Keeping proper financial records
Keeping proper financial records for your business transactions is known as bookkeeping. Traditionally the records of each business sale or purchase transaction would have been written into large books, called ledgers, which is where the term comes from. To keep your own business financial records you'd use either a spreadsheet or preferably an online accounting system.
Keeping your financial records safe
You must keep a record of your business income and costs for at least 7 full tax years, so think about how you're going to store it all! HMRC has a useful guide on what you need to know about keeping records for business
Why you need to keep good financial records
All businesses need to keep accurate records of their financial transactions. It is a legal requirement that you keep all documents relating to your tax returns for at least 6 years. But you don't just do it to prove your takings to the tax man, keeping good financial records will also show you how your business is performing. You'll be able to tell:
- How much money you're making
- How much and where you're incurring the most cost
- Whether your business is making a profit or a loss
- How much cash you have in the bank
- Who owes you money, and whether you owe any money
- When's the best time to pay your bills
- Whether you’re getting near the VAT threshold and therefore need to register for VAT
- The figures to include in your company or self-assessment tax returns, and your VAT returns
- The information you need to report to any investors or shareholders
How to do your bookkeeping
Bookkeeping involves recording all the financial transactions of a business. Your ‘books’ or records should show details of all the money flowing into and out of your business.
Your records should be split by money coming into the business (sales revenue, shown on the 'sales ledger' or 'accounts receivable') and money going out of the business (purchases and other expenses, shown on the 'purchase ledger' or 'accounts payable').
Have a separate record for each sales transaction. It should show the amount, the date, the customer, a unique invoice number and a brief description of the transaction (if you need to check anything at a later date you'll be glad you did that!)
Recording purchases and other expenses
Your purchases and other expenses records should also have a separate record for each purchase showing the amount, the date, the supplier, a receipt and a brief description of the purchase.
For expenses you need to log the amount, the date, the payee, and make sure you have a purchase receipt.
It'll save you a lot of time when you do your tax return to categorise each item using the descriptions on a tax return, eg car van and travel expenses, goods bought for resale, rent rates power and insurance, professional fees, and so on.
If you have a petty cash float, you’ll need to keep receipts for every purchase you’ve made from petty cash, and transfer the details regularly into your main record keeping system.
Managing your bank balance
At least once a month, more often if you have lots of transactions, check that the amount of money in your company bank account is correct. Take the previous balance, add the income you've actually received and deduct all the payments you've made. The total should equal the amount in your account. If it's not, you've missed something so you need to find it!