Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

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Like many small business owners, you’d probably rather concentrate on selling your product or service than deal with accounts and bookkeeping. But managing finances goes hand in hand with being an entrepreneur – grasping small business accounting is essential if you want to get your venture off to a flying start. Plus, it can help you plan so you make the right decisions around growth and profitability.

If accounting feels like a dark art right now, don’t worry; our guide will demystify the process and help you get your finances sorted.

Opening a business account

Strictly speaking, if you operate as a sole trader or freelancer, you can use your personal account, but from an accounting perspective it’s easier and more efficient if you keep your business and personal finances separate, which means opening a business account.

If you run your small business as a limited company, it’s a legal requirement to have separate accounting. Similarly, if you operate as a limited legal partnership, you need a separate bank account. Both set-ups are considered legal entities distinct from the business owner.

How to open a business account

Most high street banks offer small business accounts, although there are also many online banks with competitive deals. When you open a business bank account, you need to provide certain documents and may need to meet certain eligibility criteria which include:

• Being aged 18 or over and resident in the UK

• Proof of ID such as driver’s licence or passport

• Proof of personal address

• Proof of business address

• Companies House Registration if operating as a limited company

• Projected annual turnover

• Business tax status

• Number of employees if applicable

• Contact information

Different banks offer different benefits, credit cards, fees and rates – do your research and pick an account which best fits your circumstances.

Keeping track of your business finances

Opening a bank account is only half the picture when it comes to managing your day-to-day accounting. You need to understand what the different transactions mean and how they affect the financial health of your small business. Keeping records is also important for dealing with HMRC and filing tax returns.

Common expenses and outgoings

Income is any money that comes into your business from the sale of goods or services, as well as any rent, interest or profit from investments the business might be owed. There are lots of outgoings you need to track too:

• Business equipment

• Office and running costs

• Raw materials

• Travel and transport

• Entertainment and gift giving

• Staff expenses

• Staff wages

How to manage your books

You can choose to do your own bookkeeping either by keeping a physical log of transactions or using software such as Excel spreadsheets or an accounting app. If you don’t want to do it yourself, you can employ the services of a bookkeeper or accountant. Accounting software keeps track of your cashflow and business expenses, produces financial statements and reports, and files tax returns.

Which option you choose depends on your budget, time and company set-up, as well as your confidence in managing the finances.

• Do-it-yourself – There are no upfront costs – simply use a book, also called a general ledger, Word document or spreadsheet to log your business accounting. However, it can be time-consuming and difficult to understand or interpret, particularly if you don’t have much accounting experience. Decide what accounting method you’ll use – cash-based or accrual accounting.

You might still need to employ an accountant to prepare end-of-year accounts. As a small business, your time might be better spent chasing sales than filling in spreadsheets

• Accounting software – Many accounting apps automate many of the processes to help you keep on top of your finances. There is usually a monthly fee for business accounting software, but it’s considerably faster to use than manual bookkeeping, automating many processes such as importing bank statements, matching transactions, recording allowable business expenses for easier reconciliation and creating financial reports at the touch of a button. Accounting software also allows you to view your cash flow and balance sheet immediately and identify trends in your business finances.

• Xero Integration is one option, allowing you to integrate your financial management with payment software. You can raise invoices, check cash flow, view your balance sheet, meet your obligations under Making Tax Digital and handle payroll through the platform. If working with an accountant or bookkeeper, you can also authorise direct access.

• Kashflow Integration is an alternative accounting software but you can also try QuickBooks , Zoho Books or Sage.

They all offer similar services; it’s a case of picking the platform you find easiest to use and which best fits your business needs. The advantage of business accounting software is it’s secure, cloud-based and easy to use, saving you time to get on with running your small business.

• Accountant or bookkeeper – A bookkeeper handles your day-to-day financial transactions. An accountant has the financial expertise to cover all aspects of small business accounting, and provide advice and insights based on bookkeeping data. They can produce financial statements, deal with payroll and conduct financial audits, as well as provide invaluable advice to reduce your tax liability and ensure you’re HMRC compliant.

However, they charge a fee for accounting services which can be quite costly, particularly if you’re a new small business and finances are tight. Weigh up whether the cost of an accounting firm is worth it in relation to the money you’ll save in taxes and time it would take you to do it yourself.

One of the accredited accounting bodies may be able to help you find someone or to ensure firms are reputable:

• Association of Chartered Certified Accountants (ACCA)

• Chartered Institute of Management Accountants (CIMA)

• Institute of Chartered Accountants in England and Wales (ICAEW)

• Institute of Chartered Accountants of Scotland (ICAS)

Taking payments

Taking card payments and payments online and integrating this with your small business accounting software can make life easier for you.

Square payment software integrates seamlessly with many accounting apps ensuring all payments are automatically imported.

Finding a payment solution which offers point of sale, an electronic invoices option and online payment services, and which integrates with accounting software makes your business accounting much easier and cost-effective. It also means you can communicate with your customers and accept payment in whatever way they prefer.

Paying wages

If you take on staff, paying them (and yourself) is an essential part of business. Payroll can be confusing, especially when you factor in tax obligations like income tax and National Insurance, but using the right payroll software can take the sting out of it.

As well as NI contributions and making the right deductions, it can help you share information with HMRC and issue payslips.

As a business owner, paying yourself sometimes gets overlooked, especially when you’re starting out and trying to help your cash flow. But there are sound reasons why you should, not least because there are efficient ways to do it to minimise your personal tax liability. An accountant can advise you how to do this.

Understanding your tax liability

Tax compliance is unfortunately a tricky area to navigate, so make sure you’re up to speed with it. For example, if you file a tax return late, you face a penalty.

An accountant can give you guidance on this and make sure you’re filing everything on time, but if you choose to handle the accounting process yourself, be aware of the different filing deadlines.

The government’s Making Tax Digital is designed to make filing returns easier but you need to use HMRC-recognised software to keep digital records and file VAT returns.

Regular reviews

When you run a small business your financial health will fluctuate – profits go up and sometimes down, costs increase or decrease, and sales are great one month and slow the next. Keeping on top of your business accounting is essential for long-term success and business growth.

• Get into the habit of reconciling or reviewing your accounts regularly so you can stay on top of transactions

• Establish internal protocols, particularly if you have staff, to catch discrepancies and prevent fraud

• Review your accounting system periodically to make sure it’s still working for you

• Accept that as your business grows your accounting needs may change – what works when you first start may be too limiting as you scale

• Check out apps that integrate with small business accounting software – they could save you time and money

Once you’ve mastered the business accounting basics, it should be fairly straightforward to run provided you keep on top of it. Square offers multiple solutions, from online payments and point of sale to team management support tools, to make your accounting journey as smooth as possible, leaving you to do what you do best and run your business.