Even the most financially literate business owners can struggle with accounting. But with the right tools and information, managing your business accounts doesn't have to be a chore. This guide offers a rough overview of the practice before breaking it down into six simple steps. We cover everything from opening your business account and choosing your method to producing financial statements and filing your taxes. We sum up by emphasising the importance of accounting software and answering some frequently asked questions.
Owning a business is not easy. From managing teams to overseeing projects, business owners are often forced to juggle multiple tasks at once. After supervising other crucial areas of the business, it’s easy for financial planning to fade into the background. But it shouldn’t. Securing a strong handle on your company’s finances can spell the difference between success and failure. So even if crunching numbers isn’t your strong suit, familiarising yourself with the basics of accountancy can help you make smarter and savvier decisions that could benefit you and your business long into the future.
New to accounting? Don't worry, you don't need to go through this on your own. This guide walks you through everything you need to know about the practice, from opening a business account to producing your final financial statements. We even explore the best accounting software on the market, so you're able to automate the key processes in the easiest way possible.
If you’re looking to become more confident in small business accounting, read on to find out more.
WHAT IS SMALL BUSINESS ACCOUNTING?
In simple terms, small business accounting allows you to identify, record and measure important financial information. It’s a vital process for every small-to-medium-sized enterprise (SME) because it helps you to organise your finances, track your profits and loss, and prepare for annual tax returns.
The practice is extensive. But some common accounting activities include:
- Creating and managing invoices
- Monitoring cash flow
- Managing payroll
- Producing financial statements
- Filing tax returns
BALANCE YOUR BOOKS WITH THESE SIX SIMPLE STEPS
Whether you're new to the practice entirely or you're looking to familiarise yourself further, below we outline the six basic principles of accounting.
1. Open a separate business account
As soon as your SME goes live, you’re legally required to create a separate business account. So while it may sound obvious, setting up a business account should be your first port-of-call when it comes to business accounting. Aside from the legal obligation, business bank accounts enable businesses to build a credit history. This will be needed if your SME ever looks to secure financing in the future.
Before you open your account, you need to choose which option is best for you. Banks offer a range of different solutions for small businesses, so it’s important to shop around before you land on a specific account. When comparing options, we recommend that you consider factors like interest rates, introductory offers and account features. After you’ve chosen an account, it may also be wise to set up a small business savings account. Not only will this help you to earn a more competitive interest rate, but it also helps you to prepare for the annual tax return.
2. Choose your method
Now your account is set up; it's time to choose your accounting method. There are generally two options to choose from: cash and accrual.
- Cash basis accounting When businesses use this method, they only record their incomings and outgoings when money is exchanged. This means that invoices or bills aren’t recorded until the process has been finalised. This is the easiest way to monitor how much money is currently in your business account. However, due to lags in invoice processing and bill payments, it isn’t the most accurate way to record your revenue and expenses.
- Accrual basis accounting Accrual accounting is when businesses record their income as soon as an invoice is raised or a sale is made. In contrast to cash accounting, this method doesn’t take into account when cash changes hands. While this offers employees a more accurate depiction of their company’s cash flow, the technique typically requires more time and recourse.
Due to its simplicity, cash basis accounting is typically the most popular choice for small businesses. However, it’s sensible to do your research before you decide which method is right for your SME.
3. Set up a bookkeeping system
One of the most important components of accounting is bookkeeping. Bookkeeping is the daily practice of recording and categorising business transactions. By using bookkeeping to closely monitor your expenses, you can identify what you’re spending money on before you encounter any cash flow difficulties. This helps your balance to remain stable, which is especially useful if your business is in its infancy.
To bookkeep effectively, businesses need a reliable system in place. Bookkeeping systems typically involve maintaining a general ledger, staying on top of accounts and managing bank reconciliations. These can be done manually, but the simplest and most time-effective option is to pursue digital bookkeeping. If you opt for this method, there’s no shortage of bookkeeping software to choose from. Some popular options include Xero, QuickBooks and Crunch.
4. Set up a payroll system
Payroll impacts your employees directly, and it can easily affect staff morale. Therefore, after you've mastered business bookkeeping, it's time to turn your attention to payroll.
If your business is UK based, you'll need to register as an employer with HMRC before you set up payroll. Once you've done this, it's time to decide whether you want to outsource payroll or manage it in-house. Most accounting firms can set up a payroll system for you, so if you're looking to free up company time and resources, this could be a good option to pursue. However, outsourcing doesn't come for free, so managing payroll in-house will be the most cost-effective option for many small businesses.
