Small Business Guide to Setting Up Accounting

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.

Getting a handle on small business accounting will help you to feel in control and to know you’re making the right decisions for growth and profitability. You need a way to summarise, analyse and report all aspects of the finances related to your business – both for tax purposes and to ensure the health and viability of it. It’s a case of setting up systems to hold the money you make, pay what you need to pay and keep an eye on what’s coming in and out.

Open a business bank account

Right at the beginning of the accounting process for a small business is opening a business account.

For very small sole trader businesses or independent freelance workers it may not be necessary to have an account that’s separate from your personal finances. Whilst it isn’t always a requirement to have a separate business account in those cases, it may still be a good idea.

Opening a business account means having one place to see and carry out all of your business transactions. It’ll help you to run your business professionally, see what’s happening with your finances and keep on top of everything.

Do your research and understand the different options available. Most high street banks offer business accounts and they’ll all come with different fees, charges and benefits. Make sure the one you choose will work hardest for you and your circumstances.

Track your outgoings and expenses

Accounting at its simplest level is about keeping track of what money is coming in and what’s going out.

In your business plan you will have set out your start-up costs and where your initial financing would come from. You’ll have considered how much start-up cash you needed, your break even analysis and predicted what your early expenses and sales would be.

Accounting for your small business is about keeping track of how that borrowing, spending and income is progressing.

Having a strong accounting system will allow you to plan and prepare. This will ensure you can cover costs and to see where any opportunities or money drains are in order to make your business more viable.

Cost areas you’ll want to consider in your accounts include:

Business equipment

You need to have an idea what equipment you need in order to run your business. That may include an online store, point of sale system, equipment, a desk or the entire fit-out of a shop or salon.

Some business equipment will mainly represent a capital cost (a one-time investment), while other elements may represent ongoing costs (revenue expenditures).

You may have heavier capital costs at the beginning of running a business as you establish the means to deliver your service, such as kitting out a shop or buying essential tools.

Good accounting will allow you to plan for the depreciation (reduction in value) of those investments over time and to prepare to invest in replacements once wear and tear demands it.

Office and running costs

Ongoing running costs are a large part of your accounting process.

You need to plan and predict what costs you’re going to encounter and ensure you can account for how you’ll cover those.

This can include everything from heating and utilities, to stationery, insurance and staffing (including your own wages).

Travel and transport

If you are self-employed, you can claim allowable business expenses for costs relating to running a vehicle and other travel for business purposes.

If you have staff who need to travel for work – other than to and from their permanent place of work – you have certain obligations for recording and making travel payments too.

Entertainment and gift-giving

It’s worth getting to grips with the rules around gift-giving and entertainment you may provide for staff or clients.

In some cases you can claim these as expenses to reduce your own tax bill.
In certain circumstances you’ll need to be aware of how giving gifts and bonuses to staff might have a tax impact for them too.

Manage your books

Keeping track of all your business-related deposits (credits and sales) and debits (costs) through a good bookkeeping system is a fundamental part of small business accounting.

You may enlist a professional to help you to ensure your records are being properly and compliantly kept. It’s vital to keep on top of your tax obligations as well as to ensure you have enough money to meet your obligations and to grow your business.

There are lots of useful apps and tools available to help you keep track of everything and make accounting less labour intensive.

Xero is one option that allows you to integrate different elements of your financial management to smooth the invoicing, bill payment, payroll and tax return process.

Kashflow is an accounting software alternative that also provides a seamless catch all service similarly designed to reduce the time you have to spend on accounting and free you to run the business you love.

Taking payments

Considering how you’ll accept online and card payments and choosing a provider that can integrate with your small business accounting solutions is something you can do to make things easier on yourself.

Square is an option that integrates seamlessly with all kinds of accounting and tax software to ensure sales and payments are automatically imported.

Finding a provider that offers point of sale, online payment solutions, accounting software integration and team management support tools will help you to take payments in whichever way customers most want to interact with and to process them as efficiently as possible.

Paying wages

Paying wages for yourself and staff is a key element of accounting.

You’ll want to ensure you always have the funds, you’re meeting all your tax obligations and you have a smooth payments system in place.

The right payroll software really does take the sting out of this process and helps ensure you don’t fall down on any of your payroll responsibilities.

Areas you’ll need to have a grip on include deductions, including National Insurance, payslips and reporting to HM Revenue and Customs.

Many small business owners fall into the trap of not paying themselves at all or not paying themselves well enough as they work to establish their business. However, there are good reasons to ensure you do pay yourself properly.

Know your tax requirements

Tax compliance is a complex area, which costs small businesses about three working weeks of effort and around £5,000 every year.

Late submission of tax returns may lead to penalties and errors can result in accrual of costly back payments.

Whether you have established a side hustle or a new small business that will be your main source of income, you need to know your tax requirements and ensure you meet them.

As a broad guide, if you earned more than £1,000 from self-employment in a financial year, you’ll need to either set up as a sole trader or register as another appropriate business entity.

Find experts

When you’re starting out and trying to keep costs down it can be especially tempting to try to do everything yourself.

Whilst some things can be easily navigated without specialist help, such as setting up your own online shop, others may benefit from expert support.

You may be able to handle some elements of small business accounting, especially with the right software on your side. The support of a professional may prove beneficial though in helping you to save money overall, both by preventing errors and spotting opportunities for tax breaks or other savings.

Do some research and consider consulting a professional accountant or bookkeeper even if just for some initial guidance on how to get on the right track.

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

Review and improve

Accounting is an ongoing process for any small business. From the moment of moving your idea towards reality, finances become a factor.

Keep a constant eye on your accounting processes and be sure to consider if they’re working well.

Efficient accounting will help all small businesses prosper, and with Square, there’s a whole host of apps available that will combine with your payments and make accounting and bookkeeping a more seamless experience.