Good record keeping will keep your business thriving

In the second of our blogs based on an interesting seminar given by Peter Dingley, we identify more aspects of ‘looking after the pounds and the pennies’ as a start-up business. This time we consider record keeping.

To many business owners, keeping effective financial records will be the least of their worries amid the complexities of securing funding, fine-tuning their product offering and working up their sales and marketing strategies. However, one thing is certain – if you don’t have an effective system in place from day one, you’ll end up spending twice as much time trying to catch-up in the future. So, just what records are required for small businesses and how should you go about keeping them?

First of all, it’s important to remind ourselves that the Companies Act 2006 requires all businesses to keep adequate records of their day to day financial transactions. Even in this digital age, it is recommended that you keep hard copies of everything – or at least filed digitally with the ability to print a hard copy. Company law requires you to keep information for a minimum of three years but HMRC requires anything that could involve tax to be kept for six, so it’s good advice to just keep everything for six years to be on the safe side.

Tempting as it may be to just put everything in a box, an adequate filing system is a must! When it comes to important reporting milestones, you’ll waste a lot of time and energy hunting for specific bits of paper which could be spent much more wisely working on your business.

Of course you can do this in various different ways and most people start off with simple spreadsheets. These work perfectly well to give you a steer on basic income and outgoings. However, they will not help you to keep track of debtors and creditors to manage your cashflow effectively; nor will they give you important key performance indicators (KPIs) to keep your business on track for growth. The next step up would be stand-alone accounting systems, like Sage, and cloud-based systems, like Xero. If you envisage various people, including your accountants, accessing your financial information, a cloud-based solution is usually extremely efficient and effective. Once you have all of your information stored securely and updated regularly, it will be easy to comply with your reporting deadlines and keep on top of your business’s performance. Here’s a rundown of the information that you are likely to need.

  • Management Accounts: these are financial records that help you to run the business. When applying for business finance or even just speaking to your bank manager, they will want to see these records. They should include a profit and loss, balance sheet and cashflow forecast. It’s always good to include pipeline figures so that you can look forward as well as backwards to gauge performance over a longer period. There are CRM packages available to help you categorise your sales pipeline so you will know what to include in your figures.
  • Full/Abbreviated Statutory Accounts: you are legally required to submit these to Companies House within nine months of your financial year end and these are then available for the public to view. Your accountants will advise you whether you need to submit Full or Abbreviated Accounts and in many cases Abbreviated Accounts (which will be around five pages) are sufficient. Full Accounts will be sent to shareholders and may also be required by customers to verify your financial status. HMRC has templates and these can be sent from its website straight to Companies House for filing. However, some HMRC software is still a bit hard to use so it is always recommended to work with an accountant in preparing these formal annual accounts.
  • Taxation: Each year, you will need to provide accurate records of all your company taxes which can be summarised as:

PAYE & National Insurance – your business must be registered with HMRC before your first pay day. HMRC has a system that can be used to calculate PAYE, NI, and other matters like pension and student loan contributions for up to 10 employees. It has recently brought in real time reporting too, meaning that you have to keep on top of this on a month by month basis.

VAT – VAT returns are required by HMRC, usually on a quarterly or annual basis. VAT accounting is usually simple for 95% of businesses and we suggest being one of those because, for the rest, it is a nightmare! It’s not usually a cost for most companies but of course you must be registered in order to both charge, and claim back, VAT. There are various schemes available so speak to an accountant about which is right for your business.

Corporation Tax – this is a tax on your profits and requires an Annual Return and payment within nine months of the end of your financial year. Your Final Accounts will detail exactly how much you will need to pay; however, it is far easier to plan for this if you have kept good management accounts along the way.

So, entrepreneurs – beware! Record keeping isn’t just about filing – it is, in fact, the lifeline of your business.