What is bookkeeping? Small business bookkeeping made simple

Managing the books is a key role for small business owners. By doing proper bookkeeping, you can track your business's financial performance and stay within the law.

On the surface, bookkeeping may seem confusing. But delve a bit deeper and it's fairly straightforward. Simply put, you're recording the amount of money that enters your business and the amount that goes out of it.

By keeping track of these details, you can share the relevant information with HMRC so it can calculate the right amount of tax your business owes.

In this blog, we examine what bookkeeping is, the various specific tasks it involves, how good bookkeeping can benefit a small business, and the difference between bookkeeping and accounting.

What is bookkeeping?

By definition, bookkeeping means recording financial information about your business transactions. Its real value lies in how it gives you control over your business and make quick decisions as a result. Once you know where you are, you can better understand where it is you need to be.

Bookkeeping is a vital job in any business. This is true whether you do the work yourself or hire someone to do it for you.

Without even basic bookkeeping, your accounts just won't be accurate. Consequently, that means your accountant won't be able to get a clear picture of your business finances. It also stops you from making strategic business decisions.

Just as importantly, your business has a legal obligation to accurately record its financial accounts and file company reports to the tax office. So it pays to get this right.

Bookkeeping will help you do all of this, and will also give you useful insight into your business performance and financial position.

Who's responsible for doing the bookkeeping?

As an entrepreneur or business owner, you should not be spending most of your time bookkeeping. So who should be doing it?

If your business is big enough and can afford it, you have the option of hiring accounting staff. Or, you can outsource your bookkeeping to accounting and bookkeeping firms.

The option you go with will depend on how much it costs and whether it best suits your business. When deciding what kind of bookkeeping services you need, ask yourself these questions:

• Can I afford to hire a bookkeeper or is it cheaper to get the service supplied?

• Do the accounts need to be examined in such a bespoke way that I can't really outsource the work?

Bookkeeping should be a tool that supports a business's success, not a pain that distracts from it. If your bookkeeping isn't up to scratch, you need to sort it out sooner rather than later.

What does bookkeeping involve?

Bookkeepers can manage lots of different responsibilities within a small business. But their main focus is in organising, recording and reporting financial transactions as part of the business's operational life.

Here are some bookkeeping tasks that help keep a business running smoothly:

Recording daily transactions

You need to keep an accurate record of all your transactions. When you receive a payment or make a purchase, you should record it.

A bookkeeper can handle the recording of these day-to-day transactions. If the accounting software you use has daily automatic bank feeds, this is a great tool for your bookkeeper to use.

When your bank statement lines are fed into your accounting software, it's much easier to keep an eye on cash flow. It also means spending a lot less time on data entry.

Tracking financials

By financials, we mean the reports or statements that give you an accurate picture of the business's health and how it's performing. Your key financial statements are the:

• balance sheet

• income statement

• statement of cash flow

Monitoring cash flow

Managing cash flow is vital. If you have a steady flow of cash coming in to the business, paying for expenses won't be a problem. However, if the money dries up, you won't be able to pay for supplies and inventory – and your business will soon grind to a halt.

A bookkeeper can keep an eye on cash flow by watching the balance of revenues to expenses. Then they can take action or offer advice if it looks like the company needs more ready cash.

One of the most important tasks for a bookkeeper is making sure the company doesn't run out of day-to-day money.

Sending out invoices and managing the accounts receivable ledger

Preparing invoices and sending them to clients is usually the bookkeeper's responsibility. Managing the accounts receivable ledger, and chasing late payment, is also likely to be the bookkeeper's job.

Tackling late payments

Late payments can really frustrate a business. They might happen because:

• a supplier has forgotten to pay bills on time

• a supplier has changed its terms

• you haven't issued a request for payment

(There are more reasons too.)

One way you can combat this is to clearly state your payment terms on your invoices and get in touch with the payer ahead of the payment deadline. If you have unpaid invoices and an amount is overdue, contact the late payer straight away, remembering to stay calm yet assertive.

Handling the accounts payable ledger

Up to a certain amount, it's usually bookkeepers who will make payments on the business's behalf. This includes paying supplier invoices, dealing with expenses and handling petty cash payments.

Staying on top of business taxes

You need to make sure you pay your taxes correctly. Sole traders have to submit Self Assessment tax returns so HMRC can collect income tax, while limited companies must file company tax returns and pay corporation tax on profits.

Then there's VAT, a tax charged on most goods and services sold by VAT-registered businesses. Those registered businesses collect VAT on HMRC's behalf.

Preparing the books for the accountant

It's the bookkeeper's job to make sure the accounts are valid and up to date when the accountant needs them. This allows the accountant to use their skills and knowledge to make business recommendations, report to the board and complete company tax returns.

Other bookkeeping tasks

In more recent times, some bookkeepers have extended their range of duties to include the following:

• Training clients to use accounting or bookkeeping software

• Implementing processes for managing documents and controlling inventory, to make the business more efficient

• Implementing POS (point of sale) systems that capture the daily transactions (mainly retail businesses)

• Developing, implementing, maintaining and reviewing internal business processes

You will often find that a professional bookkeeper has an area of specialisation and it's a great idea to ask them more about this when you're looking at hiring them for services.

