The beauty of the free market is the voluntary exchange of goods and services for agreed-upon values, meaning that everyone wins. When you run a business, you are providing opportunities for employees, adding value to the marketplace with your products or services and stimulating the overall economy. You are the engine that powers the economic train we all enjoy.
As a business owner, this opportunity, and the potential it represents comes with the responsibility of keeping accurate financial records so that when it comes time to do your taxes, you can give the government what they are owed. It is surprisingly simple to become lost in a backlog of paperwork if you don’t keep accurate financial records so setting up systems that make the process of bookkeeping easy is essential.
Why is it Important to Keep Accurate Financial Records?
Keeping accurate financial records is necessary if you want to run an effective and profitable small business. Without accurate financial records, you can easily run into trouble. What are some of the potential downfalls of being unorganised in your bookkeeping?
- An inability to make accurate financial decisions about your business.
- Make expensive and avoidable payroll errors.
- You may miss tax deadlines and face financial penalties.
- It will be difficult to raise capital from banks or private investors if you don’t have organised and accurate financial records.
Best Practices for Keeping Accurate Financial Records
Knowing that keeping accurate records is critical to a profitable business is important but knowing how to keep accurate records is the truly valuable skill necessary for a business owner. What are some best practices to keep your financial records organised and accurate?
- Keep Separate Personal and Business Finances
This is basic business 101. Keep all your business and personal accounts/receivables separate to eliminate the possibility of any confusion surrounding your business finances. Separate business and personal accounts and different credit cards are a great way to keep these two different streams of income and expenses distinct from each other.
- Have an Organised System for Your Paperwork
Don’t fall into the habit of throwing all your receipts and invoices into a drawer with the thought, “I’ll get to that tomorrow.” Tomorrow will never come! Find a system that will keep all your physical and digital paperwork in an easily navigated and simple filing process. What works for you may be different than what works for others so be willing to explore and try different types of organisational systems.
- Create and Log Monthly Reports
This is beneficial for two reasons. First, you have a report that, at a glance, gives you an insight into your business’s financial health, along with all of the relevant KPI’s (key performance indicators). Second, you will be in the habit of looking at this information every month, helping you notice any discrepancies, patterns, or irregularities.
- Comply With Record Retention Mandates
Don’t go through all the trouble of keeping accurate books only to get rid of them prematurely. The government has record retention mandates on financial information, should they ever need to audit and review them. Make sure that you know what these retention mandates are and comply with them.
- Reconcile Bank Transactions when Doing Your Books
Reconciliation is the act of matching all your bank statements and transactions with your receipts, invoices, and other financial-related information. This may not be the most glamorous of business duties, but it plays a crucial role in ensuring that there are no discrepancies in your finances.
- Make Back-Ups of Your Financial Information
Advances in accounting software and technology have made access to high-quality, robust accounting programs simple and affordable. The challenge with many of these programs is that they are locally based on a desktop or laptop computer and are not automatically updated. This can pose a serious risk to your financial data.
Creating a backup of your business books and accounting information guarantees that if anything ever happened to the computer that housed your business accounting software, the information would not be lost.
- Choose a Business Accounting Software
Choosing the right software can roll “small business accounting best practices” #2,3,5 and 6 all into 1 easy step. The right software can be backed up remotely, accessed 24/7 through apps and mobile logins, has built-in report building capabilities and have organisation protocols pre-loaded into the software.
Accounting software has made the act of bookkeeping easier than it has ever been… but it still takes discipline and intentionality to keep your business records organised and accurate. Use the right software as a tool to help you reach that goal.
- Have a Plan and Pay Your Taxes on Time
Tax time, even though it is always at the same time of the year, seems to sneak up on most small business owners. This last-minute scramble to get everything in order and hopefully get submitted on time is a recipe for disaster. To avoid this scenario, have a plan for your tax preparation and work towards it monthly. It is amazing how little work you need to do at the end of the year to get your books sorted out if you have split that work up evenly over the previous 12 months.
Paying your taxes on time is also necessary and even though many people gripe about the government and taxes, it is an unavoidable and critical part of operating in the free market. Paying your taxes on time will help you avoid penalties and stay in good standing with the HMRC.
- If Necessary, Outsource Your Accounting
If you need help with your books, outsource the work. Keeping accurate financial records is easy when you have someone to help you. Some businesses need the expertise and advice that comes with outsourcing their accounting. If that is you, don’t hesitate to hire the help you need. Get in touch with one of our small business accountants in London now.