With 5.51 million small businesses currently operating in the UK1, entrepreneurship is thriving.
However, research indicates that 29%2 of companies fail because they ‘ran out of cash’. This statistic underscores the critical importance of understanding small business accounting essentials.
In this article, drawing from our experience working with various businesses, we share our top five essential accounting tips to help small business owners in the UK grow and become more profitable.
1. Separate your business and personal expenses
Having a separate business bank account, though not legally required for startups and entrepreneurs, is highly recommended as it aids in expense tracking and transparency.
Separating business and personal expenses makes tax calculations more manageable, saving you time and effort when submitting your tax accounts. Nobody wants to trawl through every receipt to identify business versus personal spending.
Also, as a limited company, The Companies Act 2006 requires companies to maintain clear and accurate financial records. Therefore, it is highly recommended that you separate your business and personal expenses as early as possible.
2. Build a solid accounting foundation
Maintaining accurate and organised financial records is essential to laying the groundwork for effective financial management.
You should start with a basic accounting system to track income and expenses. This can be as simple as using spreadsheet software or investing in dedicated accounting software such as Sage, Quickbooks or Xero – more information in our bonus tip below.
Tracking your finances not only helps you manage your cash flow but also provides valuable insights into your business’s financial health.
Regularly reviewing your financial records can identify trends, spot potential issues early on, and make informed decisions to steer your business in the right direction.
3. Create a budget
Identifying and preparing for expenses will help improve cost efficiency. A budget is the best way to keep track of expenditures and allocate financial resources to various areas of the business. Your budget could include:
- Fixed Costs (rent, lighting, internet)
- Direct Costs (costs needed for your products/services)
- Payroll
- Marketing
- Travel expenses
- Tax expenses
Creating a budget will help you identify your break-even point, prepare for significant upcoming expenses, such as your tax bill, and help find opportunities for expansion.
You should regularly review and adjust your budget to assess your financial performance against your projections.
4. Understand your tax requirements
It’s important that you know the types of tax you are required to pay. Failure can result in fines or more severe consequences.
You should always do your research and, ideally, speak to a chartered accountant to ensure you know what you need to pay.
5. Prepare to work with an accountant
As your business grows, you may need the expertise of a professional accountant to handle more complex financial matters. In addition to this, working with an accountant can help you become more efficient, as they can offer business advice and guidance.
Often, the biggest obstacle to hiring a chartered accountant is cost. Yet, when many small businesses grow large enough to need to partner with an accountant, the first step is usually to get their books in order, which can be both time consuming and costly.
To help you avoid this, start your business with the mindset of preparing to work with an accountant in the future. By keeping clear records of income, expenses, assets, and liabilities, your transition to working with an accountant will be smoother and much more cost-efficient.
Bonus: Use accounting software
Platforms such as Sage, Quickbooks or Xero offer a range of features designed to streamline accounting processes and save you time and effort.
Accounting software can help you automate repetitive tasks, reduce manual errors, and gain real-time visibility into your finances. Look for software that offers features such as invoicing, expense tracking, bank reconciliation, and financial reporting to meet your business’s specific needs.
Using accounting software also helps your business scale much faster and can help keep your overall bookkeeping and accountants’ fees lower if you stay on top of your records.
In summary
In our experience, getting to grips with your accounts early is the cornerstone of small business success.
Implementing these essential accounting tips and best practices can streamline your accounting processes, help you make informed financial decisions, and drive business growth.
If you’re looking for an accountant that does more than just submit your annual accounts and tax returns, please get in touch. We have a range of services to ensure you keep with up-to-date in the fast-moving business environment.
1 Small Business Statistics 2024: the full report
2 Why startups fail, according to their founders
