Bookkeeping for small businesses: why it’s important

There’s a lot to consider when you start a new venture, from figuring out your pricing strategies to deciding how to advertise your business. One of the key tasks on your to-do list will be to set up a solid bookkeeping routine. But what is bookkeeping exactly, and how is it different from accounting?

Bookkeeping records transactions like sales, purchases, receipts, and payments – in other words, the day-to-day financial activities in your business. Accounting uses those records to show the business’s financial standing, create financial statements, and make decisions about how small business finances are managed.

When it comes to how to run a business properly, bookkeeping and accounting are both part of the deal. But they play different roles in keeping your business on track and following the rules.

If you want to learn more about bookkeeping for small businesses, this guide has you covered. It runs through the basics of bookkeeping, explores the benefits of a robust routine, and shows how it can help you manage your money.

What is bookkeeping for small businesses?

Bookkeeping for small businesses typically involves three main tasks:

1. Paying bills and other expenses

This includes handling all outgoing payments for things like rent, utilities, and office supplies, as well as accurately recording these transactions.

2. Collecting payments from clients and customers

This task involves keeping track of money coming in, sending invoices, and making sure customers pay what they owe on time.

3. Staying on top of taxes

This involves calculating and paying the correct taxes, claiming business expenses to reduce tax liability, and following tax rules.

Sometimes, bookkeeping involves added tasks. For example, if you have staff, it might include handling payroll, which covers paying employee salaries or wages and related taxes like PAYE. Some businesses wrap payroll into their regular bookkeeping routine, while others have dedicated payroll teams.

Basic bookkeeping for small businesses

Now that we’ve covered what a bookkeeping routine involves, let’s explore how to set one up. The first step is to choose an accounting method and organise your financial records.

Choose an accounting method

There are two primary accounting methods used by businesses:

• Accrual accounting

• Cash accounting

Accrual accounting

This method records income and expenses when a sale is made or an invoice is issued, even if money hasn't changed hands yet. It’s the traditional approach and can give you a better view of your business finances. It’s often used by bigger businesses or those that offer credit to customers.

Cash accounting

This is the simpler approach, where you record income and expenses only when cash actually changes hands. It’s a straightforward way to track your cash flow.

What is the best accounting method for your small business?

In April 2024, cash basis accounting became the default for sole traders and partnerships with a turnover of £150,000 or less per year. If you prefer accrual accounting, you'll need to opt out. If you have multiple businesses, they all must use cash-based accounting, as long as the combined turnover is below £150,000.

If your business grows beyond £150,000 but stays under £300,000 in a tax year, you can stick with cash accounting. But if you go over £300,000, you'll need to switch to accrual accounting for the next tax return. Note that limited companies and limited liability partnerships can’t use the cash accounting method.

With this in mind, if your business is small and you like things simple, cash accounting is probably your best bet. But if you have a bigger business, deal with credit, or need a more detailed view of your finances, accrual accounting might be better.

Basic bookkeeping records

No matter which accounting method you choose, basic bookkeeping records include:

• Cashbook

• Sales ledger

• Purchase ledger

Cashbook

A cashbook is where you record all cash transactions, including daily sales and expenses. This record offers an overview of your cash flow, allowing you to monitor your business's financial activity.

For example, if you own a busy retail store, your cashbook will list every cash and card transaction made during the day, including sales from cash registers and any card readers you use, giving you a clear view of your daily revenue.

This record also captures cash-based expenses, such as petty cash withdrawals or small purchases, helping you keep track of spending and spot any inconsistencies.

Sales ledger

The sales ledger tracks all sales transactions, regardless of how they are paid – whether it be cash, card, through online payment links, or on credit. It’s essential for managing accounts receivable, helping you keep tabs on who owes you money and when payments are due.

Consider a small manufacturing business. The sales ledger includes every sale made to customers, from single orders to bulk purchases. This assists in managing the billing process, enabling you to follow up on overdue invoices.

