Simple Business Guide #5 - Managing your business's finances

Once your business is up and running you need to start to think about how you are going to manage your finances, ideally before customers are flocking to your door as by then you will be too busy. Invoicing your customers, collecting the cash, paying your suppliers, paying your staff, managing your cashflow - these are all things you need to start thinking about now. Where do you start? Well, let's break it down into two main areas: bookkeeping and accounting.

Bookkeeping

What do we actually mean by bookkeeping? In its simplest form we just mean keeping a good record of all the transactions that your business makes; all your sales, all your purchases, all your expenses, all your cash movements. You need to do this not only for yourself as the business owner, but also to keep the tax man happy as he requires you to keep accurate records of all your financial transactions so that you can calculate how much tax you have to pay.

There are three ways you can do your bookkeeping; you can do it yourself, you can get a bookkeeper to do it, or you can get your accountant to do it.

Do-it-yourself

If you decide to do your own bookkeeping then I really would recommend getting yourself some good bookkeeping software. You can do it using something like Microsoft Excel, but using some proper software will save you lots of time. There are many others available but the software we use, and recommend to all of our clients, is called Xero. It was specifically designed for smaller businesses, and is really easy to use, even for people with no experience. Xero makes things much quicker and easier as you can automatically download your bank statements into it, which significantly speeds up how long it takes for you to process your transactions. You can click on the link to find out about some of the other benefits of using Xero.

Whichever system you decide to use, one thing you must do is keep on top of your bookkeeping. It is better to do a little, often, rather than to let it build up over time. This is because keeping your bookkeeping up to date will help you keep an eye on what is happening in your business; who owes you money, who you need to pay, how much cash you have, all of which is really important to keep control of.

Using a Bookkeeper or Accountant

The benefit here is that someone else is doing the work for you, freeing you up to concentrate on what you should be doing - growing your business. The downside is obvious - you will have to pay someone to do the work for you. However, a bookkeeper or accountant will undoubtedly do the work faster than you would be able to, and will also know how to treat all your expenses to make sure they are accounted for correctly for VAT and Tax, so this should be a worthwhile investment.

In practice what most new businesses tend to do is do it themselves at first, and then as they become busier and their time becomes more scarce, then they look to outsource to a bookkeeper or accountant. My best tip for you if you decide to do this is don't leave it too late to outsource it. Do the following calculation - how much revenue can you generate for your business in one hour? If it is more than say £20-25, which is roughly what a bookkeeper or accountant will charge per hour for bookkeeping, then you shouldn't be wasting your time doing it yourself.

Accounting

Accounting is the next stage on from bookkeeping, where you take the basic data created by you or your bookkeeper, and then use it to generate accounts or other types of reports, to help you analyse your business's performance. This is something that you probably shouldn't do yourself, as much more technical knowledge of accounting and tax regulations is needed, so you should look at getting yourself a good, qualified accountant on board to help you with this. Our next article will cover how to choose a good accountant. There are basically two types of accounts your accountant can prepare for you;

Financial Accounts

All businesses have to prepare some kind of financial accounts every year, as these are required by HMRC for tax purposes. Limited Companies also have to submit a copy of their annual accounts to Companies House, although these can be in a shortened version. These accounts are however of limited use to you, the business owner, as they are usually only done once a year, and have limited analysis in them. They usually just contain a basic profit and loss account, a balance sheet, sometimes a cash flow statement, and some notes explaining how they have been prepared.

Management Accounts

Management accounts are much more useful to the business owner, as they are usually prepared monthly, or at least quarterly, so are much more timely than annual accounts, and they are designed to provide management with meaningful analysis of the business's financial performance. They will normally include a detailed profit and loss account broken down into different sales and expense types, with comparisons to either the previous month, or year, or to your budget if you prepare one, as well as a cash flow analysis, and a balance sheet. They can also be tailored to provide any further analysis which is useful to help you run the business better and make the right decisions.

Conclusion

Many business owners see managing their finances as just an admin task and leave it until the end of the month, or even the end of the year. But don't forget that we are talking about cash here, and cash is the lifeblood of your business. Running out of cash is one of the most common reasons that businesses fail, so it is really important to stay on top of managing it. So invest either some of your own time, or some time from a bookkeeper or accountant, to regularly keep your bookkeeping and accounting up-to-date - it really will be a good investment in the future success of your business.

If you found this article useful why not check out our other business guides, or you can sign up for our monthly newletter by filling in the form on the right - we will then send you our newsletter with other useful articles and hints and tips.

If you would like to discuss anything in this article, or need some help getting your business off the ground, or taking it to the next level, then please feel free to contact us. Don't forget - the first consultation is FREE.

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