Better accounting can help organise personal or business finances, with similar methods used for both. It puts you in control because you can spot potential problems looming on the horizon and take action to prevent them.
Understanding Money Flow
There are two aspects to business that are vital for success. Those two things are Cashflow and Turnover.
- Cashflow is defined at the total amount of money that flows through a business, taking into account monies paid and monies earned. Cashflow affects liquidity, because without adequate movement of money in to cover the money going out the business will grind to a halt.
- Turnover is defined as the number or total of sales made during a specified period of time. It may include items invoiced and paid, items invoiced but not yet paid, or a mixture of both. It’s normally calculated after VAT or other taxes are deducted. It’s not the same as profit.
Good accounting or bookkeeping can help you stay on top of both by keeping you informed of affairs at all times. When the books are up to date, you’ll know how much money you have, be aware of who owes money, and can flag any potential future cashflow problems so you can work to avert the crisis before it happens.
Put Aside Tax Money
Remember to factor in money you’ll owe the taxman when you’re calculating how much you can afford to pay yourself. Tax money includes not just income tax, but also National Insurance which is now paid annually for self-employed people.
To be on the safe side, you should take 25% of all income and tuck it away into a savings account. Should your tax bill be less than the amount you’ve saved, you can either put the excess towards toward future bills or treat yourself to spending spree. Should the amount saved fall short of your final tax bill, at least you won’t have such a large pot of money to find.
Consider Hiring a Bookkeeper
Many business owners dread the admin aspect. If this is you, a bookkeeper will save hours of headache, and could even show you ways to make the business more profitable. For daily bookkeeping activities, a bookkeeper rather than an accountant will cost less.
Make sure you present them with all the information they need, and in the format they prefer, so they don’t have to chase you for details. It’s worth working out a system between you at the outset so both know what to expect and you can work efficiently together.
Good bookkeepers may also be able to advise on matters such as payroll services if you have employees, or point of sale tools that could streamline your workflow if you’re in retail.
Maintain Separate Accounts for Business and Personal Finances
It’s tempting, especially for home businesses, to keep all your finances in one personal bank account. This soon gets complicated, however, and can lead to either business or personal debt if you don’t know which spending or income belongs to which activity.
Not having separate accounts also makes it much harder to keep business accounts up to date as it can be tricky and time consuming to go through personal bank accounts looking for business expenses or income.
Make it Easy for Customers to Pay You
The problem of non-paying clients can be serious for small businesses operating on a shoe-string. Just one unpaid invoice can ruin your cashflow and send the business into debt or worse, out of business.
Some customers still want to pay by cheque (although they are becoming more rare), and others will want the convenience of Paypal or other personal online payment options. Business clients may find direct bank transfer the most convenient way to settle bills. By making sure you have all options covered, you’re removing many of the barriers that late or non-payers may use as excuses. This is also another good reason to have a separate bank account for business purposes.
Keeping good accounts doesn’t have to be complicated, and there is plenty of professional help available to either get you started or take over the task of ongoing accounts management.