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How does small business bookkeeping work?

Small business bookkeeping is essential for steering your business towards long-term financial success.

Put simply, business bookkeeping is about charting your financial course. It involves recording financial transactions, keeping accounts in order and ensuring compliance with tax and legal requirements. In this article, we’ll explore ways to make small business bookkeeping more manageable and hopefully provide some actionable tips that you can apply to your workday.

Key points at a glance

  • Accurate decisions and tax compliance are supported by efficient bookkeeping.
  • Gain back valuable time otherwise lost chasing late payments with efficient bookkeeping.
  • Combine detailed tracking with strategic financial oversight in small business accounting.
  • Reduce administrative overhead and gain instant financial insights with digital accounting tools.

What is bookkeeping?

Bookkeeping for your small business is the process of recording, organising and documenting your day-to-day income, expenses and other financial activities. It involves:

  • Keeping accurate records of your costs, sales, purchases and payments.
  • Sending reminders for unpaid invoices and preparing financial statements.
  • Ensuring that all data is correct by dividing all financial transactions into categories.

Many confuse it with small business accounting, which looks at the bigger picture of a company's finances. However, the detailed records from bookkeeping help companies navigate towards growth by making smarter decisions.

Why is bookkeeping important for a small business?

A recent study found that SMEs spend over a week chasing late payments, often taking up valuable time for more important tasks and unnecessary costs. Here's why small business bookkeeping is helpful for your success:

  • You can make better-informed decisions with accurate financial data, steering clear of financial pitfalls. This includes identifying areas for investment, setting financial goals and creating strategies for growth.
  • You’ll have full transparency over your outgoings, helping you better meet financial obligations.
  • You minimise the risk of penalties and can claim tax deductions.
  • You’ll have a clearer understanding of your profits and cash flow, helping you better measure the success and sustainability of your small business.
  • You'll have transparency over your outgoings, ensuring you stay on course.
  • You’ll be able to minimise risks and allow for rightful tax deductions.
  • You'll always know your financial standing, helping you measure the success of your business regularly.

How is bookkeeping different for small businesses?

Operating on a smaller scale comes with distinct advantages and challenges when it comes to keeping track of your financial records bookkeeping. Here’s why:

  • Due to scale, you’ll have fewer transactions to process, making small business bookkeeping quicker. But, without software, the process can be pretty manual.
  • With fewer transactions, you can do your bookkeeping yourself, which cuts the costs of hiring a professional bookkeeper but, again, will require more time.
  • Small businesses have simpler tax reporting, so knowing your entity's structure is key for accurate tax filing.

Important bookkeeping terms to consider for your small business

Before we dive into the bookkeeping tips, let’s quickly cover some of the terms that might crop up:

  • Asset accounts
    Asset accounts represent the resources your business controls, ranging from liquid cash and receivables awaiting payment to long-term investments, property, and equipment vital for operations.
  • Liability accounts
    Represent your business's debts or obligations, with accounts payable tracking what you owe creditors.
  • Revenue or income accounts
    Records cash flow from the sale of your products or services.
  • Expense or expenditure accounts
    Tracks costs and expenses such as payroll, cost of materials, utilities and rent.
  • Equity accounts
    Convey a financial representation of the ownership structure of your business. It shows who owns your business and its value to them.

Other terms you should know:

  • Assets: The tangible and intangible items your company possesses which hold value, encompassing everything from the cash in the bank to real estate and stock inventory.
  • Balance sheets: A financial statement that displays a company's financial position by showing its assets, liabilities, and equity at a specific point in time.
  • Capital: Financial resources available for use, like money used to start or maintain a business.
  • Cash flow management: The process of tracking, analysing, and optimising the net amount of cash receipts minus cash expenses.
  • Costs of goods sold (COGS): The total cost of producing the goods a company sells during a specific period.
  • Depreciation: The reduction in the value of an asset over time, often due to wear and tear.
  • Equity: The ownership interest in the company, calculated as assets minus liabilities.
  • Expenses: Money spent or costs incurred in an organization's efforts to generate revenue.
  • Expense tracking: The process of logging, monitoring, and managing all outgoing cash flows/expenses.
  • General ledger: A complete record of all financial transactions over the life of a company.
  • Income statement: A financial statement showing a company's revenues, expenses, and profit over a period of time.
  • Journals: Financial records where transactions are initially recorded in chronological order.
  • Liabilities: Amounts owed to others related to loans, obligations to provide goods or services, etc.
  • Payroll: The total of all compensation a business must pay to its employees for a set period of work.
  • Payroll services: Outsourced services that manage a business's payroll processing, tax filings, and other employee payment-related tasks.
  • Revenue: The income generated from normal business operations and includes discounts and deductions for returned merchandise.
  • Trial balance: A worksheet listing all the accounts and their respective debit or credit balances to check the equality of the two.
  • VAT Returns: A periodic statement to the tax authorities that details VAT (Value-Added Tax) transactions and reveals the VAT owed or refunded.

