Accounting needs of small businesses in the UK

As a small business owner, there is a lot resting on your shoulders. You wear multiple hats to manage things like marketing, branding, operations, logistics, sales, customer service, accounting, and finance. The accounting and finance hat might be the last one you wear or even avoid wearing them some days. Accounting and finance traverses all divisions in an organisation and is the backbone of any business.

With so much to do, it's normal to lose track of what you need to do for proper accounting operations. Here's a complete guide to help you stay in control of your finances and grow your business.

Maintain a good chart of accounts

The chart of accounts is the financial index of a company's ledger and it's the foundation of accurate financial reporting. There are five core account types in a chart of accounts into which a small business can categorise their finances: income, expenses, assets, liabilities, and equities. There can be subcategories under each chart of accounts. For instance, business-related buildings, equipment, accounts receivables, and the like are subcategories that fall under assets. As your business evolves, it is expected to review and update the chart of accounts to align with the business needs.

A good accounting software will have the core account types with a flexible chart of accounts to support clear financial overviews, decision-making, and compliance.

Record all financial transactions

Every business transaction, either expense or income, should be recorded. It is crucial to record and track transactions to ensure every penny in the business can be traced back to its source. Clean transaction records can improve transparency and efficiency in HMRC's tax calculations. Apart from income and expenses, businesses also have moveable and immoveable assets which could have depreciation costs associated with it. This has to be recorded under the right chart of accounts and ensure the value is carried forward through a given period.

With the new Making Tax Digital (MTD) initiative, it is mandatory to digitally maintain records of all financial transactions using an HMRC-recognised accounting software. If you have recorded all your business transactions on spreadsheets, it can easily be migrated to an accounting software. You can also use the scan option on mobile applications to upload a receipt or invoice and record all financial transactions on an accounting software.

Choose the right accounting method

There are two types of accounting which small businesses in the UK typically choose from: cash basis or accrual accounting method.

In the cash basis accounting method, an income or expense is recorded only when you receive money or pay a bill. It is simple, needs basic bookkeeping skills, and can be used by sole traders.

In the accrual accounting method, an income or expense is recorded when they are earned and incurred, regardless of when money is exchanged. It is ideal for limited companies, partnerships, and larger sole traders. Most businesses prefer the accrual method; sole traders can choose the accrual method from the start to support scalability in the future.

Consider a separate business bank account

A separate bank account for your business helps set a clear boundary from your personal bank account. Although, there is no legal obligation for small businesses to have a business bank account, it is recommended to have a separate one to have an uncluttered and complete overview of all business transactions.

Reconcile your bank account often

With a business bank account, this is quite straightforward since there are only business-related transactions within the account. The reconciliation process involves ensuring the date and amount on the bank deposits and withdrawals match the income and expenses. At the end of this process, your company's balance should match the bank balance. It is recommended to reconcile bank records on a regular basis to avoid a backlog; large volumes of records get harder to reconcile manually.

Bank reconciliation is important for a small business to identify cash flow to drive bigger decisions and spot fraudulent activities and unpaid invoices.

A powerful accounting software can make bank reconciliation much easier and faster. You can connect to a bank account and fetch live bank feeds which can be bucketed in respective account types with preset details. You can reconcile faster with matches identified by intelligent algorithms.

Track and manage to improve cash flow

Cash flow is defined as the flow of money in and out of your business at a given period of time. It determines the overall financial health of a company. If there is positive cash flow, there is more money coming in than going out. If there is negative cash flow, there is more money leaving the company. Cash flow management is crucial in a business since cash is required to pay wages, bills, and rent.

A cash flow statement offers an overview of business health and supports cash flow forecasting to ensure business continuity and growth. Focus on maintaining a positive cash flow to reduce debts and build a credible image for lenders and investors through financial reporting.

With modern accounting software, you can set up payment reminders for customers for your goods and services to stay on top of your cash flow.

Observe your business performance

Reports are essential for visibility into your company's financial health and performance and useful for decision-making. There are multiple beneficial reports but the core reports every business generates and uses are the cash flow statement, profit and loss report, and balance statement.

The cash flow statement gives an overview of the money moving in and out of the company which translates to the financial health and to evaluate the company's performance.

The profit and loss report gives the revenue and expenses during a given period. It is useful to identify the profit and loss making areas of the business.

The balance sheet gives a snapshot of the business' assets, liabilities, income, and expenses. It supports planning for the future and budget allocation for expenses.

A powerful accounting solution provides the core reporting functionalities to run your business smoothly and support growth. You can do more with advanced reporting like generate reports based on business verticals, projects, sales, and purchases. A feature-rich accounting solution allows you to create and associate tags with reports and filter all reports based on the tags. Tags are created based on business needs. For instance, a profit and loss report based on location tag.

Get your VAT rate right

Value Added Tax (VAT) is administered by HM Revenue and Customs and levied on most goods and services. Whether your business is registered for VAT or not, you will be adding "VAT %" to your invoices for the goods and services you sell. There are three main VAT rates applied depending on the products.

1. Standard rate (20%): This is the default rate; most goods are charged at this rate.

2. Reduced rate (5%): Some goods and services, like children's car seats and home energy, fall under this rate.

3. Zero rate (0%): This rate is applicable for most food and children's clothes.

A comprehensive accounting solution should support different VAT rates based on the product and apply the rate automatically to your invoices to ensure your business stays compliant.

Know your UTR for stress-free tax filing

HMRC assigns a 10-digit Unique Taxpayer Reference (UTR) number for all tax obligations when you register for Self-Assessment or register a limited company. It is used to submit tax filings, pay online tax payments, and to work with your bookkeeper or accountant. You can have separate UTRs for personal and business taxes. It's important to keep your UTR number secure and share it only with HMRC and your bookkeeper or accountant.

An accounting solution that is HMRC-recognised and stays updated with all regulatory changes will ensure your business remains compliant. Furthermore, an accounting or bookkeeping partner can help you stay informed about HMRC changes that impact you and your business. It is important to be aware of changes to the tax system and adhere to submission deadlines to avoid penalty points or late payments.

You can choose to do all of this yourself using accounting software or work with your accountant to support you for all the accounting needs. Most small business accounting processes start with good bookkeeping practices which makes working with a bookkeeper or accountant more effective.

This might sound overwhelming to a new business owner, but with the right accounting partner and technology, you can streamline your financial operations and focus on business growth. Zoho Books is a comprehensive accounting solution that offers everything to meet your small business accounting needs and ensure compliance.