stress. It can cost you extra but removes your headache and prevents costly mistakes. Plus, you get time to focus on core business activities and stay at peace when a professional handle your finances and accounting needs.
Conclusion
Hiring an in-house accountant to help you with accounting needs is not always necessary. If you are on a tight budget, look for freelancers or outsource to accounting firms. They usually charge you less and ask for money only for their services, with no business overheads.
Hiring professionals in business may cost you money, but it saves time and effort, eliminates errors, maintains compliance, and saves you from hefty fines. Sit back and decide if you need a professional or if your skills are enough to complete the accounting needs of your business.