Step-by-step: How to keep your books in order

When handling business bookkeeping, here's how to keep your finances in check.

  1. Choose an accounting software to streamline your small business expense tracking. Your software should help you record your transactions and generate reports.
  2. Retain your invoices, keeping them organised and stored securely within your software.
  3. Reconcile your accounts regularly with your bank statements (daily, weekly or monthly) so that you can correct any mistakes or errors before submitting your taxes.
  4. Create financial statements to plan for your tax payments and make wise choices about future investments.

How bookkeeping software can offer support for small business bookkeeping

Bookkeeping might seem overwhelming for a small business, and it's not always clear how to begin or avoid costly errors.

Digital bookkeeping software, like Pleo's automated expense management system, eases the process, making it organised and efficient for small businesses. It offers vital support in various ways, including:

  • Small business accounting services: Bookkeeping software simplifies managing financial records. You can connect your company cards to the software, which means it captures receipts instantly, logging and categorising each transaction in real time.
  • Small business payroll services: Through automation, Pleo’s system makes it easier to track employee expenses, reimbursements, and other payroll-related items.
  • Small business financial reporting: Using bookkeeping software simplifies the generation of financial reports for small businesses, providing real-time visibility on your finances and enabling better business financial planning.

10 tips for small business bookkeeping

Proper bookkeeping is a fundamental aspect of running a small business. It ensures financial transparency, facilitates informed decision-making, and is crucial for regulatory compliance. To help you navigate the intricacies of this process, we provide you with ten tips that help you form a solid foundation for your bookkeeping efforts.

These tips aim to equip UK small businesses with the tools and knowledge necessary to efficiently manage their financial records, thereby contributing to their overall stability and growth.

1. Keep records of every payment and transaction to keep them organised

Financial record-keeping for small businesses is a must for staying on top of your finances. It not only makes tax time smoother, but also helps you understand how your company is doing.

To keep your small business's financial records in good shape, begin by sorting transactions like income and expenses. Then, make sure to reconcile your accounts with bank statements and consider using automated software to record all your financial transactions. This way, you'll have a clear and organised view of your finances.

2. Choose an accounting method

As for financial management for UK small businesses, you’ll need to establish your accounting method from the get-go. Traditional (accrual) accounting records transactions when they occur, regardless of when the actual cash changes hands. In contrast, cash accounting records transactions only when cash is received or paid.

No matter which accounting method you choose, it’s important to keep personal and business accounts separate to simplify your bookkeeping.

3. Be strict with deadlines for receivables

In small business accounting, keep an eye on accounts receivable and take action when payments are overdue.

Receiving late payments can harm your cash flow and disrupt your business’s growth. Follow up regularly with customers, and add late fees as necessary.

4. Keep track of your expenses 

Staying on top of on your small business expenses is a smart move. It helps you see where your money's flowing and make savvy financial choices. Plus, it lets you trim your taxable income by deducting business expenses, which could mean lower taxes. Nice.

And if you're thinking of using bookkeeping software, it's a game-changer. It makes small business expense tracking a breeze, giving you detailed expense reports that paint a clear picture of your spending habits.

5. File bank statements and invoices

Maintaining good financial record-keeping for small businesses requires an organised system for your bank statements and invoices. While manual methods can track transactions accurately, using software makes it even easier, as it automatically arranges your bank statements and invoices by date, reducing the risk of mistakes and saving you more time.

6. Take time for bookkeeping regularly

Effective small business bookkeeping is often about consistency and the "little but often" approach. Keeping daily records ensures the accuracy of your financial statements. 

7. Create a routine

To nail your small business financial analysis, create a routine with monthly reports like income statements, balance sheets, and cash flow statements. And, don't forget to make a timeline to keep yourself on track to meet those goals and deadlines. 

8. Manage business taxes efficiently

Handling VAT returns for small businesses in the UK can feel overwhelming when trying to keep your business taxes in check. But don't worry, UK small business tax preparation might involve simply earmarking some cash for tax purposes or setting up a handy reminder for those important deadlines.

9. Know when to outsource your bookkeeping

As your small business expands, consider professional help for financial analysis, accounting services, and payroll services. Outsourcing small business bookkeeping or additional hiring employees can give you the freedom to focus on the important stuff – like growing your business.

10. Use digital tools and bookkeeping software

As your business grows, think about switching from good ole Excel. Instead of or in addition to outsourcing, explore the advantages of going digital with your financial records. Expense management solutions offer more control and financial awareness, but make sure you take the time to select the right one for your business. 

​​Expense tracking software, like Pleo's, not only helps you stay on top of your finances but also makes your life easier by automatically tracking expenses and capturing receipts. It simplifies the process, making it easier for businesses to maintain organised and up-to-date financial records.

Don’t wait any longer and start your small business bookkeeping now

Keeping accurate records in small business bookkeeping is key for your financial health and longevity. Software like Pleo's spend management platform can save you hours each month, allowing more time for core business activities.

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