Keeping Your Accounts

Keeping Accounts, What Does This Mean & What Should I Do

Keeping your accounts is essentially maintaining the financial records for your business, known as bookkeeping. Depending on your business, this can become complex with lots of rules and regulations to keep on top of, in which case it may be wise to outsource to a professional bookkeeper. There is no reason though that you cannot undertake at least some of the work yourself and you may be able to work with a bookkeeper who will support you to undertake the areas that you are comfortable with & they will cover the remaining aspects for you. Even if you outsource the bookkeeping, it is crucial for you to have an understanding of the finances of your business and you should still therefore understand some basic principles and be on top of the figures for your own business.

Regardless of how simple or complex your business accounts in, fundamentally keeping your accounts will mean keeping accurate records on your sales, costs and overhead expenses which will form your Profit and Loss and also your assets and liabilities which will form your Balance Sheet. It is important to keep accurate records that support the figures in your accounts and you should always obtain a receipt or invoice for anything you purchase.

Whether you manage your own bookkeeper or employ a professional bookkeeper, you should run or receive regular financial reports, known as management accounts, to help you with the financial management of your business. These will give you information on how profitable your business is, where your biggest costs and potential savings are, what assets your profit is tied up in and whether your business is solvent, ie that the assets are more than the liabilities.

Along with the overall financial statements you should also be regularly reviewing who owes you money, these are known as your debtors and can be referred to as accounts receivable. If your customers or clients don’t pay at the time, you should be clear on the terms that you expect them to pay and send regular statements of account to them, chasing any payments that are later than you agreed. Late payments can be difficult to manage, particularly if you know your customer or client well, you should ensure that you answer any queries professionally and respond to disputes promptly, however if payment still isn’t forthcoming then you may need to consider legally recovering the outstanding debt. This can be time extensive to do and be damaging to relationships, so you should weigh up whether an alternative solution can be reached, such as a time to pay arrangement.

You should also be regularly reviewing the money that you owe to your suppliers, known as creditors and also referred to as accounts payable. Whilst it is good cash management to hold onto your cash for as long as possible, you should always aim to pay your suppliers on time and prompt payment can also be valuable to your ongoing relationship with your supplier.

Cashflow is the actual amount of money coming in or out of the business and this is entirely separate from profit and loss. It is really important that all business owners understand the difference between cashflow and profit & loss, to confuse the two can have catastrophic financial consequences for your business. If you are a small sole trader, operating a service type business where your customers pay at the time and you pay your costs as you go along then it is easy to see that the cashflow will roughly follow the profit & loss. If you then add in VAT registration for example, there would be a difference in the cash coming in to the profit, as some of the cash coming in would be VAT that needs to be paid to HMRC at a future time, this therefore is in the bank but a liability that you must ensure you can pay. If there is money in the bank, it can feel that the business is successful, however it is important to also follow the cashflow to ensure that this money is not committed and that you can meet your business liabilities as they fall due. Staying with the same simple example, imagine that there is an employ who is paid at the end of each month, now the business owner must ensure that there is the money available at the end of the month to make the payment and then the associated payments to HMRC and Pension Service.

A cashflow forecast will help you plan ahead to ensure that you will have the money available to meet your liabilities as they become due. There is software available to help you with this or you can use a simple spreadsheet. Either way, you need to forecast the money you expect to come in and the money you expect to come out and this will then show your expected balance at the end of each period. You should remember to record the time that you will receive and spend money, which may be different to when it is incurred.

The basics of accounts are not too complex and you should try not to over complicate your accounts to the point that you no longer understand them, basic accounts that you can understand and use to help your financial management are far more valuable than complex accounts that you have no understanding of!

Part of the complexity of keeping your accounts or understand financial statements from your bookkeeper or accountant can be the jargon, we will therefore run through some common terms and what these mean:

  • Profit & Loss is the income and expenditure of your business, often sectioned as income, also known as turnover, then the cost of sales, such as materials, taking cost of sales from turnover gives gross profit and then deducting your overhead expenses gives your net profit before tax. Overhead expenses broadly speaking are the costs you would still incur regardless of your volume of sales.
  • Balance Sheet is the assets (what your business owns or is owed) and the liabilities (what your business owes) A solvent business, put simply, will be able to pay all of its liabilities with the assets.
  • Trial balance is a list of all of the ledger codes and their respective balances for the period presented in two columns, debit and credit. Traditionally, in manual bookkeeping these would be painstakingly calculated from all of the transactions but today, software can take out a lot of the time involved. The trial balance figures are what are used to produce the Profit and Loss and Balance Sheet, each line on the Trial Balance will go on either one or the other and the column it is in will dictate where. You may hear reference to taking accounts to trial balance stage and this simply means collating all of the day to day transactions, either manually or in software to the point where a trial balance is produced. This would then be adjusted as or if necessary prior to producing the final accounts.
  • Cashflow is the flow of cash in and out of the business and the timing that this happens. It is very different from profit and loss and regular review should ensure that you always have sufficient money to pay your liabilities when they become due, or if you don’t, you have advance notice of an issue, often referred to as a cash flow issue
  • Assets are what the business has, what it owns and what it is owed. Physical assets such as buildings, vehicles and machinery are known as tangible assets. Current assets are cash or money that can be turned into cash quickly, such as bank balances. Any money owed to your business is also an asset of your business as is any stock that you have purchase but not yet sold.
  • Trade debtors, also known as accounts receivable are payments that you are owed by your customers or clients. Debtors are payments you are owed.
  • Liabilities are what your business owes, to suppliers, HMRC in various taxes or loans that have been taken out.
  • Trade creditors, also known as accounts payable are payments that you owe to your suppliers. Creditors are payments that you owe.
  • Reconciliation is the process of comparing records in your accounts with official sources, such as statements. For example you would want to ensure that you reconcile your accounting records to ensure that the bank transactions included match your actual bank statement.
  • Drawings and capital introduced are terms relevant to a sole trader. When you withdraw from or add money to the business, remembering that a sole trader means there is no distinction from the business and owner, therefore these are simply movements between the business and business owner.
  • If you are trading as a Limited Company then the business is a separate entity to the owner/s and you will hear terms such as Director’s Loan which is the money that you have put into the business which is to be repaid when appropriate, Dividends are the distribution of the profit after tax to you as a shareholder (you may also receive a salary which is an expense of the business and will reduce the profit), Share Capital is your original investment into the company to purchase the share/s, typically this will be £1/£100 for a new small company set up but can be any amount that is appropriate.