All businesses should keep records of their financial transactions. Keeping financial records is not only good practice but also a necessity. Running a business without financial records can be likened to:-
‘Boarding a plane without any idea of where the aircraft is destined to land.’
Financial records act as a compass, which gives guidance and direction to a business. A review of your books can highlight where you need to spend more or less money; who gives you the most business and who takes the longest to pay you; how much you’re paying out compared to how much you’re selling.
There is a legal requirement to retain bills, invoices, receipts and bank statements for a minimum period of six years. In essence any information which forms the basis of your tax return should be kept. Record keeping is one thing; the interpretation of financial data is another. It is usually at this point where many people enlist the services of an accountant to add depth and understanding to this information.
Categorising income and expenditure
Each sales invoice should have a unique reference number to enable them to be filed in order. The same should be done for purchase invoices and receipts. Having a simple system will enable you to keep track of paperwork. Under new legislation the ‘VAT man’ can now drop in unannounced on home based businesses. Consequently businesses should have accessible records.
It is not unusual for businesses to keep a float of £100 in either cash or a combination of money and receipts. If your business has a petty cash float, then a sheet of paper will need to be kept in the petty cash box on which you note down all purchases. A receipt should always be attained for every item and tallied with the sheet of paper. Whenever money is added to petty cash, the balance should be updated onto a new record sheet. The old sheet should then be balanced and added to the other expense receipts.
Keep on top of cash flow
A bank reconciliation should be conducted on a monthly basis. This involves taking the previous balance as shown in your bank statement, adding all payments in and subtracting those you have made. The new balance should reflect your new bank balance. If it does not, either you or the bank has made an error.
To summarise up to date and accurate financial records gives a good picture of the overall financial health and wellbeing of a business. If you feel that you are unable to keep up to date financial records then the assistance of an accountant should be sought to ensure that you understand the financial side of your business.