Keeping accounts

Whether you are a small or growing business, it's vital that you make sure you understand the basics of book-keeping, even if you use an accountant for all the complicated things.

Everything from income and expenditure to keeping receipts and producing invoices, monitoring cash flow and the payment of wages needs to be done properly.

Down to you

It's your responsibility as a business owner to complete your tax returns accurately and on time. This is easier to do if you have kept good, up-to-date records of all your income and spending through the year.

By law, you must keep business records for at least five years and ten months after the end of the tax year the records relate to. HM Revenue and Customs (HMRC) can charge you up to £3,000 for each failure to maintain or retain adequate records. There are a number of business benefits to be gained from keeping good records, though. It saves you time, and therefore money, whenever you need figures to back you up for anything. You can also be confident that you're only paying the tax you owe; and good record keeping also helps you keep up to date with how much money you owe, and how much you are owed. This will all help you to keep on top of business and project your business growth and trends.

What to record

That's the carrot and the stick. Here's how to do it well.

Firstly, you need to keep your business records and personal records separate. Most businesses find that it helps to have a separate business bank account.

Secondly, your basic records should normally include the following:

A record of all your sales, with copies of any invoices you have issued
A record of all your business purchases and expenses, including a record of any wages paid to employees
Numbered invoices for all your business purchases and expenses, unless they are for very small amounts
Details of any amounts you personally pay into or take from the business
Copies of your business bank statements

Invoicing tips

In issuing your sales invoices, it is helpful to your business, and reassuring to the taxman, to issue your sales invoices in strict numerical order. You should set up a file with file dividers for each month, and file your sales invoices in strict numerical order.

The only exception to this rule is that unpaid invoices should be kept in a special section at the front of the file until they have been settled, at which point you should mark the invoice 'paid' and also write on it the date paid, and then file it in strict numerical order.

You should also review the unpaid section of the file regularly and take steps to chase payment as often as possible.

If for some reason a customer does not pay an invoice and you need to take legal action, with a Direct Line for Business insurance policy, you will have access to Free legal advice and depending on the type of policy you have, you may also be covered for any legal expenses incurred recovering the debt.

Profit and loss

Now that you've got your sales and receipts in line, you can use these records to create a profit and loss account. This is basically a spreadsheet that shows the sales revenue you have received and the costs you have paid.

If you have a simple business, you can probably do this using a spreadsheet program. But if you have more moving parts, it is well worth investing in software to help you to track all of the information, or even use the services of a book-keeper or accountant.

Five top book-keeping applications

Related information:

What you need to know about tax - we set out the basics when it comes to paying tax on your business' profits or self-employed earnings.

Getting your name out there - you don't need to have a big TV advertising campaign to get your business noticed - there's some much cheaper tactics that can be really effective.

Dealing with staff - some tips on interviewing, keeping your employees happy and resolving conflicts.