7 Tips for Improving the Accuracy of Your Accounting for Small Businesses in the UK
It is easy to push your accounting duties to one side while you focus on the day-to-day running of the business. Invoices are either lost or stored here, there, and everywhere, invoices are haphazardly saved somewhere on your computer (at least, you think they’re all saved) and you’re so busy planning tomorrow’s important client meeting that you simply don’t have the time to focus on big-picture financial planning.
This is understandable. However, that doesn’t mean that it’s the ideal way to operate. Read on for tips or if you need an experienced accountant in the UK to help you sort out your books quickly, drop us a chat
By maintaining accounting accuracy all year round—in other words, keeping detailed and orderly records—you’ll be able to:
Why check accuracy of accounts?
- Stay compliant with HMRC;
- Make the most out of your allowable expenses;
- Legally reduce your tax obligations;
- Prepare end-of-year financial statements in no time at all;
- Plan your business’s path to a prosperous future;
- Ensure more accurate books which means more accurate data to make important business decisions.
- Run your business with more confidence.
Throughout this article, we’ll explore the five must-know tips to help UK companies improve their accounting accuracy going forward.
1. Identify Revenue Streams
Revenue streams are as simple as they sound—they’re essentially the sources of your business’s revenue. Your company may well have a few different revenue streams, such as:
- Transaction-based revenue
John sells ice creams and lemonade from his stall at Borough Market
- Project revenue
Emma has just begun building a brand new conservatory for one of her clients.
- Service revenue
Mark earns a living as a masseuse.
- Recurring revenue
Sally rents out the ground floor of her office space to another business.
You might be thinking: “Okay, great—but why is it so important to identify revenue streams?”. Well, revenue streams are at the heart of your business—and so they’re also at the heart of your accounting duties.
If you want to send HMRC accurate financial statements then you need to first identify all your revenue streams. In order to pay the correct amount of tax (and avoid penalties and fines), you need to make sure that you miss nothing off your reports.
If you want to plan for the future and identify valuable opportunities for growth, you’ll need to be aware of your current value streams.
In short, identifying—and appropriately managing—your multiple revenue streams is key to everything that your business does. Staying on top of your revenue streams is the first step to running a profitable enterprise.
2. Keep Track of Invoices and Receipts
Invoices and receipts are the financial lifeblood of your organisation. Keeping track of it helps you reduce the taxes you pay, and enables you to claim allowable deductions.
What are the benefits of keeping track of invoices and receipts?
1. Helps you reduce taxes
You’ll be able to accurately work out how much you owe, how much you’re owed, when you completed a project, how much you’ve spent, and on what. Not only is this important in the context of business planning, but it’s also a key factor in ensuring accounting accuracy. It helps you reduce your VAT and corporation tax. If you have a valid invoice then you can claim it as input VAT and pay less VAT to HMRC. Even if you have paid for something and the transaction is showing in your account, without the actual invoice you are not allowed to claim VAT back.
2. Claim all allowable deductions
Keeping track of invoices and receipts will help you claim all allowable deductions, meaning you won’t unnecessarily pay more tax than you ought to. You’ll remain compliant and won’t accidentally forget to include certain income on your financial statement (which is obviously frowned upon by HMRC). What’s more, you’ll maintain an accurate birds-eye view over your revenue and spendings—allowing you to identify your most valuable clients, biggest outgoings, unnecessary expenses, etc.
3. Save time
Lastly, it will save you time and frustrations (agh!) when you set up a system early on to keep track of your invoices.
How to Keep Track of Invoices
1. Use accounting software that is cloud-based, allows for multiple-users on your team to use it, comfortable for you to use daily, and stores data securely.
2. Follow best invoicing practices like: Making sure the description is specific and detailed as possible, double checking that the due dates are correct, finding out the total amount of money should be accurate, check that your contact details are complete and accurate.
