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Business Services Insight

Basic Bookkeeping: What is bookkeeping and how will it help my business?

Posted on January 11, 2021

Most business owners want to spend time selling products or services and winning new business rather than studying their finances. Spending time with customers may seem much more productive and likely to increase revenue than poring over bank statements.

When going into business, bookkeeping is a task that cannot be put to the bottom of the list. Avoiding keeping on top of the books can cause companies problems further down the line and often putting off sorting the issue can make matters worse, particularly when it comes to Self Assessment Tax Returns and other end of the financial year requirements.

Accurate bookkeeping gives you an invaluable overview about your business that enables you to plan the short and long term future of your business as well as make contingencies or ways to gain more business.

We have prepared a guide that sets out the role bookkeeping can play in your business and how we can help you achieve that.

Professional Bookkeeping for your small business

What services does a bookkeeper provide?

In its simplest form accurate bookkeeping tracks income and expenses on a daily basis helping you to manage cash flow. You will know at a glance how your business is doing in terms of financial health which helps you to make informed decisions about where to direct your focus next.

How is bookkeeping different from accounting?

Whilst both relate to business finances the similarities between bookkeeping and accounting ends there. Bookkeeping is a method of documenting your financial transactions. Accountancy is ultimately assessing how the business is doing overall using that information. Bookkeeping is the administrative process whereas accountancy analyses the whole financial picture.

Why do I need bookkeeping?

The value of timely bookkeeping should not be underestimated as it forms a cornerstone to any business. Any small and medium sized business should adopt some form of bookkeeping - many business owners find it easier to hire professional bookkeeping services for peace of mind. There are other benefits too such as:

1) Pick up tax deductions – using bookkeeping software is often tax deductible but without knowing the bigger picture and keeping up to date books you might never have known.

2) Access to loans or other credit – in order to secure a bank loan or other form of credit, lenders need to see accurate books, cash flow and tax returns. Without these then access to loans or credit becomes quickly limited.

3) See unnecessary spending sooner – new businesses are often quick to spend money on subscriptions or other services when first starting out. After a few months owners may hone in more on what is useful and what is not. Bookkeeping can help you to filter out that which isn't useful by keeping on top of payments and expenditure that is no longer required.

Understanding bookkeeping jargon

Typical of any financial process, bookkeeping comes hand in hand with a lot of jargon and specific terminology. Here are some of the basic types of bookkeeping defined:

  • Profit and Loss Statement / Income Statement – a report that can be produced at a specific point in time that shows revenue and expenditure.
  • Revenue – money that is made by your business ie company sales or interest generated on income.
  • Expenses – outgoings from the business for example business rates, web hosting, marketing spend etc.
  • Payroll - a list of employees in your business and the amounts that they are paid.
  • Cost of Sales – this is the total cost involved when selling products or a service – for example business advisory or print costs.
  • Gross Profit – Any profit that is left after taking away the costs of running the business. In other words Gross Profit = Revenue – Total Cost of Sales.
  • Net Profit – The actual profit that your business makes after taking away gross profit and expenses.
  • Debit – A bookkeeping entry that adds to an asset or the expense accounts such as a building or equipment.
  • Credit – Entries that increase liability like salaries or revenue.
  • VAT Returns - A form filed with HMRC to show how much VAT is due.
  • Cash Flow Statement – this report shows the cash that comes in and that which goes out of a business.
  • Balance Sheet – the balance sheet shows all business assets, liabilities and shareholders equity (if applicable) at any specific time. Not typically used by sole traders, freelancers or very small enterprises.

What bookkeeping system should I use?

By far the most common bookkeeping system to use is one that incorporates cloud accounting software. This kind of system is by far the most effective and gives businesses a real time live picture of their finances and can typically be accessible from anywhere.

Gone are the days when business owners were reliant on complex spreadsheets, using the latest version of a particular programme or they had to choose between single or double entry bookkeeping. 

Utilising cloud accounting software means that your business can work from the latest information at any time, your data is more secure and transactions can be much quicker than traditional bookkeeping systems.

When to look at outsourcing bookkeeping

Even armed with all the relevant information about what is required to maintain accurate records it is still possible that a business owner can find the responsibility too overwhelming when coupled with their day to day tasks and the demands from customers.

At this point it is worth looking at outsourcing to a professional bookkeeper who can provide support on a regular basis and act as an extension to your internal team.

If your business is showing the following traits it could be a worthwhile investment to look for external help.

  • You are seeking a business bank loan to grow.

A qualified bookkeeper can help you to present your financial information to lenders. This could save you a great deal of heartache as they will know from the start the type of information a bank will be looking for.

  • Bookkeeping takes up too much time.

If you are spending more time looking at the books than creating sales or generating new business then it could well be time to look for help.

  • You are looking to pivot your business.

In order to optimise revenue you will need additional financial information. This could easily be prepared by a professional bookkeeper and could help your business move forward financially with ease.

How to determine your bookkeeping requirements?

Once you have mastered the basic terminology and rationale for bookkeeping the next stage is about adopting best practice and implementation. We have outlined 3 different approaches below:

1) Separate personal finances

Keeping business finance separate from your personal transactions can help when it comes to deducting tax. The key rule for business expenditure is “Wholly, Exclusively and Necessary”. This means the expenses must be incurred when doing business or attracting new business.

In short anything that doesn't help your business move forward or help nurture business growth should be documented as a personal financial transaction.

2) Save up for taxation

Meeting your business targets and key performance indicators is all well and good but if you haven't factored in taxes then you could find yourself in debt at the year when compiling annual accounts. Setting money aside for taxes will stand you in good stead for the time when taxes need paying.

3) Set aside monthly time

Leaving things to the last minute is not recommended. Trying to go through things in one go at the end of the tax year could spell trouble and will be a huge amount of hassle. Setting time aside each month and sticking to it is vital to stay on track and facilitate business success rather than be constantly chasing your tail. It will also enable you to identify spend that is working for you or isn't - such as advertising spend.

Are you looking for bookkeeping services?

As outlined at the start, bookkeeping really cannot be avoided by business owners. Hopefully we have inspired you and given you some useful information about how to get going.

A professional bookkeeper like Aimtrac can help your business flourish and take away the pressure from your internal resources. Working with us means that we complement your business and act as a resource partner, providing you with a personal service for your bookkeeping needs. 

We can provide you an initial consultation by way of a bookkeeping health check with our Head of Bookkeeping & Payroll, Sharon Ashmore. From there we can help you identify a path forward for your business. Whether you require liaison with HMRC or your Accountant, help setting up financial procedures or understanding your financial position, information about cloud accounting or making your tax digital we can provide a complete solution.

Claim your FREE Bookkeeping Health Check

Businesses that have a great bookkeeping system operate like a well oiled machine. The accounts are properly arranged, data entry is systematic and clear reports are always readily available. At Aimtrac we’ll happily look at your existing processes with you for free, and we’ll offer advice as to how you could achieve the perfect system.
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