Small Business Accounting: 8 Essential Steps for Success

Congratulations on taking the exciting leap into entrepreneurship! Whether you're starting your own solo venture or leading a small team, embarking on the journey of self-employment is filled with ambition and potential. However, one area that often presents challenges for new business owners is knowing how to manage the business finances.

If you're like many new entrepreneurs, the world of small business accounting may seem daunting and unfamiliar. Questions like how do I get a business bank account, what's the best way to track expenses, what tax do I have to pay, and how do I pay myself and my team, can quickly become overwhelming.

Understanding the ins and outs of small business accounting is essential for the success and longevity of your business. This article is designed specifically for you, an entrepreneur who is eager to grasp the fundamentals of financial management and gain confidence in handling your business finances.

1. Your Financial Foundation: Setting Up a Business Bank Account

One of the first steps to solidify your financial foundation is setting up a dedicated business bank account. This step is crucial because it helps separate your personal finances from your business transactions. By having a distinct account for your business, you can easily track income and expenses related to your small business. Not only does this simplify bookkeeping and tax filing, but it also adds a layer of professionalism to your operations.

Most banks offer specialised business accounts tailored to small business owners. You'll typically need to provide basic documentation, such as details about your business and personal ID. Once approved, you'll gain access to business-specific banking features that can streamline your financial management.

How to open a small business bank account

We recommend Starling Bank for your business banking needs. They offer a range of benefits ideal for small businesses, including intuitive digital tools and transparent fee structures. Explore our Business Bank Accounts page, where you can also find a direct link to get started with Starling Bank.

2. Keeping Track of Your Business Expenses

It's important to maintain accurate records of business expenses. This not only helps you monitor your cash flow but also ensures you maximise deductions and comply with tax regulations. Business expenses can vary widely, including costs for supplies, equipment, travel, utilities and professional services related to your business operations.

To track expenses, start by organising receipts and invoices. You can use accounting software or simply maintain a spreadsheet.

Use expense tracking software

Strive's dedicated software for small businesses allows you to effortlessly upload receipts or take snapshots of expenses on the go. This streamlined process ensures that all your business expenditures are documented accurately, saving you time and ensuring compliance, find out more about our small business accounting services.

3. Start a Bookkeeping Routine

Bookkeeping is the systematic recording of financial transactions and activities within your business. This includes tasks such as recording customer invoices, tracking sales and documenting expenses. Establishing a consistent bookkeeping routine is essential for maintaining financial transparency and gaining insights into your business's financial performance.

To establish a bookkeeping routine:

• Set Regular Intervals: Allocate dedicated time each week or month to update your financial records. Consistency is key to ensuring they are accurate and up-to-date.
  

• Use Accounting Software: Make the most of user-friendly accounting software, like Strive's small business software, to streamline the bookkeeping process. This software can automate tasks such as recording transactions, generating financial reports and tracking invoices.
  

• Organise Documentation: Keep all receipts, invoices and financial documents in one easy to find place. This makes it easier to reconcile accounts and provide accurate information during tax filing or audits.
  

• Reconcile Accounts: Regularly reconcile bank statements with your accounting records to identify discrepancies.

4. Work out how you will pay yourself

As a business owner, determining how to pay yourself depends on your business structure. Let's explore best practices for each scenario:

Paying yourself as a sole trader:

If you're a sole trader, your business and personal finances are typically intertwined. However, it's important to establish a clear separation between business income and personal earnings. Setting up a designated "pay day" each month can help you manage your personal finances more effectively.

Here's how you can pay yourself as a sole trader:

1. Calculate Your Profit: Determine your business's monthly profit after deducting expenses.
   

2. Set a Salary: Decide on a reasonable salary for yourself based on your business's profitability and personal financial needs.
   

3. Transfer Funds: On your designated pay day each month, transfer the predetermined salary amount from your business account to your personal account.
   

By establishing a consistent pay schedule, you can maintain financial stability and avoid mixing business and personal expenses.

Paying yourself as a limited company:

If you operate as a limited company, paying yourself typically involves a combination of salary and dividends. Here's how you can structure your payments:

1. Salary: Pay yourself a regular salary as an employee of your limited company. This salary should be in line with industry standards and reflect your role and responsibilities within the company.
   

2. Dividends: Distribute dividends to yourself as a shareholder based on your company's profits. Dividends are subject to certain tax rules and must be declared through company accounts.
   

It's important to consult with an accountant or financial advisor to determine the most tax-efficient payment structure for your limited company, talk to an advisor at Strive today.

5. Work Out How You'll Pay Your Team

As your business expands, navigating payroll responsibilities is important for maintaining a motivated team. Start by familiarising yourself with employment laws and tax regulations to ensure compliance. Establish a consistent payroll schedule that meets both business needs and employee expectations.

Consider using automated payroll software to streamline calculations and deductions, simplifying the process. It's important to stay on top of tax requirements and maintain accurate records for reporting and compliance purposes.

We can help with personalised payroll assistance and expert guidance tailored to your business. Our team can simplify payroll processes, ensure compliance and optimise tax efficiency, allowing you to focus on what matters most — growing your business.

6. Know Your Tax Obligations

It's important to be aware of tax obligations based on your business structure. If you operate as a sole trader, you are personally responsible for paying income tax on your business profits. It's crucial to set aside funds to cover your tax bill and ensure compliance with personal income tax regulations.

For limited companies, your company will need to pay corporation tax on the profits. This tax is payable on earnings after deducting allowable business expenses. If your business's turnover exceeds a certain threshold, currently £90,000 in a 12 month rolling period in the UK, you must register for Value Added Tax. VAT registration requires charging VAT on taxable sales and submitting returns to HMRC.

Understanding and fulfilling these tax obligations is essential for maintaining financial compliance and avoiding penalties. Consider consulting with a tax advisor or accountant to ensure you meet all requirements.

7. Understanding Your Turnover, Profit and Cash Flow

In business finance, turnover refers to the total revenue generated by your business from sales over a specific period. It represents the income before deducting expenses. Profit, on the other hand, is what remains after subtracting all business expenses such as overhead, production costs and taxes.

Cash flow refers to the movement of money in and out of your business over time. Positive cash flow means more money is coming into your business than going out, while negative cash flow indicates the opposite.

Understanding these metrics provides valuable insights into your business's performance and sustainability. Regularly monitoring these indicators allows you to make informed decisions, manage resources efficiently and plan for future growth.

8. Get an Accountant for Your Small Business

Managing finances effectively is critical for the success and sustainability of your small business. From setting up a business bank account and tracking expenses to handling payroll and understanding tax obligations, navigating these financial aspects can be complex and time-consuming.

To ensure financial stability and compliance, consider partnering with a qualified accountant who can provide invaluable support and expertise in:

• Financial Guidance: Offering tailored advice on budgeting, cash flow management and business planning.
  

• Tax Compliance: Ensuring accurate tax filings, maximising deductions and optimising your tax strategy.
  

• Bookkeeping and Payroll: Streamlining processes, maintaining accurate records and managing payroll efficiently.
  

• Financial Reporting: Providing insights through regular financial reports and analysis.
  

Outsourcing your financial tasks means that you can focus on growing your business while having peace of mind knowing that your finances are in capable hands. A professional accountant can help you navigate challenges, make informed decisions and achieve your business goals.

At Strive Business Solutions, we offer comprehensive accounting services tailored to your business. Contact us today to learn how our team of experts can support your financial needs and help your business thrive.