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How is bookkeeping done?

The days of hand-writing accounting records in ledger books are long gone. Now, there are lots of systems and tools you can use to bookkeep, from spreadsheets to online accounting systems.

These tools take the pain away from bookkeeping and give you access to data and analysis that helps drive business growth.

Relatively simple analyses like profit margins and more complex information on cash flow and working capital are easily accessible to you. Trends over several years are also just as easy to see.

Is a bookkeeper the same as an accountant?

One of the biggest questions you might have when it comes to tracking your business's finances is who you get to help. Do you need an accountant, a bookkeeper or both?

As accountants and bookkeepers have different jobs and responsibilities, let's demystify things a little.

What an accountant does

Typically, the accounting process involves:

• preparing and lodging tax returns and other company information needed by law

• advising on legal entity structures

• giving general business and financial advice

Accountants are usually members of a statutory association such as the Institute of Chartered Accountants in England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Management Accountants (CIMA).

How bookkeepers and accountants can work together

A well-run business is likely to make use of both accountants and bookkeepers. The division of labour is important.

In a business, it's the bookkeeper who does the day-to-day work so that the accountant can concentrate on strategic financial operations. So bookkeepers play an important role, and without them accountants can't do the fundamental accounting tasks that comprise their job. Here's how it might work:

Company formation

You should use an accountant to help set up your business. Accountants can help you create your business plan and set up a company structure that best suits your organisation.

Accounting systems

An accountant or bookkeeper can also help you choose the right business accounting software and set it up so that it works well for you and your employees, especially your in-house bookkeeper.

Bookkeeping work

After completing the above tasks, a bookkeeper can focus on keeping your company's financial accounts up to date each day.

Accounts reconciliation

The accountant and bookkeeper will get together regularly, perhaps once a month. They might meet in person or they might work remotely, using cloud accounting software with shared access.

Either way, the accountant will look at the figures in the accounts and the bookkeeper will explain any numbers and decisions that aren't clear.

Reporting

The accountant will report to you (as the business owner) and any board members, explaining the state of the accounts so you have a clear picture of the business's financial health.

A bookkeeper can also provide reporting, but in a less formal way, on a more regular basis with what's called management accounts. You might use these reports as checkpoints each week, to see where the business is going.

Strategy

Armed with up-to-date figures, the accountant will make recommendations to you, the business owner. They'll offer advice about any planned expansion and investment. They'll also advise on whether the business can afford to move into new markets and employ other financial strategies.

Keeping to the law

The accountant will use the information the bookkeeper has prepared to write the company reports. These reports will include information about your business income and expenses, net profit, assets, liabilities and tax. The accountant will also file the company tax return forms and arrange for the business to make its tax payments.

This is a sensible way of sharing the workload. The accountant does the work they've been trained to do, while the bookkeeper provides the necessary financial data.

Some final bookkeeping tips

Accounting software

Using cloud accounting software can make bossing the bookkeeping quick and easy to manage. And by staying on top of your books, you can be confident you're prepared for all tax requirements and make sure the business moves in the right direction.

Paperless paperwork

Keep digital copies of all your business documents. Whether you have business accounting software or a digital filing system, keep everything in one place.

You may not remember the email receipt that's sitting in your inbox. Just like you probably won't find the paper receipt for that miscellaneous cash expense you paid. Make a habit of attaching receipts and invoices to transactions as they happen in your bookkeeping systems.

Always remember how long you have to keep financial records for:

• If you're a limited company: Six years after your accounting period ends

• If you're a sole trader: 22 months after the end of the tax year the return is for

Prompt recording

In life, you sometimes get distracted. Your cat may run across your keyboard or your fifth delivery of the day may have just turned up. You can't always concentrate, and you don't have to.

As a result, you should try to record information the moment transactions happen – it's all about acting now, so you don't forget.

If you have confirmed work for next week, create a draft invoice for your customer. If you order a part for upcoming work, create a bill or store the invoice for when it's paid. Your future will thank you.

By following the 'act now' principle and regularly updating your records, you achieve three things:

1. All your information is up to date, and ready for whenever it's time to make those important business decisions.

2. You don't have to dedicate days to getting all your bookkeeping up to date.

3. You'll have a new-found love for bookkeeping and your financial activities.

Track and chase

Make sure your customers pay you, so you can then pay your suppliers. With up-to-date, accurate bookkeeping, you know exactly what you're owed and who you owe.

Standardising payment terms for all customers, so you always know when you should be paid, is an easy way to avoid confusion.

Cash is king

If you're a limited company, by default the bookkeeping method you use is accrual accounting. This means that income and business expenses are recognised when they occur, not when they're paid.

For small businesses (limited company or sole trader), you could alternatively use cash basis accounting, which means everything is recorded when cash has been paid. This ensures your records match your bank statements, and it can be a simple way to manage your finances and cash flow.

If you're a limited company, you have to file your accounts at Companies House under the accruals method, but you're allowed to use cash accounting for VAT if you have a turnover of less than £150,000.

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Relevant resources

• Seven ways to make your small business accounting more accurate

• Lunch and Learn: Accounting for small businesses

• Late payments: Tips to help small businesses get paid on time