An organised sales ledger can also help when you’re devising customer acquisition strategies. By analysing sales data, you can see which products or services attract the most interest and which customer segments are driving revenue.

This information can guide your marketing strategies and help you focus on attracting new customers.

Purchase ledger

A purchase ledger records all purchases made by your business, such as supplies, materials, and other expenses. This ledger is essential for managing accounts payable, ensuring you pay vendors on time, track your business’s spending, and support a healthy operating cash flow.

In a small restaurant, for instance, the purchase ledger would list the cost of food supplies, cleaning products, and other essentials. Keeping an organised purchase ledger helps you know when payments are due, allowing you to keep good relationships with suppliers and avoid late fees.

The purchase ledger is also helpful for budgeting and controlling costs. By checking your outgoings, you can make smarter decisions about where to cut costs or invest more. This insight can be applied to both small business ideas and larger ventures, offering a practical way to manage finances effectively.

Do you need a bookkeeper for your small business?

Whether you need a bookkeeper depends on the complexity of your financial records and how comfortable you are with managing them. If you're asking, “Do I need a bookkeeper for my small business?”, it’s worth considering your options. There are three main approaches to choose from:

• DIY bookkeeping

• Hiring a bookkeeper

• Accounting and bookkeeping services

Do-it-yourself bookkeeping for small businesses

Many small business owners do their own books, especially in the early days of running a business. For some, this approach works well, particularly when financial transactions are straightforward.

For example, if you’re a home-based freelance writer with a few long-term clients and only a handful of invoices to manage each month, you might find it fairly easy to take on the side role of bookkeeper for small business. The DIY approach could be a practical long-term option, requiring minimal effort and outlay.

On the other hand, if you're setting up in the food and drink industry, perhaps by opening a new café, bookkeeping can quickly become complex. You'll likely deal with many daily transactions, a variety of suppliers, and a highly diverse range of small business expenses.

How to learn bookkeeping for small business success

If you want to know how to do bookkeeping for a small business or refresh existing skills, you have a few options. Free online courses or tutorials can be a good starting point, allowing you to get to grips with bookkeeping basics at your own pace.

Bookkeeping software for small business entrepreneurs can be another good resource. These often offer guidance on how to keep bookkeeping records for a small business, making the process easier to master.

If you’re a hands-on learner, you could also look into local classes or workshops. They offer a structured approach and the opportunity to interact with instructors and other entrepreneurs, creating small business networking opportunities that can be valuable for sharing tips and learning from others’ experiences.

Additionally, some professional accounting services offer one-to-one training and support, which can be ideal if you’re looking for personalised tips on how to set up bookkeeping for small business ventures.

Hiring a bookkeeper for your small business

For businesses with lots of transactions, hiring a bookkeeper might be wise. Adding a bookkeeper to your team can ensure accurate handling of inventory transactions, sales reports, tax filings, and payroll, allowing you to focus on other important tasks like how to get clients and how to make extra money from your enterprise. 

But how much does a bookkeeper cost for a small business? It’s been estimated that the average hourly pay rate is around £12.41 an hour for 2024. Remember though, you’ll pay a bit more for bookkeepers with more experience or specialised skills, or if you’re based in a big city like London.

It’s also worth noting that the cost of recruiting a bookkeeper goes beyond an hourly wage; you’ll also need to consider other employment-related expenses like employer National Insurance and pension contributions, along with the cost of perks like paid leave and health insurance.

Accounting and bookkeeping services

Accounting and bookkeeping services for small businesses can offer a more comprehensive approach compared to hiring an individual bookkeeper. 

They can take on a range of tasks, from basic bookkeeping to tax preparation and financial advising. If you’re considering how to scale a business and want expert advice, using a service like this can be a smart move. These services tend to be flexible, offering bookkeeping packages for small businesses that can be customised to your needs. You can usually choose a mix of services based on what you require, without the need to hire full-time staff.

