But did you know bookkeeping has many large advantages? Keeping a good set of books can help save you money, help with business planning and growth and be the foundation of a well-managed business.
Let’s start by looking at what bookkeeping is and what it drives and supports in a company.
Bookkeeping is simply keeping accurate financial records for all of the inflows and outflows of money within your business. At the basic level if you maintain a set of books for your business it should record all the income you have received and all the expenses you have paid and accounted for the VAT portion of both elements. Digging a little deeper and the income and expenditures should be allocated to certain income and expenditure categories, like office rent, or car lease payments, or stationery. This enables you to see where your income and expenditure is occurring.
The basic process of bookkeeping then drives a multitude of other outputs:
- Compliance – Every business must comply with certain regulations and stipulations. The most commonly known are a businesses quarterly or monthly VAT filing requirements. Bookkeeping is a key driver in ensuring you are keeping accurate VAT records, and you are not under or over paying your VAT obligations.
- Taxation – Accurate bookkeeping ensures that you know exactly where your business stands from a taxation perspective. (Keeping up to date business books will in turn help you understand your taxation position and help plan for those outgoing tax payments in advance).
- Decision making – depending on the size and activities of your business you may need to make key financial decisions about business growth, hiring new people or acquiring another company. Without an accurate financial picture of your business, you will never be able to plan properly for these events. Accurate, timely bookkeeping is essential to ensuring you have all the information to hand when you need it.
- Management accounts – bookkeeping plays a crucial role in the production of management accounts. The entries your bookkeeper makes will in turn roll up into a set of accounts that can then be used to understand your businesses performance and identify key areas for improvement – be they sales, cost reductions, growth plans etc. Management accounts are also necessary for certain third parties that may have an interest in your businesses performance e.g. Shareholders, banks, etc.
Accuracy and timeliness are two essential elements of diligent bookkeeping. The implication of not keeping an accurate set of books for your business can be significant, and it can cost you money.
Let’s imagine you are a small business. You started off not registering for VAT as you were not near the VAT registration threshold. Your business grows, you take on more people, you take on new projects, you get caught up in the growth and day to day management of your business. Bookkeeping takes a back seat. You adopt the approach ‘i will catch up at year end’. But you have now overlooked something. During the year, your sales went past the VAT registration threshold. You are now responsible for VAT back payments and a bookkeeping nightmare. It will cost you money. Keeping an accurate set of books ensures you know exactly where your business is at any given time. You know when you need to register for VAT, and there are no financial surprises waiting for you.
If you fail to keep accurate business books you will never know what the actual financial position of your business is. You need to ensure that you are ticking all the regulatory boxes, planning for VAT obligations, corporation and personal tax obligations.
Penalties can be incurred if you are late with VAT or corporation tax payments. Fines can be levied if you fail to file accounts and records with the appropriate bodies such as companies house.
Keeping accurate financial books for your business is the foundation for a stable financial footing with no surprises.
The benefits of keeping accurate financial books for your business cannot be underestimated. Lets look at a few:
- It could save you money – if you are not diligently recording all of your income and outgoings you will not be accurately accounting for the full profit or loss your business may make. If you fail to account for legitimate business expenses it will cost you money. This is money that could have been reduced from your tax bill.
- You can claim VAT back on core expenses. Similar to reducing your tax bill at the end of the year you can also claim the VAT element on VATable business expenses. If you don’t keep accurate business books and diligently record all of your business expenditure you may have a higher VAT obligation than is necessary.
- You know the financial position of your business at any point in time.
- You will be able to plan better for key business events – growth, recruitments, potential acquisitions etc.
- Year end becomes easier. No more painful year-end panic of preparing accounts. Keep accurate and timely books and it is more or less a press the button exercise and your accounts are ready for your accountant to review.
Directors of Limited companies have a legal obligation to maintain accurate and up to date financial bookkeeping records for their business. Failure to do so can result in fines and / or disqualification as a Director.
Whilst sole traders and partnerships do not have the same legal responsibilities, treating your bookkeeping just as seriously is critical. Our advice is to see bookkeeping as serious obligation regardless of your business’ legal status.
There are requirements to keep copies of all invoices and receipts for expenditure. These can now be filed electronically, so you no longer have to hold mountains of paper. We also recommend you keep records (or have them available for download) of all necessary financial information – bank statements, credit card statements, etc.
There are no legal obligations to use computers or specialist accounting software for your bookkeeping activities, but, we strongly suggest you review the options available. Having a robust, but simple to use bookkeeping or accounting system makes the whole bookkeeping process much easier and much less time consuming.
Like many activities relating to your business it is critical that your bookkeeping records are accurate. Remember the phrase GIGO, garbage in = garbage out. Your business’s financial records will only ever be as good as the data that goes into your business books.
Quality bookkeeping comes down to a few simple areas:
- Systems & Tools
- Quality / Attention to detail.
You need a person allocated to performing your business’s bookkeeping activities. If you are a startup it could be you or a business partner. As you grow you will need help. You can outsource bookkeeping activities to a trusted supplier or you can hire a full or part time bookkeeper, dependant on the size of your business. It is though critical that you have a person allocated to the bookkeeping function and that person is accountable for maintaining a quality, accurate set of business books.
Accounting software systems will make the process of business bookkeeping simpler. Agreed there is a learning curve in getting to know software or investing in training but that time will be time invested well to make the bookkeeping process easier. There are a multitude of tools available and many solutions are available as ‘cloud software; that you can access at any time from any internet connected device without the need to install or maintain software on your computers.
Process is critical. Document your bookkeeping process. Process helps with attention to detail and quality. A documented process ensures that if your bookkeeper is not available for a period of time (holidays or sickness) then someone else in your business can pick up the bookkeeping responsibilities so there is never too much of a backlog.
Attention to detail is the cornerstone of quality bookkeeping. Ensure your bookkeeping processes have documented minimum levels of quality that you expect from your bookkeeper. It will help your bookkeeper and it will ensure you have a measure for the quality of the bookkeeping work that is being undertaken in your business. Make your bookkeeper accountable for ensuring the minimum quality standards are adhered to.
Where can you get more help, guidance and advice on bookkeeping? Start with these resources:
- DKP Accountants – if you have bookkeeping questions, are interested in our bookkeeping services or need help with any other bookkeeping matter – talk to us. We have a friendly team of professionals well versed in all aspects of bookkeeping and we are happy to help.
- HMRC – there is a wealth of information and guidance on the HMRC website. The HMRC service desks are also helpful if you have specific questions.
We recommend Quickbooks for easy business financial management and record keeping. It is a popular accounting software package used by tens of thousands of businesses worldwide. There are other software solutions available too, have a look at some of these :
We hope this quick guide has given you an overview into the importance of keeping an accurate and timely set of financial records for your business. See bookkeeping as an investment that will save you time, and money and place your business on a strong financial foundation.
Of course you don’t need to do everything yourself. If you would prefer to outsource your bookkeeping to a trusted, reliable, experienced business , take the time to talk to us at DKP Accountants. We can provide cost effective business bookkeeping services for companies of all types and sizes.