If you decide to run payroll internally, you’ll need the help of payroll software. From Sage to OsterHR, there’s no shortage of software out there. However, for smaller businesses, we recommend finding a solution that’s scalable and can be integrated with your existing systems.
5. Produce financial statements
After keeping tabs on your finances for a while, it might be time to produce a financial statement. Financial statements contain information about a company's financial performance over a given time, and they can be produced monthly, quarterly or annually. Not only do they offer insight into your company's financial health, but they can also provide crucial information to lenders and investors.
Depending on your SME's situation, the four most common financial statements used in accounting are balance sheets, income statements, cash flow statements and equity statements. Producing these statements in-house can be a complicated and time-intensive process. So, to make your life easier, it's recommended that you turn to professional accountants or utilise financial reporting software like NetSuite, Zoho Books or FreshBooks.
6. Calculate your business tax
You’d be hard-pressed to find a business owner who looks forward to tax season. Unfortunately, if you want to set up a business in the modern age, you must calculate, declare and file taxes.
If you own a limited company, you need to pay Corporation Tax through HMRC’s Company Tax Return as soon as your business generates sales. This tax is levied on a businesses profits and the capital they receive from investments. This should be paid to HMRC nine months and one day after your accounting period ends. For instance, if your accounting person terminates on the 31st of March, your tax deadline would be the 1st of January.
Just like with many other accounting processes, software is available for business owners who want to file their taxes in house. Despite this, due to the complex and lengthy nature of filing taxes, many small business owners and sole entrepreneurs offload these tasks to accountants if they can afford to do so.
SIMPLIFY THE PROCESS WITH ACCOUNTING SOFTWARE
As we’ve alluded to throughout this article, accounting software can be an indispensable tool for business owners looking to balance their books. Not only can it save you time by centralising key processes, but it can also sync all of your financial data to one unified system. This prevents you from switching between different platforms when managing your accounts.
Moreover, software solutions make it easier to create professional-looking financial documents from the comfort of your office or home. This allows you to carry out your procedures independently while eliminating the need to use more costly accountancy services.
When browsing the market for accounting software, you should try to find programs that will be able to seamlessly integrate into your existing systems. An easy way to do this is by opting for cloud-based systems like Xero, QuickBooks and Zoho Books.
SAFEGUARD YOUR FINANCES WITH KRIYA
Managing your accounts doesn’t need to be a headache. By reaching out to professionals or by harnessing smart software, you can keep one step ahead of your finances with minimal stress.
Whether you’re looking to hire the help of a professional or keep your accounting in-house, Kriya may help you cover the costs of accounting. We offer a number of flexible funding solutions that have been designed to make financing as simple and fuss-free as possible. From embedded finance to invoice financing, our cash flow solutions help you to remove cash flow barriers so you can focus on the future of your business.
To learn more about our diverse offerings, visit Kriya.
FREQUENTLY ASKED QUESTIONS (FAQS)
What is small business accounting? In simple terms, small business accounting allows you to identify, record and measure important financial information. It’s a vital process for every small-to-medium-sized enterprise (SME) because it helps you to organise your finances, track your profits and loss, and prepare for annual tax returns.
What is small business bookkeeping? Bookkeeping is the daily practice of recording and categorising business transactions. By using bookkeeping to closely monitor your expenses, you can identify what you’re spending money on before you encounter any cash flow difficulties. Small business bookkeeping systems typically involve maintaining a general ledger, staying on top of accounts and managing bank reconciliations.
Can I do my own small business accounting? If you’re reluctant to manage your accounts through a third party accountancy service, don’t worry. It’s definitely possible to do your own accounting in-house. By harnessing up-to-date software, relying on useful resources and educating yourself about the practice, you can easily manage your businesses accounts yourself.
What is the difference between cash and accrual basis accounting? Cash basis accounting only allows businesses to record their incomings and outgoings when money is exchanged. This means that invoices or bills aren’t recorded until the process has been finalised. On the contrary, accrual accounting is when businesses record their income as soon as an invoice is raised or a sale is made. This method doesn’t take into account when cash changes hands.
What key financial statements do small businesses need to produce? Financial statements contain information about a company's financial performance over a given time. Depending on your SME's situation, the four most common financial statements used in accounting are balance sheets, income statements, cash flow statements and equity statements.
What are the benefits of accounting software? Accounting software can be an indispensable tool for small business owners. It can save you time by centralising key processes, sync all of your financial data to one unified system and make it easier to create professional-looking financial documents from the comfort of your office or home. This allows you to carry out your procedures independently while eliminating the need to use more costly accountancy services.