Accountancy for Small Business

Accountancy is referred to as the language of business, similarly when learning a new language you can feel overwhelmed or completely lost at the beginning. In this article we will go through the 4 cornerstones of accountancy, with examples, so you can start to get to grips with the basics.

What is accounting? 

Accounting is the recording, reporting, interpreting and analysis of everything that happens within your business linked to financial matters. These are the 4 cornerstones of accounting. It is important you have your books in order from day one as it can be a headache to go back and opportunities to save your business money may get missed.

Record all transactions 

There are 5 different types of transactions your business can make; it is important all of these are recorded to give you a clear picture of the finances of your business.
Revenue / sales – all money coming into the business from selling your products and/or services.
Expenses – any money you are spending to run your business.
Assets – this measures –
the future value of equipment or premise you own to produce your product or carry out your service,
monies owed to you from customers
cash held in your bank (assuming this is in the black)
Liabilities – any debts of the business, including loans, financing etc.
Equity – this represents the money the owners would be left with if all assets & liabilities were sold & settled.
Once you’ve set up your business account with your selected bank sync it with your bookkeeping system to keep the recording of all the above as efficient and easy as possible.

Reports about your business 

There are many different types of reports you can run depending on the information you need. Many of them have specific names, your accountant should be running these so you can ask to have a look or you can run them yourself using your bookkeeping software. Here are some common ones to know.
Income Statement/Profit and Loss Account (P&L) – this shows you whether your business is growing or slowing. Most businesses typically produce a P&L on a monthly basis to track performance in the prior month. This report gives business owners a sense check on the underlying trajectory of the business and whether there is a need to review costs or invest further to drive growth.
Balance Sheet – this is laid out in a ‘T’ shape and is called a balance sheet because it should balance on each side, like a pair of scales, to account for all the transactions in and out of the business. These can be produced either at the end of the financial year or at the end of every month to keep a closer eye on your finances.
Cash Flow Statement – this is a vital report you should have access to as bad cash flow is where most new businesses trip up. This gives you a much better idea of what is really going on in your business and how much cash you are owed and have available right now. This can help you make important decisions about expenditure for growth. Remember – “Revenue is vanity, profit is sanity, cash is King!”
In the event you are trying to raise money to grow your business, acquire or even sell, you will in all likelihood need at least 12 months’ worth of financial reports in support.

Interpreting & Analysing 

We have put these two together, they are not the same thing but do go hand-in-hand. Going back to our analogy of learning a new language, interpretation is vital, there will be nuisances and different ways of classifying the data so it can be interpreted differently. Be very clear about what you want to know and communicate this with your accountant or know the correct report to run to find out. Once this is done you can analyse the data factoring in your growth plans to see if they’re achievable. You can use accounting formula’s to determine results, here some examples.
Net Profit Margin = (Revenue – Cost) / Revenue. You can use this cleverly to see if you can afford a loss-leader to get customers through the door. For example, can margins be made up other places to keep prices low on eye-grabbing products that are coveted.
Return on advertising spend = current advertising cost / revenue. This isn’t always this simple however it gives you a figure to work with.
How liquid the company is = current assets / current liabilities. Again, this a simplistic equation however it’s a good base figure to start with.
Getting an accountant early on, even though it may feel like an unnecessary expense, is essential and well worth the money. There are different kinds of accountants out there, if you are a numerically literate person that feels confident doing accounts you may just want one to check over everything and file for you, cheaper packages can be found to just cover the basics. There are lots of cloud-based software packages that are compatible on your mobile as well as your desktop and allow you to check your accounts in real-time and record specific transactions when you are out and about to save time.

IT Equipment for Small Businesses

Every business, no matter how big or small, will need some form of equipment or technology for their day-to-day running. As part of your planning, you should consider what technologies you need to get up and running and what equipment/software would be good to have in the future to help you grow or streamline operations. In this article we will run the basics for most businesses.

1. Hardware – Computers, Laptops, Phones. 

It is likely you will need at least one computer to run your business. Some companies have a BYO technology policy, this may work for you however consider cost to the employee and security issues that may arise. If you do need to buy a device for a member of staff shop around, consider their needs (remote working, going to meetings with clients) and the software that they will need to ensure you get the right one for the best price. If you or an employee needs a phone you can put this on a business plan which will be cheaper than personal plans. Also don’t forget to put purchases for technology through your books to enable you to claim tax back (if you are VAT registered).

