How to do accounts for small businesses
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 which came into force in 2014.
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 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 the current limit, 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.