BUSINESS: Financial Record Keeping Basics

Today our resident accountant, Mich of MyFuroshiki, takes us through the basics of financial record-keeping!

Keeping financial records is essential, not just in order to produce your tax return but also because there’s key information in there which will help your business grow. What follows are some basic, mainly common sense, tips for sole traders.

1. Keep a cash-book
The basic financial record is the cashbook, a list of all money coming in and going out of the business. It doesn’t matter whether you write it up by hand in a notebook, create your own spreadsheet or use accounting software: the important thing is to keep accurate records. A basic cashbook might look like the following:

If you buy things on credit or allow your customers credit, you will also need a purchase and / or sales ledger, listing these transactions, as a means of tracking how much you owe / are owed.

2. Check your numbers
Build cross checks into your records, which is particularly easy to do if you’re using a spreadsheet, e.g check that Totals C+D+E = Total B, to make sure all expenditure has been analysed out. On a regular basis, check transactions against bank / Paypal statements. Items which might only appear on the bank statement, such as bank charges and interest, should then be recorded in the cashbook as business expenses.

3. Make it easy on yourself - get a system going
Keep copies of invoices and receipts, bank and Paypal statements; file them in order; note them in your ledger on a regular basis; and, if you are using a computerised system, make sure you frequently back up and / or print out everything. Broadly speaking, records should be kept for a minimum of six years.
 

Illustration courtesy of Siobhian Carroll

4. Know your reporting requirements and structure your records so they flow into what you need
Self employed people with an annual turnover of less than £68,000 a year have to report on total income and expenditure in their tax returns. It’s helpful to split out expenditure on equipment as you go along as it’s treated differently to cost of sales and business expenses. Remember to keep personal and business expenditure separate.

Limited companies have to submit annual accounts (including a profit & loss account and a balance sheet) to Companies House and Her Majesty's Revenue & Customs (HMRC). Even if it’s not a requirement yet, there are advantages to producing such formal accounts as your business grows because banks and other investors generally want to see three years’ accounts before providing funding.

5. Use the information in your financial records to monitor and make decisions about your business

• Compare your income and expenditure with your budget or forecasts.
• Look at the sales trends. Are sales higher in one month than another? Was that due to a change in selling venue perhaps or the launch of a different product? How seasonal is your business?
• Track your expenditure. How do the cost of sales compare to sales made? If, for example, the cost of sales is going up, is this because the raw materials are getting more expensive and should you therefore review your sales prices or is it, perhaps, that you are stockpiling more material? Is this deliberate, to meet an expected increase in demand or do you risk being left with a lot of stock on your hands?
• Are fixed business expenses, e.g. premises costs, going up? What impact will this have on your overall profitability?

A wealth of helpful information on financial records and on producing a profit and loss account and balance sheet can be found at Business Link, a free advisory service.