A starter guide to bookkeeping for small businesses

Bookkeeping is vital for a small business if you want your finances to make sense.

Initially, you may be the bookkeeper, but as your business grows, you may no longer have the time to spare.

Whether you plan to handle the role yourself or get someone to help, this guide 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.

In short:

• Bookkeeping = the recording and reporting of financial information
• Accounting = analysing the financial information and creating a financial strategy

What does bookkeeping involve?

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.

8 bookkeeping tips for small businesses

The following pointers will help you to get started in bookkeeping for your small business.

1. 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.

2. Choose an accounting method

Your bookkeeping will underpin your accounting, so decide at the start which method you will use. Traditional accounting records income and expenses at the date of the invoice.

Your bookkeeping will underpin your accounting, so decide at the start which method you will use. Traditional accounting records income and expenses at the date of the invoice.

Cash accounting records them on the date when you actually receive or pay the money. It reduces the risk of having to pay tax on money you haven’t yet received but is only available if your turnover is £150,000 or less.

Learn more: what's the difference between cash accounting and accrual accounting?

3. 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.

4. 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.

Be sure to keep business expenses separate from personal ones, so you can easily identify which ones can be claimed against profit to reduce tax.

5. File bank statements and invoices in order

Or, don’t waste your bookkeeper’s time and your money. Make sure all bank statements and invoices (purchase and sales) are present and correct, and in date order.

Otherwise you’ll be paying your bookkeeper for the time taken chasing down and sorting these documents, when it’s easy to do yourself.

Worse, if documents go missing, then you could end up facing a fine for late filing.

For purchase invoices (i.e. money that you owe), keep separate files for paid and unpaid invoices, and file both alphabetically by supplier name. Always remember to move invoices over once you’ve paid them.

For sales invoices (i.e. money owed to you), number them sequentially in order of when they should be paid, so that you can chase them effectively.

6. Choose suitable software

You may not need specialist bookkeeping software as it might be done with Microsoft Excel or its freeware equivalents.

However, as your business needs grow, you may want a more specialist package.

Ask an accountant what they recommend as the best bookkeeping software for a small business.

7. Produce monthly reports

Generating reports at least once a month is the surest way to stay on top of your business finances, and ensure you don’t get caught out by nasty surprises.

Your monthly reports should include a profit-and-loss statement and the balance sheet, as a minimum.

These reports provide ongoing insights into the performance of your business and help you track its financial health.

8. Know when to outsource your bookkeeping

If your business starts small, it may make sense to handle the bookkeeping yourself. As you grow, keep track of how much time per week you spend on the books.

Work out the monetary value of your own time (e.g. how much you generate for the business per hour) and compare this with the cost of a bookkeeper.

A professional bookkeeper may take only a couple of hours to handle a month’s accounts, so it won’t be long before this is better value.

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.

Get expert financial advice

Mastering bookkeeping is key to keeping your small business on track. By staying organised, using the right tools, and knowing when to get professional help, you can ensure your finances are in good shape and avoid any nasty surprises.

With solid bookkeeping practices, you’ll be well-equipped to manage your cashflow, make informed decisions, and focus on growing your business.

Let Unbiased match you with a qualified accountant or bookkeeper so you can ensure that you get the most out of your financial management and help your business grow.