Accounting and bookkeeping services also help ensure you fall in line with the latest tax rules and regulations. This way, you can focus on running your business while the experts take care of the numbers. 

What’s the best way to do bookkeeping for small businesses?

The best approach to bookkeeping for your small business depends on your needs, your small business budget, and how comfortable you are with handling finances.

Some businesses find that a combined approach works best: outsourcing the more complicated work while managing other tasks in-house, perhaps with bookkeeping software for small business.

For example, you might choose to personally manage daily cash transactions and basic record-keeping but leave tax preparation and understanding how to do a payroll to a professional. This mixed approach allows you to stay on top of day-to-day bookkeeping while bringing in experts for trickier tasks.

If you’re not sure where to start, you could begin with a DIY approach and then switch to a professional bookkeeper or accounting service as your business grows or when things get more complex.

Making Tax Digital

When choosing your business's bookkeeping approach, it’s worth giving the government's Making Tax Digital (MTD) initiative some thought. It requires businesses to keep digital records and send tax returns using approved software, aiming to improve accuracy, reduce errors, and make the tax process more efficient.

VAT-registered businesses already follow MTD rules and are automatically enrolled by HMRC. MTD will apply to self-employed people and landlords starting in:

• April 2026, if your annual business or property income exceeds £50,000

• April 2027, if it exceeds £30,000

If you have an existing business, make sure your bookkeeping software for small business meets MTD requirements. Or, if you're using paper-based records, switch to a digital system to stay compliant. Many of the best bookkeeping programs for small businesses are already MTD-ready, helping you prepare for the new standards.

If you’re in the early stages of setting up a limited company or sole proprietorship, it’s a good idea to use approved bookkeeping software or accounting tools for small businesses from the beginning (or ensure your tax adviser does). This way, you’re ready for MTD when it hits, avoiding any last-minute rush to comply.

Why is bookkeeping important for a small business?

Diligent bookkeeping for small businesses offers an impressive lineup of benefits. A well-planned routine can help you to:

• Keep tabs on cash flow

• Be tax ready

• Secure loans and credit

• Reduce risk of fraud and errors

• Grow your business

Keep tabs on cash flow

Keeping track of cash flow helps you manage everyday finances and avoid cash shortages. Bookkeeping comes in handy here – while it doesn’t produce a cash flow statement, it gives you the numbers you need to create one.

Cash flow statements list your income and expenses over a specific period, helping you find patterns and prepare for the future. This insight can be useful in various scenarios, like finding trends in customer spending and seeing when your business is busiest.

This can inform your strategies on different aspects of business operations, including how to price products and when to introduce a customer loyalty programme to boost sales at slower times. Effective bookkeeping can also guide your marketing strategy for small business, helping you decide when you have the budget for promotions or advertising without affecting your cash flow.

Be tax ready

Whether you’re setting up a business on the high street or planning how to start a business from home, you’ll need to deal with taxes at some point. Robust bookkeeping can make all the difference to your experience.

By keeping detailed records, you can stay on top of a range of tax requirements, from VAT and business rates to end-of-year filings. This makes tax-related tasks easier and helps ensure you file accurate returns.

Proper bookkeeping also allows you to track business expenses for tax purposes and meet HMRC deadlines without worrying about tax investigations, fines, or last-minute scrambles. By staying organised, you'll have everything you need when tax time arrives, reducing stress and keeping your business sweet with the taxman.

Secure loans and credit

If you’re figuring out how to start a business with limited funds or need a cash advance to boost your working capital, bookkeeping is crucial for getting loans and credit. Lenders and suppliers need to see solid financial records before they trust you with money.

Good bookkeeping is also handy if you're exploring small business crowdfunding. It helps with how to write a business plan and create cash flow forecasts that attract support. When potential investors see that you have a firm grip on your finances, they're more likely to contribute to your campaign.

