Keeping accurate financial records is a legal requirement that enables the production of end-of-year accounts and tax returns. Well-organised, up-to-date and accurate financial records are essential for sales and cash flow analysis, credit management and stock control.
Most businesses find it easy to handle their own book-keeping needs. A computer-based system is quickest and easiest for all but the simplest businesses.
Unless your business finances are very simple, a computer-based system will be better. Maintaining and assessing financial records in manual form will cost your business more time and money.
The HMRC Making Tax Digital requirements being phased in from 1 April 2019 will eventually require you to report your tax returns online using compatible software. This will apply to VAT and self assessment.
Think about the growth of your business. Changing to a computer-based system later on will be disruptive.
Computer-based systems offer increased speed and flexibility. They can take the boredom out of repetitive tasks, but you do need to make sure your financial data is kept safe and secure.
Find out about accounting software packages
Ask other businesses or your accountant which packages they recommend.
You can choose to download software to your own network, or use an online (cloud-based) package.
You have to record all the money coming into and out of your business, both to keep track of your cash flow and for your tax records. HM Revenue & Customs (HMRC) has a penalty regime which places a duty of reasonable care on businesses, reinforcing the need for good record-keeping.
Create files for keeping sales records
Non-cash businesses issue invoices for each sale and keep them in two files: Sales Paid and Sales Unpaid.
Cash businesses use till rolls and point-of-sale systems to record their sales. Records of these also need to be kept.
Create files for keeping purchase records
Keep two files for purchase invoices: Purchases Paid and Purchases Unpaid.
Keep a separate box file labelled Petty Cash for receipts for business purchases made using cash.
Open a separate business bank account
A separate business bank account makes it easier to keep track of your business income and expenses. Do not write personal cheques from this account.
If possible, try to make all business purchases from this account rather than from your own pocket. For small amounts (eg travel expenses) this might not always be possible.
Ask for monthly bank statements and keep these stored systematically.
Set up a manual or computerised Cash Book to summarise financial information
The Cash Book records all money coming into and going out of your business bank account (including cheques and electronic payments).
Accounting software will automatically include the same functions as a Cash Book. If you opt for a manual system, you can buy an analysis book to use as your Cash Book.
You need to choose which headings to use to record different kinds of expenses. Ask your accountant for advice.
If necessary, set up a separate book for cash sales
This record will be similar to your Cash Book, but it will be used for recording the actual cash going into and out of your till.
Pay the customer's cheque into your business bank account if the payment is not made electronically.
Take the relevant invoice from Sales Unpaid and file it in Sales Paid.
Put the most recently paid invoice on top, so that the invoices are automatically in the order they were paid.
Update your Cash Book once a week
Look through your paying-in book stubs. Enter into the Cash Book details of all the invoices paid.
If you are registered for VAT, record separate figures for the value of the invoice excluding VAT and for the VAT amount.
Check the entries against the invoices in the Sales Paid file. Put a tick against the invoice number on each invoice to show that the details have been entered in your Cash Book.
If you regularly pay batches of cheques into your bank, you need a separate 'bank' column in the 'money in' section of your Cash Book. This shows the total value of cheques paid in each day, making it easier to check against your bank statement.
Deal with any irregular situations
If an invoice is amended, issue a new invoice. Write 'Cancelled: see invoice no. xxx' on the original invoice and file it in Sales Paid.
If partial payment is received, write 'part paid', the date and the amount on the invoice. File a photocopy in Sales Paid and keep the original in Sales Unpaid. When you update the Cash Book, put P by the invoice number (eg P169).
If you issue a credit note, give the note a number (like an invoice) and file it in Sales Unpaid. When you update the Cash Book, record the details as usual, but put the amount in brackets to show that it is a negative amount that must be deducted from your sales total.
Check through your unpaid invoices once a week
Chase any that are falling due or are overdue.
The longer a customer has owed you money, the further back in the Sales Unpaid file the invoice will be.
Record any business expense you pay out of your own pocket
Write details of the purchase on each receipt.
Keep receipts in your Petty Cash file
File them in date order.
Total all Petty Cash receipts once a month
Write yourself a cheque for the total.
Attach the receipts to an A4 sheet and file it in Purchases Paid.
Enter the details in your Cash Book
Put your own name and 'petty cash refund' as the supplier.
Break down the total into the different headings you are using. For example, if you spent £10 on stationery and £5 on parking you would enter £15 as the total, broken down into £10 for stationery and £5 for travel.
Treat purchases made by credit card in the same way
Refund yourself the total of all the business purchases when the credit card bill arrives.