How to do bookkeeping as a small business

There’s no getting away from it – if you run a small business, you’ve got to run its bookkeeping too. Sometimes, this can seem like an overwhelming and lengthy job, especially if you’re not 100 per cent sure what you’re doing.

You also probably find it a bit of a chore, since you didn’t start your business to search through boxes of receipts, enter data into spreadsheets, or read through bank statements at eleven o’clock at night.

Here’s the good news. With the right approach and tools, you can make sure all aspects of bookkeeping when it comes to your small business are meticulously taken care of, without feeling stressed or sacrificing too many hours each month.

In this article, we’ll show you how.

It covers:

  • What is bookkeeping?
  • Can I do my own bookkeeping?
  • How to make bookkeeping easier
  • Which software features to look out for

What is bookkeeping?

Using “bookkeeping” and “accounting” interchangeably is common, but the two terms do have different meanings. You’ll need to know the difference, because accounting is not something you can really tackle all by yourself (though you’ll still need high involvement in it).

So, how do they compare?

Bookkeeping is the process of recording all the money that goes in and out of your business

This involves collecting and storing financial information such as receipts, invoices and bank statements. You need to do some bookkeeping practices by law, and accuracy is essential for paying the right amount of tax to HMRC each year.

Accounting is the process of interpreting financial data and creating reports and forecasts

This helps you understand the financial health and performance of your business. There is a lot more that goes into this, which is why you should collaborate with a certified accountant to make the most of your financial data.

That being said, you might not need to do this just yet. If you’re business is still small, bookkeeping should be your first priority for two reasons:

  1. To make sure you’re doing everything right from a legal point of view and reducing your risk of being fined
  2. Because without solid, accurate bookkeeping, any accounting you do will be based on flawed or incomplete data sets. This means any insights you try to gain would be unreliable

Once you’ve found your groove and got a solid foundation from bookkeeping, then you may consider how an accountant could help you power up your small business with more knowledge of its finances.

Can I do my own bookkeeping?

You certainly can. And it doesn’t have to be difficult, boring, or time consuming. Though many tasks fall under bookkeeping, there are five essentials that you need to do to keep things rolling smoothly and legally.

In the early days, you’ll be able to manage all of these without too much trouble. But, as your business grows (along with the volume of its financial activity), it’ll become more cost effective to hire an accountant or bookkeeper to take the reins while you focus on more value-adding tasks.

In the meantime, here’s what you’ll need to do regularly to keep clean books:

#1 – Record everything

Keeping an accurate record of all incoming and outgoing transactions is the primary task of bookkeeping and a legal obligation for your business. That means, each time you make a purchase or receive a payment, the information needs to be stored, along with the amount.

These financial records will be used later for your tax return, so accuracy is essential. Holding onto receipts for up to six years is also recommended.

#2 – Reconcile transactions

You might have heard the term “bank reconciliation”. This is a key bookkeeping task that involves looking at your bank statement and checking it against your financial records. Line by line, you’ll need to make sure all the debits and credits on the statement appear in your records.

This process helps you spot errors like unexplained spending or charges, and double payments or record entries. Seeing these things early helps you investigate and make corrections before they cause trouble later on.

#3 – Monitor cash flow

Cash flow is the amount of money that comes in and out of the business. “Cash in” includes all the money paid to you by customers (and any Government grants for example), while “cash out” includes everything from supplier payments and staff salaries to utility bills and rent.

It’s really important to keep a close eye on cash flow, because if it stops, your business won’t be able to function. By regularly checking what money is available, you can better manage how you pay suppliers, invest in stock, or even extend your credit if needed.

Remember to consider more than just how much is in the bank. Think about how much you currently owe, how much customers owe you, when payments need to be made or are expected, and how much VAT you’re liable for.

#4 – Watch out for late payments

At some point, every business will experience customers who aren’t the timeliest when it comes to paying what they owe.

There are many reasons this might happen, but from your point of view, it can’t go on too long. Delays to money entering the business can impact how flexible you can be, and even prevent you from making basic purchases.

To keep cash flowing, you need to chase those customers who still have outstanding invoices. Remember to be specific about when you expect to be paid by, but always remain polite and professional.

It’s also a good idea to ask how you can support them in pushing it over the line – whether that’s allowing them to pay a different way or splitting payments into smaller chunks.

#5 – Pay tax

No matter what type of business you run, you need to pay tax on whatever money it earns. There are a few different types of tax, each with their own criteria, rules, and processes.

It’s ultimately your responsibility to understand which applies to you, and how and when to submit your tax return to HMRC.

Doing this yourself is possible (even simple with software), but if you’re unsure, this is one task you might want to pay a bookkeeper or accountant to do.

