Keeping track of your financial situation is one of the most important tasks you face as a small business owner. However, although it has the potential to be one of the most arduous tasks, an effective financial management plan is vital if you are to maintain a healthy, stable business.
Day-to-day bookkeeping is the cornerstone of your company’s financial management strategy. Book-keeping involves adding details of transactions to your accountancy software - or, indeed, your ledger if you are keeping accounts by hand. You should keep records of money in and money out, with each transaction assigned to the relevant account. Depending on the sophistication of your accountancy package, and on your preferred workflow, you may also choose to generate invoices as an integrated part of your book-keeping process.
An efficient book-keeping process will provide a very basic overview of the health of your business. However, book-keeping is not intended to offer detailed analysis. Rather, data from your bookkeeping software would generally be passed to an accountant who would translate it into useful information about your company.
Choosing an accountant
Your choice of accountant will be an important one, and one that should be tackled early in the life of your business. In the first instance, you must decide whether or not you require an accountant. Some small business owners choose to take on responsibility for the financial management of their own business, meaning that they must take care of day-to-day bookkeeping, accountancy, payroll, tax payments, annual company returns and more.
On the other hand many others choose to hire an accountant, either on retainer or once a year to complete their annual return. While accountants can seem expensive, it is worth considering that you are paying for the fact that it allows you to get on with running your business, rather than struggling with Companies House. You may also choose to outsource your book-keeping, although this is generally the preserve of larger companies.
You may also have payroll concerns to address. If you are an employer, you have certain extra responsibilities in your accounting procedures. In the first instance, employers are required to operate a PAYE scheme. You will need to deduct income tax and National Insurance Contributions from your employees’ pay, and account for these deductions.
Furthermore, you must meet set deadlines for paying the value of these deductions to HM Revenue and Customs, and making a regular return. Failure to meet these deadlines will result in automatic financial penalties, on which interest will accrue. It is worth remembering, however, that small businesses are permitted to pay their deductions quarterly, rather than monthly. This can help to ease pressures on cash reserves, particularly in the early phases of a start-up.
Several standalone payroll solutions are available, but many of these require a specialist to operate them. As such, if you employ several people you may consider hiring a dedicated payroll administrator.
Cashflow forecasts should be a vital element of your financial management plan. Insufficient cashflow can kill off an otherwise viable business, and it is therefore essential that you budget effectively. You should revisit the cashflow forecast and profit and loss elements of your business plan regularly. If you are not meeting your cashflow targets you must act promptly to rectify the situation - but you can only achieve this through regular monitoring of the relevant data. As such, it is important that you, or the relevant member of your team, are sufficiently au fait with your accountancy package and bookkeeping processes to ensure that you can spot a looming cashflow crisis before it arrives.
Your cashflow forecast should also act as a basic budget for your business. It should show all of your overheads, as well as predicted extra costs on a month-by-month basis. It is important to remember that unexpected costs frequently arise; as such, you should leave room in your forecasts for a contingency fund in order to ensure you have sufficient reserves to meet these costs.
You will also be required to comply with various tax regulations. Depending on the legal structure of your business you will be subject to either corporation tax or self assessment income tax; limited companies will be obliged to pay corporation tax, while sole traders can carry on in any profession they wish and simply report earnings as self employed income. Your tax liability will be calculated from your year end accounts, which will in turn draw on your bookkeeping records. You or your accountant will work out how much tax you must pay, and then prepare your self assessment form.
VAT accounting is also a major concern for small businesses. You should think very carefully about whether or not VAT registration is the correct choice for you; you would be able to reclaim the VAT you pay on business expenditure, but you would also have to charge VAT on your own goods or services. This means an extra accounting burden, and severe penalties if you fail to pay your VAT bill on time.
If you are VAT registered you will need to keep detailed accounts regarding purchases and sales that are chargeable to VAT. Most businesses then file a quarterly VAT return. You will have to pay HMRC if you have brought in more VAT that you have spent, but you can claim a refund if your VAT expenditure has exceeded your VAT income.
From this over-view you can see that effective financial management is a time consuming task. You should give careful consideration to the advantages of hiring an accountant. Most entrepreneurs do not set up in business because they enjoy doing accounts - unless they are starting an accountancy firm. A good accountant is an investment; they come at a price, but they enable you to spend your time doing what you are good at - running your business.
However, there are significant advantages associated with keeping your own books and preparing your own accounts; primarily, it provides you with a regular and comprehensive overview of your business, and helps you spot potential problems before they arise. As such, if you are confident that you can fulfill the tasks required of you, managing your own finances may be the best option.