Keeping track of your finances

1. Overview

A vital part of running a successful business is looking after your finances. When they’re put together in the right way, the numbers paint a detailed picture and tells a story about your business. This section reviews the key elements of running the money side of the business.

2. Keeping track of your finances

At its simplest, financial management is about making sure you have enough money coming into the business to cover all your expenses and to make a profit.

Poor financial management is one of the most frequently cited reasons for business failure. Many business owners shy away from looking at their finances and believe they can rely completely on their accountant.

Yes, accountants, bookkeepers and other business advisers can be extremely helpful. However, to be completely in control of your business, you need to keep your finger on the pulse and use the figures to assess performance. This also enables you to take corrective action if it is needed. 

3. Monitoring your cashflow

Managing cash is a key priority in your business. They say ‘Cash is King’ and that is certainly true.

Your cashflow forecast is a critical planning tool. It helps you to see whether you have enough cash to pay all your expenses when they are due. It also helps you make important decisions about running the business.

You should monitor your cashflow regularly, ideally at least once a week. Record your actual income and outgoings and compare them to your forecast. If you keep a close check on your cashflow, you can see the peaks and troughs and are more likely to be able to deal with them. If it looks as if you may run into short-term problems with your cashflow, react quickly.

There are 2 sides to the cash equation and if you have cash problems look at them both.

On the one side is your income. Your main income usually comes from sales. Focus your attention on sales and look at ways to make immediate sales to help you over a short-term problem. Make sure you are also getting all outstanding invoices paid as quickly as possible.

On the other side of the equation are your outgoings. Control your costs carefully. Look at every item you plan to purchase and ask yourself if it is really needed. If it is, do you need to buy it now? And are there ways to keep costs as low as possible, for example, leasing or hire purchase?

Remember, the golden rule for a successful business is to make sure that what you get in is higher than the amount you spend.

Once your business is established and is making sales, your aim should be never to spend more in a week than you had in the bank in the previous week. It’s also good practice to have at least one month’s cash reserve.

4. Keeping records

As the business owner, it is your responsibility to make sure your business keeps accurate accounts and records, and meets all of its tax and filing obligations. The key is to be organised, keep the paperwork up-to-date and flag up any tax or filing deadlines so that you have plenty of time to prepare for them.

Tax obligations

As a business owner you have tax obligations and you must comply with all tax, National Insurance and VAT laws. This includes:

  • self-assessment (if you’re a sole trader, in partnership or are the director of a limited company)
  • corporation Tax (if you are a limited company)
  • PAYE (if you are an employer)
  • VAT (if you expect business takings to be above the VAT threshold)

In outline, the current regulations (as at February 2014) are:

If you are a sole trader, you must:

  • send a Self-Assessment tax return every year
  • pay Income Tax on the profits your business makes
  • pay National Insurance

If you are running a limited company, you have responsibilities both on behalf of the company as well as yourself.

Every financial year, the company must:

  • put together statutory accounts
  • send an annual return to Companies House
  • send a Company Tax Return to HM Revenue and Customs

You are also liable for Corporation Tax on the profit your business makes.

If you are a director of a limited company, you must also:

  • send a Self-Assessment tax return every year
  • pay tax and National Insurance through the PAYE system, if the company pays you a salary

For all businesses, if you expect your business takings to be above the VAT threshold, you must register for VAT. See HM Revenue and Customs for current threshold level

All the relevant information regarding your tax obligations is available from HM Revenue and Customs who also provide advice and support. You can register and complete all necessary documentation online.

Further information and advice is available from your Business Wales business adviser, accountant or local social security office.

A WORD OF WARNING: Failure to meet all your legal obligations could result in a fine or even court proceedings.

5. Using an accountant or bookkeeper

Hiring an accountant can be a sound investment, particularly if you are a limited company. Tax, VAT and National Insurance are complex and having a professional adviser can save a great deal of time and effort. A good accountant does much more than just put your accounts together. They can:

  • help you to run your business in the most tax efficient way possible
  • help you to understand what taxes you need to pay
  • make sure you don’t miss a tax deadline
  • make sure your tax submissions are accurate
  • advise on ways to manage your business
  • help maximise your tax allowances
  • provide proactive tax advice throughout the year

Remember, an accountant doesn’t generally do the day-to-day input of accounts, unless you pay extra and they base your accounts on the figures you provide. You may consider hiring a bookkeeper to do the day-to-day paperwork and keep the records for you.

Choosing an accountant

Here are some of the questions you should consider when choosing an accountant:

  • are they experienced in providing services to businesses like yours?  A large national firm of accountants may be more used to dealing with larger, more established businesses, whilst a smaller, independent accountant may have more time for start-up businesses. If you have a specialist business, you may want to consider an accountant with experience of your sector
  • have they got the appropriate professional qualifications? It is wise to look for a Chartered or Chartered Certified Accountancy practice – these accountants are fully qualified and their skills and knowledge are current
  • what services do they offer and how do they charge? Most accountants offer a wide range of services. Be clear about what you want them to do. And if, for example, they offer an ‘inclusive’ package, find out exactly what is included
  • are they conveniently located? Whilst most of your dealings with your accountant can be done online and by telephone and email, you may want to meet face-to-face several times a year to discuss some aspects of your business. If this is the case, you probably don’t want to have to travel far
  • do you feel comfortable with them? You want to be able to develop a professional, yet friendly and open relationship in which you can ask questions and feel comfortable discussing your business. It is recommended that you meet your accountant before you agree to do business with them

It is always useful to get recommendations from a business colleague or friend - use this to create a short-list of possible accountants and then make your own judgement. 

Finally, always keep in mind that it is your business and regardless of the support you may have, you need to understand your financial situation.

Use this managing your finances effectively checklist (MS Word 12kb) to help you manage your finances.