When first starting your new business, it can be very easy to overlook arguably the most important aspect: The Accounting. Whilst you may be fantastic at your profession, you may be less enthusiastic about math, or working with at first glance, complicated tax returns and expenditure logs.
Unfortunately, to successfully run a business you do have to begin the process of learning, or at least understanding what’s required to keep your business ticking over soundly in the financial department. Below, we’ve compiled the very basic steps you can take to begin learning what’s required in your business’ accounting.
1) Set Up a Business Bank Account
The most basic step of them all. Once your business is registered, you’ll need somewhere separated from your personal bank account to keep income that you accrue and for any LLC’s, partnerships or corporations, a separate account is legality. For other forms of businesses, a separate bank account keeps financial records clear and when it’s time to file your taxes, makes the process significantly easier. A business bank account also protects your personal assets in the worst case scenarios such as bankruptcy, lawsuits, or audits. Plus, if your business could be or is eligible for funding at any point in time, creditors and investors prefer separate, clear business accounts which can increase the likelihood of approvals.
2) Choose a Bookkeeping System
Bookkeeping and accounting are two different things. The process of bookkeeping differs from daily accounting because bookkeeping involves the day-to-day work of recording transactions, categorising those transactions, as well as reconciling bank statements, recording, preparing and posting invoices and credit notes, reconciling supplier statements to supplier accounts, organising payroll and much more. In comparison, accounting looks at business progress and builds financial statements out of the data collated by the bookkeeper.
The management of bookkeeping is flexible and involves multiple methods. To manage your books you could:
- Choose to do it yourself by using software, or standardised applications such as Excel.
- Outsource to use a part or full time online bookkeeper who can take care of all aspects of bookkeeping whilst offering useful advice and support.
- When your business has grown, eventually taking on someone full time, either in house or online.
3) Register for the Right VAT Scheme
Whether you are a small limited company, or a sole-trader, whatever your business structure being registered for VAT is essential, even if you are below the current threshold. Currently registering for VAT is compulsory if your annual turnover or sales exceed the threshold however.
VAT registration means charging customers the standard 20%. This amount is calculated using the date on which either the sales or purchase invoice was raised and is added to the sales invoice value, but kept aside from the amount your customers pay. The benefit is that you can reclaim VAT on any business-related purchases made and expenses incurred, regardless of whether your supplier invoices have been paid or not. The net amount of the two must be paid over to HMRC each quarter.
4) Get the Right Accounting Software or Support
Both bookkeeping and accounting can be confusing and overwhelming at the very start, and often for those with no financial background, these two aspects of a business can easily be pushed aside or procrastinated due to the complexity of each task. But if the information is not kept up to date, filed correctly, or filed on time, there can be financial penalties incurred depending on the nature of the mistake. Therefore it is vital that those who need the right support get it – in the form of either simplistic software such as Xero or Sage, or simply having an online virtual accounting partner accessible to you whenever, from wherever.
5) Take Care of Your Tax Obligations
Depending on your type of business, your tax obligations will vary. For those self-employed in either a sole proprietorship, LLC, LTD company or partnership, business income can be claimed on your personal tax return. On the other hand corporations are separate tax entities and will be taxed independently from their owners. Any income you make from the corporation is simply taxed as an employee.
In the UK, there are three different types of taxes to be aware of: Corporation Tax is paid by all UK limited companies, no matter their size and returns must be completed with tax due for payment to HMRC within nine months and one day of the businesses set accounting period. Self Assessment Income Tax is the calculation of any personal income tax accrued on your income for an annual period between the 6th of April and 5th of April and any tax owing must be paid by the 31st of January, following on from the previous 5th of April tax year. Lastly, Income Tax falls into four different bands depending on your annual income. Those earning under £12,500 do not pay tax on their income.
Meanwhile for American business owners, estimated quarterly taxes are compulsory if you’ll owe more than $1,000 in taxes within a financial year. Across the border, Canadians are required to pay income tax in installments if the net tax owing is more than $3,000.
These basic steps can give you and your business huge financial security in the long-run, and the bigger and better your business grows, the more you’ll get to grips with the various financial paperwork that seemed so daunting in the first place.