Accounting for small businesses in London
)
Posted: Tue 25th Jun 2024
Accounting is crucial to any small business. When you have a clear understanding of your financial situation, you're in a much better position to make informed decisions that will ensure your business' long-term success.
From bookkeeping to taxes, there are many important aspects to small business accounting. Read this blog to learn how they can help you manage your finances and achieve your goals.
What is small business accounting?
Small business accounting means having a system to record and report your business' financial transactions. With a good accounting system in place, you can:
Assess how your business is doing financially.
Make informed decisions.
Ensure your financial records are accurate and up-to-date.
Stay within the law.
What does it involve?
Although people often use "accounting" and "bookkeeping" interchangeably, these terms do cover different areas of financial management.
Simply put, bookkeeping is what keeps your financial records in order, while accounting is what helps you make sense of those records.
Bookkeeping
Bookkeeping is recording transactions like sales, purchases and payments and having a trail of evidence for every financial decision you've made.
With complete and organised records, you can pay the taxes you owe, apply for funding or simply review your overall performance.
Accounting
Accounting is interpreting, analysing and understanding the information your bookkeeping has generated.
You prepare financial statements – such as a balance sheet, income statement and cash flow statement – which give you a snapshot of your business' financial position, profitability and cash flow over a specific period.
With these statements, you can budget, forecast and make decisions based on the information to hand.
Keeping to tax laws
Like every small business, you have a legal duty to accurately report your financial activities and pay your taxes on time.
Tracking your income, expenses and deductions means you can properly complete your tax returns and obey the law.
How to set up a small business accounting system
Having an accounting system gives you valuable insight into how your business is doing financially. Follow these simple steps to get your own system in place.
1. Choose accounting software
Pick an accounting software package that best suits your needs. There are plenty of options available, from basic spreadsheets (like Excel and Google Sheets) to more advanced cloud-based software (such as Sage, Xero, QuickBooks and FreshBooks).
Before you decide, consider whether the software fits your budget, what features it provides and how easy it is to use.
2. Set out your chart of accounts
This is a list of all the categories you'll use to track and organise your business transactions. It includes revenue, expenses, assets and liabilities.
Take some time to consider the categories most relevant to your business and set up your chart of accounts accordingly.
3. Establish a bookkeeping system
Decide how you'll record your income and expenses. You might do it manually (like entering data into a spreadsheet) or automate it through your accounting software. Put a system in place for organising receipts, invoices and other important financial documents.
4. Set your business budget
A budget helps you allocate funds appropriately and know what you're spending. Categorise your expenses and set realistic targets for each category. Monitor your actual spending against your budget and adjust as you need to.
5. Put a payroll system in place
If you have employees, you'll need a payroll system so you can accurately calculate and pay wages. Consider using payroll software or outsourcing the task to a payroll service provider.
6. Have a process for reviewing your finances
Regularly reviewing your financial statements helps you understand your business' performance. Create reports like income statements, balance sheets and cash flow statements then analyse them to look for trends and possible improvements.
7. Stay updated on tax obligations
Like all small businesses, you have certain duties when it comes to paying taxes. Familiarise yourself with deadlines for filing tax returns, the tax rates you'll pay and any deductions you can make.
8. Seek professional guidance
Accounting can be tricky for all business owners, especially those who haven't done it before. Fortunately, there are lots of professional accountants and bookkeepers you can hire to help you.
What can an accountant do for your small business?
Manage your financial records: an accountant will keep track of all transactions (including sales, purchases and expenses) and make sure everything is accurately recorded and organised.
Prepare financial statements: an accountant can study these statements and identify trends, areas of improvement and opportunities for growth.
Handle your taxes: as well as staying updated with the latest tax laws, an accountant will advise on tax credits and ways to lower your payments, and prepare and file your tax returns accurately and on time.
Provide financial advice: an accountant can find ways to reduce costs, increase profits and manage your cash flow effectively.
Support with financial forecasting and budgeting: an accountant can analyse past financial data, market trends and your business' goals and create realistic financial forecasts and budgets.
When is it time to hire an accountant?
You may be comfortable handling your finances on your own. But if you reach a point where you feel you'd benefit from professional help, you can think about hiring an accountant. Here's when this might happen:
Your business is growing and you're making more transactions (and creating more invoices and documents in the process).
You've found some inaccuracies in your financial records and you're not sure how to fix them.
You're spending a lot of time dealing with your accounts and less on other important matters.
You want to better understand tax laws and regulations and what your responsibilities are.
Solid accounting practices are crucial for any small business. Keep things organised, use helpful tools where you can, and get professional advice when you need to. By staying on top of your finances, you'll set your business up for success.
Read more:
Find the right support for your business
At Grow London Local, we understand that you’re passionate about your small London business. That’s why our website is packed with resources tailored to you. Find more support