2. Software 

This will vary greatly depending on your business and we will go into some essential ones further on in this article. The Office Suite (Word, Excel, PowerPoint etc) will be the most common and can be purchased on a business plan. If you need creative software, like Photoshop, Illustrator etc., this may affect the choice of computer or laptop you decide to buy. Mac’s are great for design software however come at a premium and can cause compatibility issues if other employees are working on PC’s. The Abode Suite including these programs charges a monthly fee of around £40 per user so if you are planning on only using these programs to make marketing material & social media content consider using online template platforms such as Canva which are easy to use and a lot cheaper.

3. Network 

You will need to set up a network if you have several employees working together that need to share documents or use printers. What kind of network you’ll need will depend on how many devices you need connected. For 5 or less users you can set up a simple network, bigger businesses may need multiple routers and large organisations will need to build their network around a server.

4. Accounting System 

Setting up accounting software for your business is essential. It will mean you can easily and quickly keep all your transactions in order making your accountant love you and ensuring you don’t fall foul of the taxman! Accounting software is simple to set up and can be done online in minutes. Quickbooks, Xero and Sage are all designed with small business owners in mind and are great options to get you set up. Larger firms may want more developed software which you can integrate into your systems and customise to your needs.

5. Payroll Software 

There are free versions of this all, alternatively the above mentioned accounting software brands offer payroll software as well. If numbers aren’t your thing, you have many employees or are time-poor having this software can be of great benefit to you. It makes difficult calculations, carries out repetitive tasks and gives you peace of mind when it comes to getting your workforce paid correctly and on-time.

6. Inventory Control System 

As your business grows or if you have lots of stock to manage an inventory control system can help keep you organised. Again, most of the companies that offer accounting software have inventory management systems that can be easily integrated into your business.

7. CRM (Customer Relationship Management) 

This is a system where a business administrates interactions with customers and potential customers. MondayCRM, Pipedrive and Freshworks CRM are some examples of software that can help you build customer relationships, analyse data, and manage client information. As your business grows these systems will become increasingly useful and can be a vital tool when scaling. Some training for staff will be necessary but this will be offset by increased efficiency and streamlined customer interactions.

8. Cloud Working 

Traditionally software such as Office programs would be downloaded individually to each an employee’s computer however now you have the option of having all your company’s documents on the cloud. This is particularly useful for remote working (each person has a log in to access documents from any device), sharing files, reducing initial spend on software and saving space taken up by lots of documents being saved down onto computers.

9. Payment Options for Customers 

Online integrations 

Along with other benefits of having a website, setting your business up so customers can purchase online can add revenue streams, enable you to reach customers all over the globe and allow purchases out of your regular ‘opening hours’. PayPal, Worldpay and Opayo (previously Sage Pay) are some popular examples; some of these can be integrated into your current website and some will need you to build a website with that provider. If you offer a subscription service consider setting up a Direct Debt option for customers, this will stop you from having to bill people constantly and make it easier for customers as their payment goes to you automatically.

Card machines at point of sale 

If you run a shop, restaurant, mobile salon or stall you may want to purchase a card reader. There are many options to choose from; check out details on the most popular ones here.
Plans are different for each one, some have one off payments and some are rental arrangements. Most have a small fee they charge, sometimes it’s based on the transaction amount, number of transactions or overall monthly revenue that goes through the device.

In summary … 

You may not always have a large amount of spare cash to spend on IT equipment and technology when you start your business so build up as you go, shop around for deals and consider finance/leasing as alternatives. Using technology to make it as easy as possible for customers to purchase your product is the priority. Having computers fast enough with enough memory for your employees to carry out their duties effectively is also a must. There are a lot of free or low-cost software’s available to help you run your business more efficiently from accounting systems to social media design and scheduling tools. One last thing to remember when it comes to your businesses data is – have a back-up! Ensure important information & documents are secure and backed-up devices are regularly updated just in case you have a system failure.

Invoicing for Small Businesses

We’ll look into the basics of invoices and then how you can use invoice financing as a tool to get a quick injection of cash.

