1. Implement a book-keeping system

You may only need a cashbook, noting items of income and expenditure, and stock records to start with. Free cashbook downloads are available – search the internet or contact an accountant for advice. If your business is growing, consider purchasing business software. Advantages of using software include accuracy, speed and stock management, but against this you need to consider cost, training requirements and processing time. Use categories of income and expenditure relevant to your business. Give each receipt a numbered reference and file them. Make sure you split out any VAT whether you are registered or not.

2. What information should I put on my sales invoices?

Check what information you are putting on your sales invoices. Get it right and you are more likely to get paid. Include the word “invoice”, date, your name and address and that of the customer, the invoice number, what you have sold and the total cost. If you are VAT registered, include your registration number, VAT charged, rate of VAT and tax point (usually same as date of supply). It is also advisable to include your payment terms, eg 7 days, due date for payment and how you like to be paid, with bank details to facilitate BACs transfers.

3. Perform bank reconciliations

Reconcile your bank statement to your cash book at least once a month to make sure that the balance on your cash book is the same as the balance on your bank statement. Go through each item on your bank statement and tick it off against your cash book and vice versa. Record and investigate any differences, which are often timing related, such as uncleared cheques and lodgements, but could also include expenses you have missed from your cash book, or bank charges/interest.

4. Monitor your cashflow

It’s incredibly important to make sure you have sufficient funds in your business to pay your creditors when payments fall due. Plan ahead to make sure you know when you are going to get paid and when you need to pay your own bills. Using a cashflow statement will help identify where there are likely to be negative funds, and you may need an overdraft or alternative funding. It will also identify times where there may be surplus cash that you can invest in your business, or extract from the business.

5. Set up effective credit control procedures

Check your customer’s credit rating before taking them on. Make sure you know what invoices have been issued and which have been paid. Monitor your bank account and incoming post regularly to mark off when invoices have been paid. Have a pre-defined collection procedure so that when the invoices are due, you know what to do. This will usually start with polite enquiries such as whether the client has received the invoice, and may end with collection procedures via CCJ. Consider payment plans for customers struggling to pay.

6. Find out if you need to register for VAT

Once your turnover reaches the VAT threshold for the last 12 months or less, it is compulsory to register for VAT. However, you may wish to register voluntarily if you have high expenses and your clients are mainly VAT registered. There are many schemes available that might benefit your business and make accounting for VAT much easier. Consult your accountant for advice in this area.

7. Set up a PAYE system

Once you take on your first employee, you are required to extract income tax and national insurance from your employee(s) before payment. This is known as Pay As You Earn (“PAYE”). As an employer, you are also responsible for paying employers national insurance. Issue your employees with (monthly) payslips showing the deductions made, and make payment of those deductions to HMRC on a monthly or quarterly basis. Annual returns are also required for HMRC and your employees.

8. Compare your results to your business plan and take action

Use your cash book to compare your actual income and expenditure with your business plan. Are the results in line with your expectations? If not, why not? Are your prices too high? Are you reaching the levels of customers you expected? Are your payment terms too lenient and those of your suppliers too harsh? Perhaps you are exceeding your business plan results and need to take on more staff than expected to keep up with demand. Regular review of your results can trigger important business decisions that will make your business the success you want it to be.

9. Extract funds legally from the business

If you are a sole trader you can take funds out of the business as often as you like and as much as you like, but remember they are not an allowable expense for tax. Directors of limited companies can receive a salary and dividends. Dividends may be taken so long as there are sufficient “distributable profits” in the company. Your accounting system should be able to show your level of profit at any point in time, or seek advice from your accountant. Declare dividends in the board minutes and use a dividend voucher.

10. Keep in touch with your accountant

Let your accountant know your plans for the year so that they can advise you on legitimate tax planning schemes. For example, bringing forward the purchase of major new equipment could give you a lower profit and lower tax bill than if you bought it in the next tax year. Your accountant can also advise you as to eligibility for other tax reliefs and how to utilise losses effectively. Company structure will be another area where your accountant can advise you. A limited company could be a better option for a very profitable business to make use of the lower rates of corporation tax and tax on dividends, for example.

Book Keeping