Basic accounts for small businesses

I've put together a pretty basic accounts spreadsheet to help you get started - there are details on how to get a free copy in the 'Library' section. For the 'Access All Areas' password, sign up for 'Priority Updates'.

The details below are an extract from the book 'Business Survival & Prosperity Guaranteed'.

Basic Accounts

You may think that with a background in banking, admin and accounts I’d be pouring over Profit and Loss statements and such like all the time, but this is not so. My business model would give any high-powered MBA consultant a severe attack of the screaming abdabs! Ok, so I do give spreadsheets a pretty fair hammering as they are so useful, and my accounts are all kept accurate and bang up to date. But everything is kept as simple as possible though — no loans, suppliers and tax liabilities paid on time and a comfy working reserve of capital. There is no point concentrating on earning pennies in interest whilst losing pounds from lost sales — my focus is directed on the important things.

There is no big secret with accounts; it is as simple as building a house. Get the foundations right and the house stays up. The better the footings the higher you can build. When you build a doorframe by going up, across and back down again with pieces of timber, you expect the last piece to join at the end of the first, rather than just waggling about without connecting to anything.

Take the time to record everything properly when the transactions take place. It will take a lot more time, with more chance of error if you have to try to piece things together later on. Do it at once, before you forget!

I once had to sort out a six year backlog of accounts—the cost for my time to put it right (let alone all the fines and penalties incurred) was huge. The problem was caused because the owner of the practice had abdicated responsibility for the ‘bean counting.’ As a very highly trained professional, it was not his responsibility to be bothered with all the ‘petty number crunching.’ Wrong! It was his company, so who else was responsible? Apart from the cost, there was also all the resulting wasted time and the hassle.

What is all this ‘double-entry’ stuff anyway?

Double entry is the foundation of accounting. Every financial transaction has an equal and opposite one somewhere else. When you sell goods, your stock level goes down, but you are now owed the money by your client so your ‘accounts receivable’ figure goes up as well. When their money comes in, the ‘accounts receivable’ sum (an asset) now drops by this sum, but your bank balance goes up instead. You now buy new goods, so your stock level goes up but your ‘accounts payable’ liability also increases by the amount of the supplier’s invoice. When you pay off the invoice, this debt is cleared but your available bank balance falls by the sum of the cheque. You’ll need to understand these basics before delving deeper into the ‘black arts’ of finance and accounting, but I hope this bit at least now makes sense!

To explain how this works at a more complex level, and to show how important it is to get all the details right, I usually use the example of payroll and wages. Many business newbies list the total of the net (after tax) wages paid to staff as ‘wages’ and the total tax paid out as ‘tax’ and leave it at that, but this not the whole picture.

Firstly, there can be problems with tax credits, wages paid on account, deductions and so on. To make sure that any differences stand out, it is much easier to set up ‘control accounts’ (like individual bank accounts) for both ‘Wages’ and ‘PAYE /NIC.’ Also, as we’ll see later, as well as the NIC (National Insurance Contribution) you must deduct from the ‘gross’ wages due, there is an additional sum to pay as well for the privilege of being an employer — another cost that needs to be recorded. You must also separate the details for both employees and directors.

Your wages ‘journal’ (a breakdown of ‘debit’ and ‘credit’ sums to enter in your accounts) will look like this. The figures are not representative, but just there for illustration.

The payments for both wages and tax will then be debited to their individual control accounts. If everything has gone through properly, the payments will cancel out the original sums to leave zero balances. If not, you’ll need to find the difference.

I’ve not given this example in an attempt to confuse you, but just to show the intricate nature of double-entry accounts. And if it stops one person deciding that it will be ok to just dump all the book keeping onto an unwilling partner who doesn’t understand it either, then that will be a result as well!

What about running two sets of books?

Always declare all your income, no matter how tempting you may think it is to ‘trouser’ some straight into the back pocket. Even if the moral argument is not enough, there is the risk of extreme penalties if you are caught. It can be hard enough to keep everything on track being totally legit. I’ve never tried running two sets of accounts (one for yourself, and one for everyone else) nor would consider doing so, but I imagine the effort involved to make everything mesh perfectly would be fantastic. Use this effort instead on all the legitimate activities that will benefit your company far more anyway. You won’t always be looking over your shoulder as well!

I’m convinced that all the government inspections on tax and V.A.T. I’ve been through have gone so well because there was nothing to hide. I could be completely open and honest — inviting them to look at anything they wanted. Had there been any sticky areas, I’m sure my body language would have betrayed me. A friend and fellow musician was formerly a tax inspector, and gave me some very useful insights into how they worked.

