Taking the word ‘accounting’ seriously is the difference between a business being successful and having to call it a day and file for bankruptcy.
Each year four in ten small business do not make it and come to its end.
The principal reason for the failure is out of cash!
They run out of cash because they do not often understand the financial drivers in their business and end up spending money they do not have, neglecting factors such as gross and net margins, and most importantly, the break-even point.
To run a small business, you do not need to be an accounting expert, but you will want to have a few basic accounting skills in the back pocket to ensure your business runs smoothly and is on its track to make money.
This blog post will take you through some time-saving small business accounting tips to set your small business up for success.
Let’s get started!
This blog post is divided into the following sections
Table of Content
Importance of accounting in small business
As mentioned above, poor financial management is one of the key reasons for small business failure.
Since a small business has a limited budget and resources, accounting plays an important role in providing information that helps businesses in their development and growth.
For small business owners, accounting is important because of the reasons below:
- To keep track of the cash flow. In order to prevent your small business cash flow from running dry, you should implement the policies for sound financial strategy and efficient record-keeping.
- In order to understand the concepts of variable costs, fixed costs and how to cost the project accurately, a small business owner can rely on cost accounting. This way, you do not end up losing money on a project you thought would be the big earner.
- Accounting gives a better grasp of the well-being of your small business.
- Accounting helps you detect and prevent theft and frauds by employees, customers, and suppliers.
- Accounting can make you better equipped with facing audits.
- Business insights and financial intelligence- key reports and matrices
- Comparing budgets against actuals- assuming you have a budget. If not, you can work with your accountants to prepare one.
Whether you are a sole trader or employ people, the key to thriving your small business is to regularly review your financial statements and establish the detailed budget which will allow you to discover operational inefficiencies in your business.
How accounting help your business?
Accounting does not make things easier when it is tax time but gives you a better idea of how financially your business is doing.
Good accounting can also make your business more attractive to clients.
Let’s have a look at some common ways proper accounting can help make your business more valuable,
1. Make your business stable financially
With accurate finances, you can have an accurate image of how much money is coming in and going out of your business.
With accounting, you can create more accurate forecasts for your business’s future expenses and revenue, so you can ensure you have enough cash reserves to float your business through any tough times – just like COVID-19.
With accurate and stable business finances, you can offer your customers a consistent and positive experience.
2. Offers your business a greater efficiency
Good accounting offers you up-to-date financial information about your small business.
This can help you make important decisions about the need for and timing of new business investments.
- Could new equipment make your business work faster?
- Could this mean you deliver better service to your customers?
Accurate financial information helps you decide whether it is the right time to invest more cash in your small business and how those expenses will affect business cash flow.
3. Help you craft smarter marketing strategies
Accurate financial records offer you insights into your cash flow and expenses, which in turn can help you make much better decisions about marketing your small business.
Accurate accounting data will help you decide the right time to launch the marketing campaign and help you understand whether your efforts are delivering the results you want.
Checklist to stay on top of your small business accounts
- Keep all the receipts
So, you want to claim the £2.50 coffee and muffin from the Starbucks client meeting as a small business expense?
Then you need its receipt!
If HMRC ever decides to investigate your small business accounts, you will need to be able to show proof of all the business expenses.
- Invoice regularly
If you do not take the money upfront, then you need a system for invoicing your clients – especially if you have lots of clients and they owe relatively small amounts.
Even if you are confident everyone will be invoiced, it can play havoc with your small business cash flow to postpone asking your customers for money.
Plus, it is likely one or two may slip through the net, meaning you have given away your work for free!
- Collect debts as soon as they are overdue
Often small businesses are timid about asking customers for overdue payments, but a polite reminder on the day the invoice becomes overdue is not offensive.
In fact, it achieves something very important, as it shows your customer the way in which you like to do the business.
- Reconcile your bank accounts
Generally, at the end of each month, you will ensure that the transactions noted in your accounts match the actual transactions in your bank statement.
If you are using a business credit card or PayPal account, those also need to be reconciled on a regular basis.
An accountant or bookkeeper can help you if you do not feel confident reconciling all your small business accounts by yourself.
- Record director loans
Many small business directors lend their own money to their companies or borrow money from their companies as an interest-free loan.
You will need to record such deposits or withdrawals so that an accountant can calculate a tax to be paid or refunded.
- Keep on top of tax
It is easy to be caught-out by a tax bill if you have not mapped out what you are likely to owe the HMRC in the coming months and noted when those payments are due.
Set aside some chunk of money every month so that you can pay all of your VAT, Corporation Tax, PAYE and NICs when due.
The taxman is actually unforgiving when it comes to late tax filing, so make sure you are not caught out this way.
Also visit our blog post how to submit self assessment tax return and top 25 small business tax diductions.
Do small business owners need the help of an accountant?
A good rule of thumb to follow – you should consider hiring an accountant if managing your business accounts starts getting in the way of completing day-to-day business tasks.
Or you might feel peace of mind working with a small business accountant at tax time or addressing several questions related to your small business.
Though, the decision is yours.
An accountant can help small businesses in many ways, such as,
- Help you decide on the business structure to suit your needs, from a sole trader to a Limited Company.
- Prepare the financial documents, including your business plan
- Provide you advice on opening the business bank account
- Manage payroll processes
- Prepare your tax returns & finding tax breaks that apply to your small business
- Close small business books at the end of the year & create financial reports
- Help navigate a tax audit if a problem ever occurs
If you decide to work with an accountant, it is simply up to you how many of your financial tasks to hand over to your professional.
You might just need to consult an accountant while you are launching your small business, or maybe you would like to hand over all your financial documents at tax time so they can file your tax return.
Are you a small business owner? Do you think you need an accountant – confused!! No worries, check our blog post, “Do I need an accountant for my small business” to clear the confusion and also visit how to choose a small business accountant.
Final thought
In summary, whether you are a startup or an established business, you need a consistent way to do your accounting. Accounting can be a complicated and challenging task when it is new for you, but with the help of the above checklists, you can make sure that it is done right. However, you can get the help of small business accountants for your peace of mind and in order to focus solely on your small business.
