How important is good record keeping for my small business?

When you’re starting your own business, collating receipts and hunting through emails may not be at the top of your most enjoyable tasks list. Yet, recordkeeping is a vital part of small business accounting and will provide valuable information that will enable your business to grow. Keeping accurate records will help you plan for tax payments, view progress, identify strengths and weaknesses, make preparing for your annual accounts quicker, and make it easier to be HMRC compliant. 

Read on to find out: 

• The benefits of keeping good records
• What your records should look like
• How long you should keep your financial records
• What you can do to make records management easier 

Keeping records is a legal requirement if you run a limited company. If you’re a sole trader, it can also make the task of filing your annual self-assessment much simpler.

1. It makes accounting and tax easier

However you decide to keep records, whether you use a spreadsheet, accounting software, or employ bookkeeping services, recordkeeping will help when preparing your annual company accounts and tax return. If your records are up to date, you won’t have to spend time searching through and organising paperwork when the deadline looms.

2. Helps with business planning

Cash flow is the life blood of any company. By keeping records of all transactions, you can keep tabs on how much cash is coming in and when, which makes it far easier to know when you can invest in growth and when you need to tighten your belt.

3. Provides data to identify strengths and weaknesses in your business

Keeping organised records will build up a picture over time of how profitable your business is. Records also tell you where your income is coming from and which revenue streams are most lucrative. If you use accounting software to track your transactions, you’ll be able to look at your profit and loss statement online at any time. This can reveal seasonal trends as well as flag up areas that need improvement.

4. Financing or selling your business

Potential investors or lenders will want to see records of past performance before agreeing to funding. If you have kept comprehensive records, then supplying the information should be straightforward. Without indicators of past performance, any loan application could be rejected. When it comes to selling your business, if you don’t have comprehensive records, you may not get the price you want, or you might struggle to find a buyer if the books don’t reflect a financially sound company.

5. Keeps track of expenses and reduces tax obligations

If a pile of crumpled receipts and invoices are currently your accounting system then transactions may be forgotten about, lost or missed. This means legitimate expenses might not be included in the annual accounts, leading to a larger tax bill.

Countingup, the business current account with built-in accounting software eliminating this pain point for small business owners. The 2-in-1 app nudges you to scan receipts when you make payments, automatically categorises your expenses and gives you a running estimate of your tax owed. With your organised financial data in one place, you can save hours of time-consuming admin associated with filing your tax return. 

6. Identifying when you reach the VAT threshold

Any business turning over £85,000 a year needs to register for VAT. This amount is cumulative, meaning that businesses coming close to the threshold need to check the past 12 months’ turnover every month. Without organised records, this becomes a challenging task and could leave you open to penalties because you’ve unexpectedly exceeded the threshold and failed to apply on time.

7. Meeting creditor obligations and paying employees

Just as keeping records allows businesses to track cash flow and profits, it also helps track money owed to creditors and the monthly payroll. If you know what your cash flow will be like in the coming months, then you can plan when to pay creditors. This can help you  stay confident knowing that you have enough money to cover any monthly wages.

Businesses should record all sales, details of payments, expenses, receipts, credit purchases, debts, stock, assets and liabilities. Other relevant documents such as bank statements should also be kept. If there are receipts missing, then it’s important to make note of the expense incurred. This is where an accounting app can really help, because rather than having to keep paper receipts, you can scan them and enter any details straight away. 

All businesses must keep records for as long as the law requires. This is important because if there is an issue with tax, then HMRC can demand to see older records. VAT records should be kept for a minimum of six years while tax returns must be kept for five. 

There are some instances where you may need to keep them for longer. For example, if you bought equipment you expect to last more than six years. Company records should also be retained where a transaction covers more than one accounting period.

Accounting for startups can feel burdensome because there’s a lot to learn. The one thing that does help is regularly updating the accounts. Accountancy admin can build up unless you keep on top of it, especially if you run a business with lots of daily transactions. Setting aside time each week to do the reconciliation, upload receipts and check a business’s financial health is a great habit to get into.

Save time everyday by automating your bookkeeping admin with Countingup, the 2-in-1 business current account and accounting app. Learn more here.