What is Bookkeeping & Why Is It Important/

Bookkeeping is so much more than numbers and spreadsheets. It is the art of recording all financial transactions your business makes, which will give you an in-depth look at your expenses and revenue.

What Is Bookkeeping?

Bookkeeping is so much more than numbers and spreadsheets. It is the art of recording all financial transactions your business makes, which will give you an in-depth look at your expenses and revenue.

For most business owners, the accountancy/financial side of running your business is probably the bit that gets left until the last minute. With pressure to finish projects or get orders dispatched, balancing the books is usually the last thing on your mind.

It is important for any business to have a handle on the company's financial position at all times. Many businesses are driven purely by sales/turnover, with little thought to cash flow and margins/profitability.

As a general rule, it is important to know the following about your business at any given point in time:

How much money do you have in the bank?
How much do customers owe you?
What stock do you have?
Who do you owe money to? This would include HMRC for all forms of taxes and trade suppliers and any lenders (Bank, Hire Purchase etc..) 

These are the fundamental key factors that you must keep on top of to operate a successful business. You need to know if you will be able to pay those bills as they fall due, particularly with staff wages. Cash flow is vital, and if customers haven't paid, you should regularly chase/remind them of monies outstanding.

 

What Is The Purpose Of Bookkeeping?

If you are new to running a business, you may already have a million other things to worry about and brushing up your bookkeeping skills may seem like a task for another day. However, there are many benefits to keeping accurate documentation and monitoring your spending and income.

Bookkeeping has two primary objectives:

To accurately document all financial transactions that result from business activities using best practices.
To determine and analyse the financial outcomes of business activities.

Why Is Bookkeeping Important?

Why is bookkeeping important?

You will not be able to run your business for very long without sound knowledge of your finances. 

There is a number of different taxes small businesses need to pay throughout the year, and bookkeeping means you can correctly calculate how much is due. This helps you prepare for the financial year ahead and allows you to think about your next moves, make strategic plans, and develop realistic objectives.

How you organise and document your finances is up to you. You can outsource the work to a bookkeeper, or you can do it yourself. However you decide, you must keep adequate records of your business transactions and ensure you comply with all legal and regulatory requirements. 

 

How Often Should I do My Bookkeeping?

Business owners who do their bookkeeping once a quarter or once a year are doing so purely to make HMRC and Companies House happy.

This can make the bookkeeping become detached from the day to day systems within your business and becomes simply data entry of historical transactions for tax purposes. Some issues that may occur when bookkeeping is not done regularly:

  • Too much bookkeeping to do at once, which ends up both tedious and time-consuming
  • Accounting records will not be up to date, which can cause delays with reporting or answering basic financial questions
  • It becomes harder to remember what different transactions refer to
  • Finding invoices is much more difficult
  • Won't have up-to-date data readily available to analyse your performance and plan ahead
  • Your accountant will not be able to give you reliable tax estimates because your accounts will not be up to date

I would recommend doing your bookkeeping at least once a week. Building your bookkeeping into your daily, weekly or monthly routine works well for lots of business owners, and is more likely to become a habit.

Keep Your Receipts

HMRC require you to keep all your receipts. HMRC may ask to see receipts, and you will be in serious trouble if you don't have anything to provide, so make sure you're keeping evidence of all your business expenses. Printed receipts can get lost or worn out easily.

HMRC accept digital copies, so it's a good idea to scan and back them up. If you use accounting software, you can attach your receipts to the transactions. This will improve productivity and speed for when you have to find the proverbial needle in the haystack. You are also required to keep bank statements, cheque stubs, sales invoices, till rolls and bank slips.

Accounting Software

Using accounting software can be easy and can help you increase productivity.

You can create and send professional-looking estimates. Once your customer agrees, you can convert the estimate into an invoice.

 

Instead of scrambling to find receipts, you can use the mobile app on the go to immediately snap a photo of a receipt and add it as an expense.

You can use the Project feature to manage the expense on a job and see how much profit has been made. You can stay on top of admin, like tracking time, mileage and expenses on the go using the mobile app. This fits conveniently into busy work lives. Most software has a tax timeline to keeps track of your tax liabilities and reminds you when payment is due.

There are some business bank accounts that offer free accounting software.

Separate Bank Accounts

It is important to make sure you have a dedicated bank account for your business to avoid dipping into your own money to pay for company expenses. It is easier and more convenient to use one card for both work and your personal expenses. As you get busier, it will definitely get a lot more bothersome having to rummage through and decipher all of your bank statements, splitting out your personal and business spending. As a sole trader, you are not legally required to have a business bank account. Like many, you can use a separate personal account for your business.

A Limited Company is a separate legal entity to its directors and shareholders, which means it legally needs its own business bank account.

Bank Reconciliation

Bank reconciliation must form part of your bookkeeping. If you're not doing this at least once a month, it'll give you a headache down the line as it will be harder to account for any discrepancies or weaknesses in your process.

Reconciling your bank transactions against your recorded expenses and sales invoices will enable you to find any errors, keep an eye on those late-paying customers, and avoid duplicating any supplier payments.

Most of the accounting software allows you to have a bank feed, which is a digital link between your bank account and accounting software. It automatically imports your bank transactions. This automating process can help speed up your reconciliation process. 

Making Tax Digital - Income Tax (MTD)

Using the right accounting software will mean you are MTD compliant ahead of when it is compulsory in 2023. From 2023, self-employed businesses and landlords with an annual business or property income of more than £10,000 will be required to follow the rules for MTD for Income Tax Self Assessment from their next accounting period starting on or after 6th April 2023. You will be required to send quarterly income tax updates to HMRC digitally.

More info can be found here: https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital