It seems obvious that cashflow and accounts are important elements of running a business. However when you first start your business, bookkeeping and accounts isn’t something you easily get excited about – unless perhaps you are starting a business as an accountant. If you watch the television programme ‘Dragons’ Den’ you can see how many would be business owners and current business owners have a very poor grasp on basic accounting principles. This post describes how I, as a business owner, have dealt with bookkeeping over the years and finishes with some ‘top tips’ based on my experiences. I run a business in the UK so some of the references in this article are UK specific, however if you replace VAT with ‘local tax’, I’m sure a lot of these tips hold true everywhere.
I was very fortunate when starting edgeofmyseat.com because I was helped by The Prince’s Trust and one of the things they do is set new businesses up with a business mentor. The monthly meetings with my mentor ensured that at least once a month, I got my accounts up to date and could talk about my cashflow, where I expected money to be coming from and where I was spending it. This was one of the most valuable things that The Prince’s Trust did for me as a new business owner. The mentor sat me down and made sure I realised that while I might be great at doing the work, if I also didn’t keep my eye on cashflow, the business wouldn’t succeed.
In my first year running the business I operated as a sole trader, I did all my own bookkeeping and end of year tax return. As the business grew we become a UK Limited Company and registered for VAT and at this point I took on an accountant. By the time he had been through our accounts he had saved me more than his fee, as there were various things I wasn’t claiming for that I could do. However I still continued to do the day to day bookkeeping, using my accountant for occasional advice, and also the end of year returns. Almost eight years on, I still do all of our bookkeeping and despite it being something that could be easily outsourced, I would rather devote some time to this and know exactly what is happening financially on a daily basis.
I am often asked what software we use for our accounts. Up until very recently I used Quickbooks, while Quickbooks is a very capable small business accounting package it doesn’t run on the Mac or Linux, and also takes some experience to understand how to use it. When Drew McLellan became a Director of edgeofmyseat.com it became clear to me that we needed to explore alternatives to Quickbooks that would enable him to become more involved with the finances of the company. In the time between me setting up the original accounts in Quickbooks in 2001 and Drew joining the company in 2007, several online accounting and invoicing applications had been launched and we eventually selected Xero as the application that fulfilled our requirements best. I could (and probably will) write an entire post about that transition but it has made life far easier for me as the person who does the bookkeeping and for Drew who just needs a quick overview. I would very much recommend Xero from our experiences so far.
Business cashflow tips
Know your financial position
If you run a business the financials are your responsibility. Get help when you need it but don’t outsource to the extent that you don’t know your financial position. If you don’t understand something that your accountant or bookkeeper is doing, ask them. Make it your responsibility to have a decent working knowledge of the books.
Have up to date details of your position available, in an easy to understand format
When I was using Quickbooks, it was very difficult for Drew to understand our financial position. I had spent years learning Quickbooks as the business had grown and I understood what was happening, however without that knowledge it was hard for Drew to just get a quick overview. With our move to Xero, Drew can now login and see the overview and reports so both Directors of edgeofmyseat.com are up to date with our position at any time. If you do outsource this side of your business make sure you are getting frequent management reports, and that you understand them.
Get professional advice
I do my own bookkeeping, but I wouldn’t dream of doing my end of year accounts on my own – I know my limitations! A good accountant should save you money as they will be up to date with current legislation. They should also be able to help you set up your accounting software to make day to day bookkeeping easy, and in a format that will make their job at the end of the year straightforward.
There are other places where you can obtain advice, business organizations such as the Federation of Small Businesses and Business Link in the UK offer lots of helpful advice on financial issues. If you have a good relationship with your bank they can be a port of call – but a lot does depend on the individual bank and branch.
Set aside your personal/company tax and VAT as you receive it
Ideally you should have a separate account to transfer the portion of every payment that is VAT (if you are registered) and the percentage of profit that will be tax to as you receive payments. Most business bank account providers can also give you a linked instant access savings account. I find that having the money in a different account stops me seeing it as available cash! If you don’t have a separate account make sure that you always know what amount of the money sat in your account is earmarked.
Chase unpaid invoices
An organized system for creating and tracking invoices means that you know when invoices become overdue. Don’t be shy in chasing invoices – if you have done the work then you should be paid for it. It is a sad fact that many businesses purposely avoid paying until they are chased for the money, and will delay as long as possible. Have a set procedure that you use to chase and enforce your invoice terms. In the UK the Better Payment Practice campaign site has lots of practical advice for chasing payments.
Don’t leave things to the last minute
Leaving end of year accounts or VAT returns to the last minute causes two issues. Firstly, you are more likely to make mistakes or forget to include things if you are running up to the deadline. Secondly, if you have made a mistake somewhere and find your VAT or tax bill is a lot more than you were expecting, you have no time to find the extra cash. I try and keep our books up to date each month, so I have as long as possible to sort out any issues before the accounts have to be finalized and outstanding tax paid.
The above are some of the suggestions that I have for keeping up to date with the figures in your business. If you have any other tips please ad them in the comments. Also, I’m planning to write a few articles on business related issues based on my own experiences, so if there is anything you think would be interesting to know – let me know and I’ll see if I have any ideas on the subject.