3. Track Deductible Expenses
The government wants to encourage businesses to flourish—after all, this is crucial for a healthy economy. As such, certain job-related expenses are tax-deductible (these are also known as allowable expenses). This means that if you pay for goods in order to keep your business running, then you’ll be able to reduce your tax bill accordingly.
Over the course of their financial year, Mohammad’s business brought in £500,000. However, it spent £150,000 on allowable expenses (including the cost of business-related travel, staff salaries, and accounting fees). This means that Mohammad’s business is only liable to pay tax on £350,000 worth of its revenue.
Tracking deductible expenses means that your business won’t unnecessarily pay too much tax. Whilst it’s always a good idea to stay in HMRC’s good books, these rules are in place for a reason—so you need to make the most out of them.
Not only will keeping track of your deductible expenses reduce your corporation tax bill, but it’ll also significantly improve your operating margins and may even help with cash-flow planning.
4. Prepare Financial Statements
Financial statements tell your business’s story over the past financial year: How much you made in any given period and on which project, the value of your business, and how much cash you have, how much you pay your employees, whether you’re in the red or the black, and much more.
How to Prepare Financial Statements of Your Company
Your financial statement comprises three key elements:
- Balance sheet: An overview of all your assets and liabilities (as well as stockholders’ equity if applicable).
Debby is preparing her private business’s balance sheets. First, she counts up her fixed assets: work computers, office furniture, warehouse machinery, and stock. Then, she looks at her current assets: how much money the company has in the bank, how much they have in the till, and how much they’re owed by clients. Finally, she considers her creditors: the cost of office rent throughout the following year, SaaS subscriptions, and how much the business will owe utility suppliers. Take the liability out of the asset and you will get your equity which is the current value of your business.
- Income statement (also known as a profit and loss statement, or P&L): A snapshot of your company’s revenues and expenses throughout the financial year. The main difference between a balance sheet and Income statement is that in an Income statement you will see how much money you made in a period compared to how much you paid out which gives you your net profit.
Dave calculates his annual revenue—in other words, the amount that his restaurant has brought in throughout the year from selling food and drinks. He then deducts all expenses: rent, the cost of purchasing ingredients, utility bills, and staff wages. Having completed this calculation, he’s now arrived at his net operating income.
To calculate his restaurant’s net profit, however, Dave also has to consider any outstanding debts and interest payments—such as the £10,000 loan from the bank to get started (a debt that’s now reached £11,200 due to interest).In this example you will see the £11,200 as a liability on your balance sheet that needs to be repaid and £11,200 as expense for having this loan as interest.
- Cash flow statement: An overview of where your company’s money came from during the financial year and how it was spent.
Beena first takes a look at her business’s operations cash flow. This includes the revenue her garage brought in (before tax) from selling cars, as well as the depreciation of older cars that she hasn’t been able to sell.
Having calculated her operations cash flow, she now looks at her investing activities. This might include things like investing in brand new computers for all her back-office staff. Finally, she includes her financing activities—for instance, her loan repayments to the bank.
Once you’ve prepared your balance sheets, income statement, and cash flow statement, you’re now ready to send off your financial statement. It’s crucial that you do this in a timely manner. According to HMRC, failure to do so can result in:
- Criminal prosecution;
- Civil penalties;
- The registrar strikes your company off from the registrar (meaning all assets become Crown property).
Quick note
A financial year isn’t exactly 12 months on the dot. If you incorporated your company on January 1st 2020, then your financial year would actually run until 31st January 2021.
If you’re a private company that’s filing its very first accounts then these are due within 21 months of the date of incorporation—and if you’re a public company, this is within 18 months of the date of incorporation.
Emma started her privately-owned construction business on January 1st 2020. Her company’s first financial statement (which covers all business activities between January 1st 2020 and January 31st 2021) is due before midnight on the 31st October 2021—in other words, 21 months from the date of incorporation.
Billy runs a publicly-owned software company that was also incorporated on January 1st 2020. His company’s first financial statement (which covers all business activities between January 1st 2020 and January 31st 2021) is due before midnight on July 31st 2021—in other words, 18 months from the date of incorporation.
