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Five Accounting Basics every Small Business Owner should know


Five Accounting Basics every Small Business Owner should know

Despite the legal requirements for UK businesses to file annual tax returns with HMRC and Companies House and the potential impact of getting these returns wrong, a significant proportion of business owners do not prioritise their finances. In fact over a third of small business owners considered financial management a “necessary evil”and a quarter said they “prioritise it, but would rather be working on something else.”

The pressures of running a business are one of the reasons for this, with many small business owners finding themselves pulled in multiple directions. Another is a lack of understanding when it comes to accounting practices, even if they outsource to an accountant.

Whether you are managing your accounts yourself or have outsourced some or all of this work, you need to understand some of the basics of accounting language. Take some time to talk to an expert or do some research yourself. A firm understanding of the difference between turnover and profit and capital costs and expenses, will really help. If possible, get an accountant to talk you through what you should be recording and when and how you should be recording it.

As a small business owner, it is extremely beneficial if you have a working understanding of accounting basics. Below are five areas you cannot afford to be ignorant about.

1. Cash Flow

As a small or medium-sized business owner, understanding your company’s cash flow is critical to its success. It will allow you to adapt to the uncertainties of today’s economic climate and plan for any seasonal cycles your business might work to. If you don’t already have cash flow forecasts, you need to create them, looking at previous year’s performance and considering the environment in which you are working to predict income and expenditure. When you review your accounts, you can update these forecasts, making it easier for you to manage your business and look for cost-savings and further operational efficiencies.

Cash flow is also about making sure you get your invoices paid on timeand this means understanding the importance of agreeing terms, especially in the service industry with work that will take place in stages or over a prolonged period of time. Getting a regular cash flow from these big jobs can mean the difference between you going under and staying afloat in those early days.

2. Tax Deductions and Expenses

By developing a good understanding of the basics of accounting, you will build an understanding as to what can be deducted from your taxes and what can’t, which can have a significant impact on the financial viability of a small or medium-sized business. By deducting some items, you may be able to identify cost savings which will help your bottom line. Understanding tax implications will also make sure you are operating legally and that, once you file your return, you are not at risk of fines or reputational damage.

3. Expenses

Knowing what you can claim as a legitimate business expense, will allow you to reduce your tax bill as this is deducted from you profite (and you only pay tax on the profit you make, not your turnover). Make sure you keep receipts for every purchase that is related to your business and if you’re not sure, keep it anyway as you may well be able to claim it as an expense. Keep a log of all your expenses on a spreadsheet or using an app. One way of keeping tabs on receipts is to take a picture of them with your phone. That way if you lose the receipt you still have a record of the transaction.

4. Reviewing Accounts

Most business owners will want to grow their operations in the medium to long term. You won’t be able to do this unless you are able to understand your financial position, both now and projected into the future. It’s not ideal to rely entirely upon someone else to tell you where you stand, as you should have a strong grip on this in order to plan your growth strategy and budget accordingly. No matter how well you know and trust your accountant, you should sit down with them regularly (and not just once a year) to review your accounts and make sure they are well managed and in order.

5. Payroll

If you have employees then it is absolutely crucial that you have an understanding of the duties beholden on you as an employer. Many businesses will choose to outsource their payroll function early on. Whether you do or don’t do this you should really have a firm understanding of your financial commitments to your employees around things like the minimum wage, auto enrolmentand national insurance contributions.

Although this article is aimed at UK businesses, the same principles apply to any small business in the world, so get yourself up to speed on your country’s tax regulations and get a grip on those accounting basics. They will serve you well over the years.


About the Author: Nick Brown is a chartered accountant and a partner at Eastbourne and Brighton AccountantsPlummer Parsons.

I am the founder of Startup Today. I am the main writer and have put in many hours of work into creating this blog. If you want to find out more about me then lets get in contact.

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