Main types of tax

Income tax Corporation tax Value Added Tax (VAT)
This is paid by landlords and sole traders using a system called Self Assessment This is paid by limited companies, foreign companies with a UK branch or office, clubs, co-operatives, and other unincorporated associations VAT is a tax charged on most goods and services sold by VAT registered businesses. If this is you, you’ll need to charge the applicable tax rates on whatever you sell and submit returns to HMRC

Source: Sage

Pro tip: There is a new scheme being rolled out by HMRC called Making Tax Digital. This brings new requirements for you to keep all accounting records digitally, use compatible software to submit your tax return, and more. This is already in place for VAT, and will be launched for Income Tax Self Assessment in April 2024.

How to make bookkeeping easier

These five bookkeeping tasks seem like a lot to think about, but you can make things significantly easier by following three golden rules. Combine these with quality accounting or bookkeeping software, and you’ll stay on top of your books every month without breaking a sweat.

Take a ‘little but often’ approach

A chief reason for bookkeeping being a time-consuming, stressful, and tedious job is that many people let the individual responsibilities add up. By putting it off, you make it bigger and increase the chances of mistakes.

It’s better to take a proactive approach and work on tasks more frequently for smaller chunks of time. Block frequent time out in your calendar dedicated to each task and set them to reoccur at the intervals they need doing (monthly, weekly, and daily).

The more you do this, the faster you’ll get, and it’ll eventually become habit.

Digitise everything

When it comes to bookkeeping, paper can be endlessly problematic. Whether its scribbled notes, financial documents, or receipts, hard copies often get lost or damaged. And you can guarantee the ones that disappear will be the ones you need most.

The more you can digitise, the better. Your record keeping will be way more accurate, you’ll be able to search for, access, and share the data you need almost instantly, and everything can be securely backed up.

Any form of digitisation will bring you benefits but using dedicated software for your bookkeeping makes it significantly easier, as so much of it can be automated (more on this below).

Invoice efficiently

We’ve already touched on why healthy cash flow is so important. Make sure you establish an invoicing process that is efficient as possible. You want to be invoicing as soon as work is completed and accepted, and chasing any late payers persistently (but nicely).

Try to think of other ways to improve your process, such as breaking large jobs into multiple stages of invoicing, using customisable templates, automating tasks where possible, and setting up rolling invoices for repeat customers.

If you stick to these three golden rules, you’ll slash the hours it takes to keep clean books, save yourself a lot of headaches, and keep the cash flowing.

Which software features to look out for

To truly empower your bookkeeping abilities, you should be using a quality accounting or bookkeeping software solution. Why? Because all five of the tasks mentioned above can be at least partially (if not fully) automated.

Yep, that means:

  • Reduce hours to seconds for many individual tasks
  • Ensure more accuracy in record keeping
  • Make earlier discovery of errors and correct them sooner
  • Make compliance effortless
  • Have secure, frequent backups of all your info
  • Get real-time visibility of cash flow

There are many high-quality solutions out there that will help you achieve all this. And when you consider the monetary value of the hours you’d spend doing bookkeeping on paper or using generic tools like spreadsheets, software is often incredibly cost effective.

When deciding what software to choose, consider the level of support that the provider includes, as this will be essential if you’re new to bookkeeping.

Once you know which provider will be easily available to help, look out for these essential software features:

Digital record capture – Some solutions allow you to use a smartphone app or desktop scanner to capture everything from documents to receipts and can automatically pull the data straight into the system.

Automatic reconciliation – Software that integrates directly with banks can automatically reconcile transactions against the digital records stored in the system. This literally means a key bookkeeping task is done for you.

Mobile functionality – Being able to access the software on a mobile device allows you to stick to your bookkeeping schedule, even when you’re on the move. This way, you can avoid tasks adding up simply because you didn’t have access to your system.

Tax automation – Software from reputable providers automatically calculates your tax in line with the latest legislation (even as it changes) and allows you to submit to HMRC with ease.

Secure cloud storage – Cloud based software will securely store and back-up your data, so if you run into any issues onsite, you’ll have peace of mind that your information is safe and still accessible.

Find out how Sage Accounting can help you manage your books

Take control of your financial records

When you first get started in business, looking after the financials can seem a bit intimidating.

But by taking the time to fully understand the five main bookkeeping tasks, you can take control of your financial records and build a solid foundation for any future accounting activities.

Stick to the three golden rules and consider using a quality software solution that can automate much of the work, and you’ll be able to keep accurate and compliant books with only a few work hours a month.

Ryan Grundy is a content writer at Sage

More on small business bookkeeping

Bookkeeping when you’re a sole trader

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