The prospect of bookkeeping is enough to strike fear into many people who want to start a small business. Yet with the right system in place, maintaining simple financial records doesn't have to be an ordeal - it simply involves detailing business income and expenditure from the outset and keeping accurate records.
As well as being a legal requirement (you must retain your financial records for six years), staying on top of your bookkeeping will help you to monitor your cash flow.
All you need to run the most basic set of accounts is: a cash book to record money entering and leaving the business; a sales ledger, detailing money received and amounts still owed; a purchase ledger to track outgoings; and a wages book, which details salary payments and National Insurance contributions.
As a small business, you may decide that it is a better use of resources to find a suitably qualified bookkeeper or accountant to keep your records for you - especially if you don't feel confident enough to tackle it yourself. A good bookkeeper or accountant can ensure you keep the right records, stay on top of your finances and free you up to get on with establishing and growing your business. They can also help you avoid potentially expensive mistakes!
If you decide to do the bookkeeping yourself, you will need to: keep your cash purchase receipts and invoices for all business expenditure such as utility bills, bank and credit card statements; fill out paying-in books and cheque book stubs; maintain payroll records (if you employ people); and keep VAT records (if you're registered).
You can keep these 'books' as paper records or computer spreadsheets, but most businesses now prefer to use simple bookkeeping software to keep track of income and expenditure - especially now that many tax returns and all NI and PAYE information has to be submitted electronically to HM Revenue & Customs.
If you decide to run manual accounts, you need sections for purchases paid and purchases unpaid. When you pay an invoice, simply transfer it from unpaid to paid. You'll need to do the same for sales paid and another for sales unpaid.
You should set up a dedicated business bank account. Avoid using your personal account to accept payment or buy things for your business.
Basic accounting software is more affordable than ever (budget £100-£180 inc VAT) and many deals come with free support. You could even set up a few simple pages in popular spreadsheet software, such as Microsoft Excel.
Dedicated accounting packages are easy to use – even for those with limited know-how. Errors can be corrected quickly (which is more complicated when using manual systems), you get a snapshot of your cash flow at the click of a mouse, and it is simple to check what money you owe and are owed. Handy financial reports can also be gained at the touch of a button. You can also view sales patterns and costs, which can help with forecasting and budgeting.
Employing a full-time bookkeeper isn't viable for many small firms. Sometimes such a role is combined with other duties such as office and HR manager. Often a spouse gets drafted in to take care of the books in return for a part-time wage. You might be able to afford a part-time bookkeeper or may consider outsourcing the job to your accountant or to a local bookkeeping service.
The no-cost option, of course, is to do it yourself and maybe get an accountant to take care of the more complicated stuff. Having to 'do your books' after hours or at weekends is an occupational hazard for many small-business owners. It can be the last thing you need after a long, busy day - but it can't be avoided if your business is to survive and prosper.