Not only are financial statements a requirement, but they also allow your business to stay on top of its financial health.
5. Prepare Tax Returns
Tax can be tricky for small business owners in the UK. There are a lot of deadlines to meet and more rules to follow for each. Take note of these deadlines and the rules so that you pay the correct amount of taxes. Pay too much, you’re giving your hard-earned money away. Pay too little, and you might run into trouble.
However, if you know you’ll be elbow deep in running your business, we can help you out with that to help make tax season less stressful and less expensive.
Businesses generally have to file three main types of tax returns - VAT, Income Tax/Corporation tax, Employee-related taxes and annual accounts. Below we explain what it is and the general deadlines you should take note of:
| Type of Tax | What is it | Deadlines |
| Value Added Tax (VAT) | A tax that you add to the prices of goods and services you sell once you’ve made over £85,000 sales in the UK. Your company has to be VAT Registered. This is the most frequent threshold. It may be different if your business trades with the EU. The VAT tax rate also varies, but 20% is the standard. |
Depends. Based on the accounting period you’ve chosen: It might be every month, every quarter (3 months), or every year. |
| Annual Account | Submission of your accounts to the company house. | 12 months after your accounting period. |
| Corporation Tax | This is a tax on your profits. The higher they are, the more you pay. However there are allowable ways to reduce your taxes. | 9 months and 1 day from the end of the accounting period it covers. |
| Employee Related Taxes like PAYE, Employer and Employee National Insurance | These are calculated and collected from employee pay at every pay run. You have to file reports with the tax office declaring how much you paid your employees and how much tax you withheld. | Usually submitted to HMRC either monthly or weekly |
While you might rightly think that you have a year to get your tax returns ready, you should probably kick start the process sooner rather than later so as to pay your taxes on time, and avoid fines. We can help you bear the grunt work of keeping track of all these deadlines through automation to make the paying of taxes less stressful. Drop us a chat.
6. Seek Professional Guidance
As a small business owner you can decide to manage your business accounting on your own, or you can employ a professional accountant to help you establish your company, prepare financial papers, arrange payroll processes, file taxes and more.
A great rule of thumb to follow: if handling your business accounting starts getting in the way of completing projects for your customers, you should consider hiring an accountant. Or you might feel better working with an accountant at tax time, or to tackle questions related to your small business. Ultimately, the decision is yours.
Here’s how an accountant can help your small business:
- Identifying the best company structure to suit your requirements, from a sole proprietorship to a corporation.
- Preparing the financial documents included in your business plan
- Providing guidance on opening business bank accounts
- Managing payroll processes
- Preparing your tax returns and identifying tax breaks that apply to your business
- Close your books at the end of the year and generate financial reports
- Help you navigate a tax audit, if that issue ever occurs
If you do decide to work with an accountant, it’s up to you how many of your financial tasks to hand over. You might just prefer to consult an accountant while you’re starting your business, or perhaps you’d wish to hand over all your financial records at tax time so they can file your tax return.
7. Automate Whenever You Can
Depending on the size and nature of your industry, you may be able to use accounting software that’s already available out there, or customize your software. We’re always here to help you with using Xero, which is our software partner.
Software is now simplifying the tedious process of entering data into spreadsheets and manually reconciling figures. You can use a cloud-based accounting software which complements your digital business. If you already do all your banking online as well, using software will sync your business bank account with the cloud software, and do so securely.
Run your business with confidence
By implementing our five top tips listed above, you’ll stay compliant, build a strong relationship with HMRC, pay the correct amount of tax, and maintain accounting accuracy at all times. Stay on top of your business’s financial health and make next year your most profitable to date.
Get in touch to find out more about how East river helps UK businesses of all shapes and sizes stay on top of their accounting work. If you’re wondering how to do accounting for e-commerce companies, we can help to. Simply drop us a chat.