We’ve all experienced the constant pressure of running a business. It’s one thing after another and naturally the attention goes to delivering to our customers. However, as the end of the tax year approaches the reality of what is needed to complete a tax return hits home. Without the right processes in place you may find yourself in a tricky situation.
Only two things can help you ensure you don’t get into this pickle again – accounting, and bookkeeping. These are important financial processes that’ll assist you with financial control and end-of-year tax affairs. But they’re not the same thing, and it’s important you understand the difference as your business grows.
Bookkeeping is the process of keeping accurate records of business transactions. All financial transactions are recorded and stored in your ‘books’. Additional activities include verifying and recording invoices, paying suppliers and keeping receipts.
The bookkeeper’s job
A bookkeeper is a data entry professional. A bookkeeper’s role is to maintain accurate business records. The ‘books’ a bookkeeper maintains are then used by an accountant to prepare finance reports and file tax returns. Some accounting practices offer bookkeeping as part of their service, so everything’s under one roof.
Bookkeeper or DIY?
You can practice good bookkeeping yourself with software. There are a variety of tools out there, such as Rydoo. If you’re already on top of your books but are struggling to keep tabs on your invoices, you can track invoices with Solna.
If you prefer not to complete the bookkeeping yourself, outsourcing to a bookkeeper is the only option. Bookkeepers typically charge £50 an hour. Most freelancers will need three to four hours a month, so the outlay will be around £200 per month. If you earn way more than this then it makes sense to outsource to free up your time.
Presenting financial information
Accounting is the process of presenting financial information in various reports. A relevant example is the end of year self-assessment. Simply put, accounting is the art of presenting information in different forms, such as balance sheets and income statements.
The accountant’s job
An accountant is a finance expert who manages your tax affairs on your behalf. Your accountant exists to provide up to date monetary business advice and help you run a tax efficient operation. Bookkeepers, by comparison, crunch data. They don’t provide advice or assist with the creation of financial reports or tax returns.
The benefit of using an accountant
You don’t need an accountant to file your self-assessment tax return. You can do this yourself online in a matter of minutes. However, in doing so you run the risk of paying more income tax than you should. For example, you might not make proper use of your allowable expenses or setup a tax efficient payment structure.
Accountants are worth their weight in gold because they can advise you on the most tax efficient structure for your business. For instance, they might set up a PAYE scheme for you and note some payments as dividends. This is all complicated stuff if you’re not familiar with accounting – which is why you need an accountant.
Whether you choose to take on a bookkeeper or do it yourself, it’s important you bring bookkeeping and accounting together. Both jobs are separate but the relationship between them should be close. Good bookkeeping makes an accountant’s life easier (and reduces your bill in the process) and good accounting ensures all your hard work is put to proper use when any financial reports or returns are created.
Don’t forget that many day-to-day tasks you might assume are covered by bookkeeping aren’t. Bookkeeping doesn’t send out invoices for you nor does it automate payment reminders if they become past due. And, while bookkeeping will help you make informed business decisions, it won’t track your customer credit scores so that you stay in the loop about their risk profile. For these tasks, you will need to use an automated system that can generate invoices, chase them automatically and allow you to check current and potential customers’ credit scores. It is good to know your invoices are being managed efficiently and where the risks of late payment may be.
ABOUT THE AUTHOR
Inna Kaushan is co-founder of Solna, a smart invoicing platform powered by credit score data. Solna speeds up the invoicing and payment process for freelancers and small businesses. Through leveraged credit data that is overlaid on the platform’s invoicing and reporting functionality, users get a clear picture of their customer’s financial health and their overall exposure to risk. The system’s automated credit control functionality automatically chases overdue invoices – freeing up time and ensuring faster payment.