First published 13 July 2018 • Updated 06 June 2019
When you run a business, having a good bookkeeper is vital. This person may be you, but as your business grows you may find you no longer have the time to spare.
Whether you plan to handle the role yourself or get someone in to help, this quick introduction will help you understand the essentials of bookkeeping and why it’s so important for a successful business.
What’s the difference between bookkeeping and accounting?
Bookkeeping and accounting are often confused. In fact, bookkeeping is a small but vital part of the overall accounting function. Bookkeeping is the process of recording and reporting financial information, while accounting is the process of using such data to establish the business’s financial position and make decisions about how the finances are managed.
Bookkeeping = the recording and reporting of financial information
Accounting = analysing the financial information and creating a financial strategy
What’s involved in bookkeeping?
Bookkeeping is managing the day-to-day finances of a business. It includes:
- Making payments (e.g. bills)
- Chasing payments from clients and customers
- Ensuring your business pays the right amount of tax
- Claiming back tax for your business (e.g. expenses)
- Managing payroll to pay your staff and HMRC correctly
Bookkeeping tracks payments in and out of the business using three financial records:
Cashbook – this records your cash flow (everything moving in and out of your business’s account)
Sales invoice – this records what you’ve sold, including both paid and unpaid invoices.
Purchase invoice – this records what you’ve bought (including services) and how you’ve paid for each purchase.
These are usually the minimum records (‘books’) you’ll keep – there will probably be more. Keeping accurate books is important for financial reporting, and vital if your business faces an audit.
What is good bookkeeping?
All of the tasks that fall under the bookkeeping umbrella need strong organisation and meticulous attention to detail. Payments must be made accurately and on time, and you must be able to find records quickly. Here are some pointers to steer you in the right direction:
- Keep records of every payment – Use your books to track every payment and make it clear when they were made or received so you can easily find them if you need to refer to them later.
- Be strict with deadlines – Never make late payments (especially to HMRC) and give your clients a payment deadline so you can chase them effectively. Take note of any late payers and consider not working with them if they keep missing payments. This is called credit control, and the aim is to keep your cash flow healthy.
- Keep track of expenses – You can claim tax back from lots of business expenses to reduce your overheads. You’ll need receipts to substantiate your claims from HMRC, so keep them stored somewhere safe and organised in different business categories.
Which is more important right now – bookkeeper or accountant?
For a small business, finding a bookkeeper may initially be more urgent than having an accountant. However, in most cases it’s not an either-or decision. If you outsource your accounting function, bookkeeping and payroll can usually be included as part of the service. Having a comprehensive finance function can put your mind at rest, save you time, and enable your business to grow as fast as you want it to.
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