One of their methods is to trawl through small ads and news items looking for names. If they can see you have earned anything (no matter how small) without declaring it, then you are busted. There can be an automatic penalty, followed by their assessment on unpaid taxes. When I started as a ‘hobby’ musician, I sent a letter to the local tax office advising them that I was earning money, but not yet making a profit. I later earned a (very) small fee appearing at a local folk club without repercussions, but another act who had not advised their tax office were caught out and hammered. One of them even had his self-employed income re-assessed, “If you are lying about the music, you are probably lying about that as well.”

My friend also told me that whilst they often tolerated a bit of mildly enthusiastic claiming of expenses, “if you are taking the piss don’t be surprised if a double-decker bus load of inspectors turns up on your front door early one morning!” Nowadays computers are used to profile and compare different traders in the same industry. If the norm for your industry is to spend 50% on materials, but you are claiming 80%, your name may well ping up for a friendly visit from the heavies at Her Majesty’s Revenue and Customs.

How to keep your book keeper happy!

Ok, so this section is bound to be a bit of a moan about the things that clients do which wind up book keepers. But as we’ll see later, learning to see things from the perspective of others is an incredibly powerful and effective skill — for both business and social life.

Book keepers are in general shy, retiring, tidy and precise creatures who like simple lives of tranquillity created through order, structure, and accuracy. This will be a good thing — when (if) you ‘enjoy’ the experience of a tax or V.A.T. inspection. Things will swing along swimmingly if all your records are complete, and in good order. I’ve been through quite a few inspections now, and always treat it as a challenge. Rather like a cheesy stage magician, I challenge them to inspect the accounts and then “pick an invoice, any invoice,” before producing the original with a flourish!

Make life considerably easier for your tame bean counter by taking a little time to sort things right from the start. For example, it may be marginally easier for you to carry sugar and salt back home in one bag instead of two, but you can imagine the hassle to sort them out afterwards?! Keep all debit/credit card slips separately for each card. Yes, you’re the boss, so of course you can mix them all up together if you want to — and throw in a few receipts for your partner’s underwear as well, on a private card for good measure (I’ve seen it happen). At the end of the day though, it will be your money wasted in sorting the mess out. Also, if there is no valid receipt available, it will not be possible to claim back the V.A.T., or perhaps even the net cost, so you’ll end up paying more tax. Your accountants will be happier as well, so audit fees can be kept to a minimum.

I was once working at a new client’s during a visit from a pack of V.A.T. inspectors. When asked to produce last year’s records, he explained “ah, everything was in the back of the Escort van that was nicked and burnt out.” There was a period of stunned silence when we all looked at him, and the scent of disbelief hung heavy in the air. The inspectors then politely but firmly insisted that it was therefore his obligation to obtain copies of every single bank and card statement, invoice, all sales and purchase invoices and each petty cash receipt. I politely but firmly gave notice that it would not be possible for me to continue due to pressure of work from other clients.

Please don’t complain if you feel you are being nagged by your book keeper. At least this shows that they are still concerned about, and taking an interest in your affairs. It can be really damaging if you end up with someone who is past caring. This can happen when the book keeper wonders why they should bother about the details, when no-one else does. It’s a bit like sharing a house or flat — why would you make an effort to keep the place tidy when everyone else treats it like a tip? Not the right attitude from someone being paid to do a job perhaps, but it is human nature. I always try to deal in realities, rather than ‘should’s’

Keeping records

Everything has to be written down properly. The idea should be that anyone, without specialist knowledge of your company, can inspect the records and see exactly what you have bought and sold, who was involved and when the transactions took place. You don’t even have to do any complicated filing yourself. It is not a problem to simply put all your paper work in a shoe box and pass it on to someone else to sort out—many do—so long as you remember to do five things:-

1. Always get a receipt, and make sure it is a ‘V.A.T. receipt’ if you are registered.

2. Put everything in the box—all the cheque stubs, invoices, tickets, receipts and statements.

3. Write out all the details you can. Fill in cheque books and paying in (credit) books with details of the invoices paid, write cheque number and date paid on purchase invoices.

4. Find a good, reliable book keeper who can come in as often as needed to keep everything in order.

5.Make sure that you understand fully the financial implication of any transactions you undertake. For example, one client ‘saves money’ by using credit cards and cheques for one company to buy things for another. At one time, he was ordering goods through company A on behalf of company B, and then paying the bills through company C. Although the transactions were all above board I had to record everything meticulously so that any auditors and investigators could see that nothing was fraudulent. Instead of the one original transaction, I had to enter up three sets — with each company having two ‘inter-company’ accounts. It would have been a lot cheaper and easier if each company had remained fully independent.

I’ve gone into more details in the ‘Simple records and filing’ section (of the book) , which is intended to provide enough of a framework to get you started, rather than being a full course. But it will at least point you in the right direction