When you start to run a business there are many things you need to know about which may be outside your area of expertise. Getting to understand the day to day management of the financial side of your business may be one area where you need to improve your knowledge.
Understanding the important financial processes of accounting, and bookkeeping is vital if you are to avoid getting into a pickle. Let’s look at both of them and how you can use them so you are set up for daily management and are ready for the inevitable realities of tax returns and financial reports.
Bookkeeping and the bookkeeper’s role
Bookkeeping is the process of keeping accurate records of business transactions. All financial transactions are recorded and stored in your ‘books’. Additional activities include verifying and recording invoices, paying suppliers and keeping receipts.
A bookkeeper is a data entry professional. A bookkeeper’s role is to maintain accurate business records. The ‘books’ a bookkeeper maintains are then used by an accountant to prepare finance reports and file tax returns. Some accounting practices offer bookkeeping as part of their service, so everything’s under one roof.
Do it myself?
You can practice good bookkeeping yourself with software. There are countless tools out there, such as Rydoo. If you’re already on top of your books but are struggling to keep tabs on your invoices, you can track invoices with Solna.
If you don’t want a hand in maintaining your books, outsourcing to a bookkeeper is the only way. Bookkeepers typically charge £50 an hour. Most freelancers will need three to four hours a month, so the outlay will be around £200 per month. If you earn way more than this then it makes sense to outsource to free up your time.
Accounting and the accountant’s role
Accounting is the process of presenting financial information in various reports. A relevant example is the end of year self-assessment. Simply put, accounting is the art of presenting information in different forms, such as balance sheets and income statements.
An accountant is a finance expert who manages your tax affairs on your behalf. Your accountant exists to provide up to date monetary business advice and help you run a tax efficient operation. Bookkeepers, by comparison, crunch data. They don’t provide advice or assist with the creation of financial reports or tax returns.
Do I need an accountant?
You don’t need an accountant to file your self-assessment tax return. You can do this yourself online in a matter of minutes. However, in doing so you run the risk of paying more income tax than you should. For example, you might not make proper use of your allowable expenses or setup a tax efficient payment structure.
Accountants are worth their weight in gold because they can advise you on the most tax efficient structure for your business. For instance, they might set up a PAYE scheme for you and note some payments as dividends. This is all complicated stuff if you’re not familiar with accounting – which is why you need an accountant.
Bringing both worlds together
Whether you choose to take on a bookkeeper or do it yourself, it’s important you bring bookkeeping and accounting together. Both jobs are separate but the relationship between them should be close. Good bookkeeping makes an accountant’s life easier (and reduces your bill in the process) and good accounting ensures all your hard work is put to proper use when any financial reports or returns are created.
Don’t forget that many day-to-day tasks you might assume are covered by bookkeeping aren’t. Bookkeeping doesn’t send out invoices for you nor does it automate payment reminders if they become past due. And, while bookkeeping will help you make informed business decisions, it won’t track your customer credit scores so that you stay in the loop about their risk profile. For these tasks, you will need to use an automated system that can generate invoices, chase them automatically and will allow you to check credit scores of your current and potential customers – so you know which customers are likely to be the riskiest when it comes to getting paid on time.
ABOUT THE AUTHOR
Inna Kaushan is co-founder of Solna, a smart invoicing platform powered by credit score data. Solna speeds up the invoicing and payment process for freelancers and small businesses. Through leveraged credit data that is overlaid on the platform’s invoicing and reporting functionality, users get a clear picture of their customer’s financial health and their overall exposure to risk. The system’s automated credit control functionality automatically chases overdue invoices – freeing up time and ensuring faster payment.