Maintaining your own financial records - AKA doing your books - can seem daunting when you're new to it. However, doing accounts is an essential part of being self-employed and running your business. Elaine Clark of CheapAccounting.co.uk gives her top five tips on bookkeeping
Keep self employed books from the start
Legally, all businesses must maintain accurate financial records and retain them for six years. As soon as you set up your business, start recording all your costs and sales you make. Keep receipts for any stock and supplies you have to buy. In fact, you may incur costs before you start up. Many of your expenses are allowable and can be deducted from your profits, which will reduce your tax liability.
Start recording everything from day one, keep on top of your accounts and make sure you know the dates your accounts, tax, VAT, PAYE, etc are due. Late payments and returns can incur heavy fines and penalties.
Your books can help you make better-informed decisions when running your business. Without detailed, current knowledge of your finances, you won't be able to tell if your business is performing well or not. You also risk making bad decisions because you don't have the necessary figures to hand, which can ultimately lead to business failure.
Get a bookkeeping system
Set up an accounting system from the start. You could start with a manual system, but it makes more sense to use a spreadsheet or an easy accounting system. It helps reduce repetitive entries and the risk of accounting errors. Accounting software allows you to enter information once and it carries out all the laborious VAT and tax calculations for you. You can use it for bookkeeping, to create invoices and run reports on the financial health of your business.
There are many packages designed specifically for small businesses and many offer both desktop and cloud versions - which you can access via an app on an internet connected mobile device. For a small monthly fee - or less than £100 up front, this time-saving software can also help you avoid making expensive mistakes. Some business bank account providers offer account holders free accounting tools that can help manage business finances.
If you intend to use an accountant, agree the system with them before you start your business. You will be surprised how much you can save on fees if you use a software package your accountant is familiar with or recommends.
Claim all your business expenses
The general rule is, you can claim for any cost incurred "wholly and exclusively for business".
Remember to keep all receipts for allowable business expenses – they provide evidence of purchase should HMRC make such a request. Create labelled envelopes for each month and retain receipts in these, housed within a box file. Better still, make all purchases on a business debit or credit card, then your statements will also provide proof of purchase, enabling you to accurately track all expenditure. Also retain copies of every invoice you pay and any bills, for example, for utilities, etc. If you pay by cheque, make sure you fill out the stub fully.
Record all your business trips and claim for these - even trip to the local post office in your car to send a business letter or parcel. In fact, you can even claim for cycling to the post office. The allowed rate for cycling is 20p per mile - so get on your bike instead of using your car.
If you use your home as an office, you can claim for a proportion of your domestic bills - including lighting, heating, internet and telephone charges, even a percentage of your rent or proportion of your mortgage interest (although this can make you liable to Capital Gains Tax if you sell your property).
Whilst there is no exhaustive list available of what you can claim, common sense should prevail when applying the "wholly and exclusively" rule. If in doubt, speak to an accountant.
Get bookkeeping advice
HMRC produces free videos and webinars. These cover getting started, record-keeping, business expenses and more.
HMRC also provides a free payroll solution, which has everything you need to meet your employer-filing responsibilities.
It can make sense for some small businesses to use the services of a bookkeeping or accountancy service. Generally, an accountant should be able to more than justify their fee by saving you a lot of time, hassle and money. Accountants are mindful of a business' income, especially when it comes to start-ups. To get an accountant to complete and submit a tax return, expect to pay £200-£300, slightly more if you're receiving ongoing advice, too. For a larger business, annual accounting costs should not be more than £100 per month.
Budget for tax
Although you may have made a profit (income minus costs), not all of this money is yours. You will have to pay some to the taxman. Make sure you budget for this as you go, so you won't get any great shocks at the end of the year. Open a deposit or business savings account and put money aside for your tax. Saving 25%-30% of all income you receive is likely to mean you'll easily be able to pay your tax bill.
Written by Elaine Clark of CheapAccounting.co.uk.
