One of the greatest mistakes made by new owners of small businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.
Most owners of a start up and new growing business have a flair for the environment in which the business operates.
They may be a great salesperson, an outstanding mechanic, carpenter, solicitor, or inventor
Unfortunately, most people do not like to keep the books.
As an owner of a business start up, you must remember that your company’s books and financial statements represent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss.
Financial statements and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors and trade creditors, as well as taxing authorities and other governing bodies.
The necessity for good, well-organised financial records cannot be over-emphasised.
Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems.
Far too often owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them.
It should be noted that HMRC are increasingly making Business Records Checks of those businesses they believe could have poor records.
As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with appropriate information.
Making Tax Digital
The Government proposes to require businesses to submit accounts information to HMRC quarterly as part of the “Making Tax Digital” project.
This was planned to start in 2018 but has now been deferred apart from VAT reporting.
Those starting a business should therefore consider a computerised accounting package from the outset that enables you to comply with these new obligations.
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.
Thus if the business is already MTD compliant for VAT they will also be compliant for income tax. The start date for MTD for corporation tax has yet to be confirmed.
There are a number of very good and easy to use accounting software systems which are commercially available, but none of them will solve the problems of inaccurate or poor-quality financial records.
If you want to use a computer-based accounting package, either in your own business, with a service bureau, or through your accountant, it is imperative that you generate accurate information to be entered into the system.
Cash or Accrual Accounting?
One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of accounting.
The cash basis of accounting has the advantage of simplicity and almost everyone understands it.
Under the cash basis of accounting, you record sales when you receive the money and account for expenses when you pay the bills.
Unfortunately, as we all know, the business world is not always so easy. Sales are made to customers and you sometimes must extend credit.
Your business will incur liabilities which are due even though you may not have received the invoice or have the cash available to pay them.
Most users of financial statements such as bankers and investors are used to accrual-basis statements and expect to see them.
Once you become familiar with them, they provide a much better measuring device for your business operations than cash-basis statements.
What is internal control?
It is the system of checks and balances within a business enterprise that helps to ensure that the company’s assets are properly safeguarded, and that the financial information produced by the company is accurate and reliable.
When you are operating as a “one-man shop”, or at least handling all the company’s financial transactions, maintaining good internal accounting control is relatively straightforward.
However, when your company grows to the size where you must delegate some of the functions, it becomes more difficult to ensure that all the transactions are being accounted for properly.
No matter the size of your business, you should always be able to answer “YES” to the following questions:
1. When my company provides goods or services to our customers, am I sure that the sale is recorded and either the debt is recorded in accounts receivable or the cash is collected?
2. When cash is spent by my company am I sure we received goods or servicesThese are fundamentals in a well-run business.
As the company grows you will need to consider concepts such as segregation of authority or controlled access storerooms.
No matter what the size of your enterprise, you should consider controlling your business and safeguarding hard earned assets as a priority from the outset.
Starting a business is an exciting time but do not overlook the importance of maintaining good financial records.
For more information see our Business Start Up Guide on Bookkeeping and Accounting