Overall, good bookkeeping can improve your chances of getting funding, whether through traditional loans, credit, or crowdfunding. It builds trust and shows that your business is well-managed.

Reduce risk of fraud and errors

Solid bookkeeping assists with small business risk management, helping you to catch problems early. By recording every transaction, you can spot issues like double payments, unauthorised spending, or missing expenses before they turn into big issues.

Good bookkeeping also reduces the risk of internal fraud and fosters a better workplace culture. When you keep detailed records, you can create a transparent system that encourages accountability and trust among employees. This makes it easier to find and fix inconsistencies, contributing to a more honest and positive working environment.

You can rely on consistent bookkeeping to help you avoid accounting mistakes too, ensuring your financial statements are accurate. This precision is important not only for daily operations but also for long-term planning and compliance with regulations. Focusing on precise bookkeeping helps build a strong foundation for your business.

Grow your business

Bookkeeping can be a powerful tool for growing your business. It provides insights into which areas of your business are most profitable and how you can allocate resources most effectively.

Accurate records can therefore allow you to explore low cost business ideas, such as online business ideas and other growth opportunities with confidence. The data from your bookkeeping records can also support customer retention by showing you which customers are the most valuable, helping you focus on keeping them engaged.

Bookkeeping tips for small businesses

Using bookkeeping software for small business isn’t the only way to save time and effort. Here are five more tips to make bookkeeping simpler and more straightforward.

Organise your records

Keeping your records organised is a must for effective bookkeeping. Create a filing system that separates receipts, invoices, and other financial documents by category or date. This approach makes it easier to track income and expenses when filing tax returns or preparing financial statements.

If you're running a hospitality business, for example, you could organise records by food supplies, beverage purchases, and equipment maintenance.

If you outsource bookkeeping, having well-organised records makes the job easier for professionals, which can save you money on bookkeeping or accounting fees.

Track your inventory

If you sell products, tracking your inventory is another essential step for effective bookkeeping. 

It helps you know what you have in stock, when to reorder, and how much inventory is tied up in unsold goods. By keeping tabs on your inventory, you can manage the cost of goods sold (COGS) and maintain healthy profit margins.

Let’s say you own a craft store. Keeping track of inventory means updating your records regularly as new products arrive and old ones are sold. This helps you avoid overstocking or running out of popular items, which can affect customer satisfaction and business growth.

Maintaining a clear view of your inventory allows you to make better business decisions, reduce waste, and increase profits. If you’re considering ideas for second income streams for your business, tracking inventory can help you identify new products or services worth adding to your lineup.

Set aside time for bookkeeping

Bookkeeping can quickly become overwhelming if you let it pile up. Set aside regular time to keep your books updated, whether it’s weekly, bi-weekly, or monthly. This simple practice helps you stay on top of your financial records and avoid mistakes that can happen when you try to do it all at once.

If you’re a restaurant owner, for example, you could schedule time each week to update the purchase ledger with food orders and track daily sales in the cashbook.

Reconcile transactions

Regularly reconciling your business records with bank statements is a smart way to ensure accuracy. It involves comparing your internal financial records to your bank statements to make sure everything matches. This practice helps identify errors, like incorrect entries or double payments, and can prevent fraud by catching suspicious transactions early on.

Reconciling transactions is also helpful when conducting a SWOT analysis for small businesses. It allows you to spot financial weaknesses, such as cash shortages or unrecorded expenses, and improve your net cash flow.

By reconciling regularly, you can keep your records on point, finances in check, and get a clear picture of your business's financial health.

Back up your data regularly

Losing financial data can be disastrous for a small business. To avoid this, always back up your records to prevent data loss from hardware failure, software issues, or cyber attacks. 

It may be a good idea to use cloud-storage solutions like Dropbox or Google Docs when it comes to storing your data. As well as making your business files easily accessible to you from any location, it also enhances small business cyber security measures by ensuring your data is recoverable if you’re targeted by hackers.

Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.