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How to do accounts for small businesses

Learn the basics of accounting from a small business perspective including cashflow, tax, organisation and filing
Peter Trimm

/ Last updated on 5th November 2017

Two box files for storing accounting files and paperwork on a wooden desk.

We tend to try and get out and see our customers as regularly as possible, so that we become engrained in their business, and demonstrate our understanding of the way they work.  On the back of one such visit, I received an email from one of our category managers. Accounting. The customer he visited, who owns a couple of small businesses, had bowled him over with the following statement; “I can buy businesses and make them perform better; because I know my accounting software“.

Related: A guide to payroll software

This got me thinking.  Now, of course, the accounting software was Sage, otherwise, I wouldn’t have included it in this article.  But it’s not a shameless plug (well, not entirely) – what is important is the understanding that if you get the accounting right, it can form the basis of your business model and help you manage change in a growing business – by empowering you to make the right decisions at the right time.  Picture it this way; every year, half a million people set out to start a business of their own. Up to a third are believed to fail in their first year. Put bluntly, getting to grips with finances can help avoid this happening. Accounting for small businesses is a critical area to dominate in being successful.

1. Get the accounting basics right from the start

As an ex-accountant, I tend to put the control aspects of a business’ management first.  Unfortunately, I have seen a lot of new businesses fail, not through lack of ideas, creativity and entrepreneurial spirit, but from lack of control and insight into the financials.

Even if you’re not from a financial background, have a fear of numbers or failed maths at school – you need to understand the financials.  Keep records from the start, no matter how basic.  Register your business with HMRC or your company with Companies House; open a business bank account; and set up your financial record-keeping system. This is necessary by law.

2. Cash flow is king

You need money to pay your bills.  Businesses that don’t pay their bills may end up out of business.  Mitigate this risk by making sure you know and understand who you are extending credit to, that your VAT return is up to date and you are in control of your costs.

Closely manage your cash flow and keep track on who owes you money and who you owe money to.  Always prepare for what money you have coming in and going out – account for the non-financial as well as the financial, i.e. usage of assets and stock. Take credit when you can, but ensure you are able to pay when it becomes due.  I would recommend never giving credit unless you understand the risks and built in the cost of credit in your pricing, and whatever you do, don’t spend VAT that belongs to the government.

3. Be legislatively compliant

This is no mean feat, and it takes time to understand your compliance responsibilities and act accordingly – that’s everything to do with payroll, tax, VAT and any changes in business legislation, such as RTI.  The deadline for small businesses to start submitting monthly RTI payments to HMRC was in April. This means that you need to submit payroll in real time to HMRC, so whenever you pay an employee, or face a fine.

It can be daunting to think about the wealth of legislative changes that can occur in just 12 months, and so it’s worth looking for accounting data that automatically updates, not just to comply with regulations, but to categorise income and expenditure to provide business insight.

4. Understand the right VAT scheme for your business

Standard VAT

Don’t be too late in registering for VAT.  Whether your business is below or above the current £85,000 threshold, any business wanting to become VAT-registered can apply to use this scheme.  VAT is calculated using the date with which the sales or purchase invoice was raised. The benefit is that you can reclaim VAT on any purchases made, regardless of whether your supplier invoices have been paid or not.

VAT Cash Accounting

This is available to any business with an annual turnover (taxable supplies) below £1,350,000, and differs from the standard scheme in that VAT is not calculated until an invoice is paid. In the short-term, this benefits your business’s cash flow as you’re not paying VAT for any sales that you’ve yet to receive payment for.  The downside to this scheme means that until you’ve paid for your purchases, no VAT can be reclaimed from HMRC. Further information can be on the HMRC site.

Flat Rate Scheme (Invoice and Cash-Based)

This scheme is favoured by sole traders, freelancers and small businesses that make occasional or low-cost purchases, as using this scheme, VAT on purchases cannot be reclaimed (with a few exceptions).  The flat rate scheme was created to simplify the process of paying VAT. In essence the scheme works this way: VAT is still charged at 20% of the invoice value; however, VAT is paid to HMRC at a lower rate, (dependent upon your profession or trade) leaving a difference which is extra profit to the business. You can find further information on the HMRC site here.

5. Set yourself targets and then stick to them

Setting realistic and measurable goals to aim for is an essential aspect of setting up a successful business.  Without measurable goals, a business can end up sitting still or worse, spiralling out of control.  Understand your KPI’s – that’s key performance indicators – and how you can measure them.  Set yourself targets and budgets and then track them to identify improvements or declines over time. Always make sure you work within your limits and only set targets that you can realistically achieve.

6. Understand your (profitable) customers

It’s something that we are proud of at Sage – knowing our customers inside out.  I believe it should be an essential part of any business.  Without your customers, you wouldn’t have a reason to exist so make an effort to get to know them, and the macro/micro issues at their level.  Understand what customers deliver you the best returns and how you benefit them.  And the only way you can drill deep into this understanding is through using your accounting data.  Remember – the customer information in your accounting system is valuable data – use it wisely.

7. Get organised & KEEP organised

Do not put off accounting work.  I’ll repeat that – DO NOT put off accounting work.  It’s easy to keep on top of when you have the right tools, and with RTI legislation coming into effect, you either submit returns on time or face a fine.  Keep on top of your invoices (both in and out) and keep the required records in line with tax schemes you are using.  Keep separate accounts for what are truly separate businesses.

Keeping accurate up to date accounting information gives you back control of your business so that you can grow it on a solid footing.  Doing it from the start could help you save money and avoid the worry later down the line for needing additional accountancy fees, possible bank charges from late payments or unexpected tax payments.

In summary…

Cash flow management, VAT, understanding what products and services provide you with the greatest returns, and management around who owes you money may sound like obvious things to keep a close eye on, but many small business owners don’t.  If these areas are left unattended, they can leave your business exposed to risks.

I am constantly amazed by the passion and determination demonstrated by our small business customers.  They truly are the lifeblood of the UK economy, but it is not an easy path to follow.

It stands to reason that if two heads are better than one, then entrepreneurs have a better chance of survival if they utilise those that know better; and this couldn’t be truer when it comes to accountancy.  Very few entrepreneurs make the decision to go it alone because they just love accounting.   But it’s an essential part of business nonetheless so finding a way to do it well with the least amount of time is essential too, and can mean the difference between success and failure in a challenging economic environment.

Related: A guide to taxation in the UK

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