1. What is an invoice and why do I need them? 

An invoice is a formal request for payment from a customer that has received goods or services from you. It is an itemised document that clearly states what they brought and how much they will need to pay. Invoices are part of bookkeeping and need to be clear, accurate and organised.

2. What should I include in an invoice? 

Google sheets have invoice templates, so do cloud based accounting systems such as Quickbooks or Xero. You want all your invoices to have the same format and look professional. Ensure you include the following:
Business logo.
Your businesses contact and billing address.
You clients billing address.
Invoice number. These need to be sequential and are essential to keep things organised as they refer to that invoice alone.
Amount due.
Date you issued the invoice. This should be as soon after the goods or services are provided as possible.
Due date of the payment.
In a table you should have a further breakdown of what the services/goods purchased with individual prices. This can be the flat or hourly rate charged. Also have a column for quantity purchased.
Tax should be stated separately. Please see VAT section below for more details.
Payment terms. This is the amount of time you have previously agreed with the client they have to pay the invoice. It’s usually stated as ‘Net – number’. For example, if you’re client has 30 days to pay the invoice the payment terms will be ‘Net 30’.
Personal note. Add a thank you and any other information that you think would be useful for the client.

3. How should I keep track of my invoices? 

The invoice number will help you do this. Set them up sequentially and have your own spreadsheet which is updated every time you send out an invoice. Carry out a weekly review of who is due you pay you and send a friendly reminder if they aren’t a regular client. You can also save a copy of the invoice in folders, think how you would like to organise these in line with your type of business. Is it more useful to organise them by invoice number, month sent or possibly, by client? Most businesses send their invoices by email, save as a PDF that can’t be edited and attach to the message as timely as possible.

4. What’s the difference between an invoice and a receipt? 

Although very similar a receipt is issued after payment, an invoice is a request for payment. Be aware that an invoice isn’t legally binding within itself. To make a transaction legally binding you need to have a contract signed between the two parties or, at least, have an agreement in writing of some sort, for example an email exchange. To cover yourself it is good to outline what your payment terms are, what services/goods you will provide and what the costs will be to ensure you and your client are on the same page.

5. What is a VAT invoice and when do I use it? 

If you and your client are NOT VAT registered you shouldn’t issue a VAT invoice. You should simply charge for the goods/services provided including the information from point 1. If you and your customer are VAT registered you are required by HRMC to provide a VAT invoice for goods/services subject to sales tax. This also applies if the invoice between the two VAT registered parties includes non-sales tax items. VAT invoices look very similar to regular invoices but include a little more information:
Your VAT number
The VAT rate(s) charged
The total amount before VAT
The total amount of tax due
The total amount due including VAT.
Now we’ve gone through the basics of invoices, we’ll explain the basics of what invoice financing is and how it can benefit you.

6. What is invoice finance? 

You can use your outstanding invoices to raise cash for your business quickly. You can sell the invoice to a company or borrow against the invoice, both minus a fee. Some companies will require your company to be a certain size and want all your outstanding invoices sold/borrowed against together, others will be happy to work with smaller businesses and allow you to select which invoices you raise cash with.

7. What are the types of invoice financing? 

Factoring – this is when you transfer your invoice debt to a company. They take a percentage or charge a fee and give you the cash. You have transferred the invoice to them so they are now reasonable for collecting that debt. This is traditional invoice financing and usually involved you handing over a chunk of or all your outstanding invoices.
Selective – this is where you choose which invoices you want to ‘sell’. You may only need a smaller cash injection so this may make more sense as the company will only take the fee from that selected invoice(s) rather than all your outstanding invoices.
Discounting – this is a loan based on your outstanding invoice(s). You borrow money against the value of your invoices and then pay the invoice financing company back after your client has paid.

8. When should I use invoice financing for my small business? 

Invoice financing can be a quick way to get a good amount of urgently needed cash into your business. When deciding on if you think it may work for you consider
Contracts – make sure you’re not tied into long contracts, large contract termination fees, handing over more invoices than you want to.
Shop around for the best percentage – traditionally the majority of invoice financing firms wanted to work with large, well established companies however the industry has change drastically in the past few years with much more flexible plans and options available to you.
Use this as a short-term solution – when you’re a small new business your suppliers may negotiate longer payment terms with you, build relationships with them to get them to pay invoices quicker and use invoice financing in the meantime.