Small Business Accounting Tips
Every small business owner in the UK today knows that properly managing cash flow, and a business’ accounts, is key to success. There’s an overwhelming amount of evidence to support this idea.
One of the most influential studies on this topic to date is insurer Hiscox’s 2016 report on why SMEs fail, which found that 82% of SMEs fail due to financial mismanagement, and that cash flow is the #1 killer of businesses.
The Office for National Statistics use a similar terminology, and their most recent 2019 data found that ‘death rate’ of UK businesses per year is slowly growing, which reportedly sat at around 11.2%. While there’s no doubt that factors outside of an SME owners’ control can cause a business to collapse, especially under pandemic circumstances, the answer to the question of ‘how can I combat financial challenges?’ often follows a common theme.
That is, upgrade your business’ accountancy processes across the board; from strategy to bookkeeping, and ensure you have the right people and technology in place to facilitate proper accounting. In this article, we’re going to share tips on how you can look to achieve this.
What is business accounting?
The typical small business accounting process revolves around the following core activity:
- Recording financial data.
- Reporting that data back to the business and relevant stakeholders.
- Interpreting the data – what insights can we draw from it?
- Analysing the data – what’s the impact on the wider business strategy?
For smaller businesses, the responsibility of handling this could fall with the business owner, who must typically wear many hats in the early stages of growing a business. In this instance, perhaps the most important accounting metric to focus on is profitability, as growing the business to a point where it’s able to expand its staff and dedicate individual team members to key disciplines (such as operations and accounting) could unlock more growth opportunities.
What does the ideal accounting team look like, then? Well, it could include:
- A financial lead, responsible for drawing up the quarterly financial strategy, managing the team, and working with leaders within other teams (such as marketing) to set budgets.
- A bookkeeper, responsible for facilitating the recording of transactions, and chasing up late payments.
- An accounting executive, responsible for updating inventory records, submitting annual tax returns, and reviewing financial statements.
Of course, exactly which responsibilities face the team and how these are shared is highly personal to each business. One popular option used by many businesses is to outsource some of these services to an external agency, or freelance accountant.
This is typically useful when handling more technical tasks, such as tax returns, rather than handling the strategic accounting piece, which is best informed by a wider understanding of the business’ strategy and financial planning.
Accountancy tips for small businesses
A quick disclaimer before we start, our general tips around accounting shouldn’t be taken as gospel. They’re informational tips that are intended to help you spot opportunities and get creative around how you could improve your processes.
With that in mind, let’s dive in.
1. Choose an accounting model
The two best-known accounting models are cash accounting and accrual accounting. The former involves recording a transaction within your accounts only when cash is transferred, e.g. if a cheque is cashed. This gives you a good idea of exactly how much cash you have in the bank at any one time, which gives you an idea of exactly what you could spend in the short term.
Conversely, when using an accrual accounting method, you’ll record financial transactions when the terms of a sale are formally agreed, not when money is paid. If you’re offering your customers a range of credit options, accrual accounting is likely to give you better financial insights and improve your reporting, which could strengthen your business strategy.
So, if you’re dealing with a lot of customers directly and money is paid at point of sale, then a cash accounting model may be a good fit for you. However, if you’re working with large businesses and finding that your accounts receivable is key to your profitability, accrual accounting is probably a better system for your SME.
A couple of quick final notes on these models are that:
- Within a cash accounting model, you don’t actually record your accounts receivable, so you might not know what you’re owed. This is handy, though, in the sense that you’ll only pay tax on completed transactions, versus potentially being taxed on sales before receiving payment.
- In accrual accounting, your accounts won’t match your books. This might make some small businesses a little nervous, but isn’t inherently a bad thing.
2. Know the common transaction types
Equally important to recording financial data in full is understanding what that data means. To help with this, it’s worth arming yourself with knowledge of the common transaction types so that you can quickly identify what each transaction represents. These include:
- Revenue – also known as sales. These transactions are indicative of a demand for your product. Without revenues, your business can’t be profitable, and you may also struggle to secure investment. Conversely, having a good understanding of your revenues may make financial conversations easier.
- Expenses – or costs. Managing costs is complex, but having a quick view of your business’ running costs can come in handy when you’re looking to make efficiencies and gauge whether this spend has increased month-on-month.
- Assets – for a local bakery, the expensive commercial ovens they purchase are likely to be the most valuable assets in the business (other than perhaps the premises, if owned). When reviewing the accounts, it’s important to acknowledge these transactions as assets that have future value and can drive revenues.
- Liabilities – the direct opposite of assets, liabilities are owned properties or items that cost you money to run or maintain over time. Similar to expenses, you’ll want to keep an eye on how much your liabilities are costing you and ensure you’re allocating enough cash to covering these costs.
- Equity – which is simply how much of the business you own. Calculating the difference between your owned assets and your liabilities will determine the value of your equity, and valuing your business can help to determine your eligibility for external finance products or investment opportunities.
Experienced SME owned and accountants alike will typically recommend keeping your business accounts entirely separate from personal accounts to avoid any confusion.
3. Refine and improve your bookkeeping system
Our third and final tip is to bolster your bookkeeping system. Our bookkeeping guide can help you figure out what that system could look like, but essentially, you’ll want to:
- Select a bookkeeping strategy (e.g. double entry).
- Define duties clearly for the bookkeeper.
- Ensure the right software is in place to support the process.
Accounting software is probably worth investigating if you haven’t already thought about whether there are solutions available that could help you. Products offered by companies such as Xero and Sage can plug into your business’ bank account and process huge amounts of financial data.
They help you by crunching this data into a set of meaningful insights, and a robust cash flow forecast, for a price. A simpler solution could be managing your accounts via a Microsoft Excel spreadsheet; however, this process can be time consuming.
So, finding the balance between getting the valuable insights you need, the time your team can afford to spend on accounting, and cost, is an exercise that could be worth undertaking for all SME owners.
We hope our accounting tips have helped to spark some ideas around how you could develop and improve your accounting strategy. We’ll leave you with the idea that life is like accounting; everything must be in balance – but only by recording all relevant financial data can you start to find that balance.
How could Rapid Cash help?
At NatWest Rapid Cash, we help SME owners across the UK overcome cash flow challenges and jump onto growth opportunities through our innovative invoice finance model. Our solution plugs into your accounting software, and can give you a cash advance on the unpaid invoices that you choose to borrow against. Read more about how our product works.
To be eligible for Rapid Cash you must be trading for more than 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, FreeAgent and Netsuite.
Security and guarantee required. Product fees may apply.