Every entrepreneur has to deal with the challenge of handling the accounting for their entity. However, not every entrepreneur needs the same thing when it comes to their accounting needs. Depending on the industry, bookkeeping can be very straight forward and as simple as entering in bank transactions where other industries rely on much more detail. In later posts we will discuss the accounting requirements for specific industries and business needs, however, in this article we will stick to more general aspects of evaluating your business.
The first step in evaluating what you need is to get a better understanding of what goes into bookkeeping and what your expectations are. I have met too many people who make assumptions about accounting and then make decisions that our based on misconceptions; do some research. The first thing I always tell people is you will pay for what you get. Bookkeeping is like anything else there are a lot of people claiming they are experts and few are really worth it. Entrepreneurs need to know what questions to ask when interviewing accountants.
The next step is understanding your business model and industry. As I have mentioned I will be going into detail about different industries and models in later posts. Your industry and model dictates many aspects of your business and your bookkeeping is one of those aspects. Lets say you are a retail location and you need a POS, a shift management system, and commission tracking. If you do not plan well you will end up with three completely different systems that do not integrate and will end up costing you money in the long run.
Evaluating your expectations is very important as well. There are two sets of expectations; the detail of information you require and the investment you’re willing to dedicate to your bookkeeping. You can not expect to have CFO level work at administrative prices. The more detailed bookkeeping and accuracy you require the more qualified person will be necessary.
Where does all this leave you? An educated choice that is well thought out will give the best end result. Entrepreneurs are faced with two options; hiring an employee or a Business Bookkeeping Service provider. Even though outsourcing is becoming a more popular choice there is still quite a bit of hesitation when coming down to making that decision. Hiring an employee is always the first thought when considering this need. However, a quality employee that you can rely on can be very costly.
Even though these options seem limiting if you’re creative you can find the right fit for you. I have seen business owner manage a multi-person bookkeeping department, outsource the entire department, outsource lower level tasks, or even outsource the management of the department. The ability to choose and mesh these different solutions gives you an avenue to meet your goals.
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A business has to prepare and show its financial results. The size of your business and its financial success will determine where you have to file your accounts and what certain formats to have to comply with. If your business is a limited company, plc or LLP then you will need to file accounts with Companies House. Only companies with a certain turnover figure or above need to have their accounts audited. The turnover figure is not the same as the profit figure. However, if you are a sole trader or partnership, you do not have to submit accounts to Companies House (the agency who monitor and register businesses under the current Government regulations). H M Revenue & Customs do require that partnerships and sole traders do report and follow their legislation and therefore have to report their profit or loss to them, the same as limited companies, plc’s and LLP’s have to. To be in a position to report to the Revenue and complete their required returns, you will need to have basic accounts prepared which will include a profit and loss account. This can then be sent with your tax return to support any entries on your tax return. Profit and loss accounts are also used by banks and financial companies if you are applying for any form of credit and they normally would like to see your last three years accounts and/or tax returns. What does a profit and loss account show?
The profit and loss account brings together your business’ financial transactions and summarises them into useful categories which can be reviewed. They also summarise these to show if a profit or loss has been made. They will cover a given time period, your accounting period, which is usually a year but can at times be longer or shorter, for example when you are just starting or ceasing a business. You can create your own profit and loss account. To start with you will want to simply split it into two halves with the top half being your income and the bottom half showing your expenditure.
The income figures are then further analysed by showing your turnover figure and other income. Turnover or business sales is the total amount of your product sales or services in your financial year or period. How you record this information will vary depending on the type and size of your business but you could use a simple listing in a book, or a computer spreadsheet or a computer software program.
As well as the business’ main income, it may also receive income from any property which it owns, sale of any assets including equipment, any additional cash or bank loans and bank interest and this is all classed as other income.
Business expenses which are spent in connection with the production or creation of your product of service you sell are called cost of sales. Business expenses are the costs incurred enabling you to carry out your business such as rent, travel and motor expenses, administration and stationery, interest and advertising. Any expenses relating to any equipment your business has or uses is classified under cost of equipment. This can include vehicles and any equipment which is leased or bought on hire purchase. Only expenditure relating to the business should be included in your profit and loss account and any personal expenditure should be taken out from the figures in your accounts.
When choosing your accounting period being a self employed or a partnership it is easier if you produce your accounts on a yearly basis with the year ending either on 31 March or 5 April. This will mean your accounts will fall in line with the information and figures needed for your tax return and will make the process of completing your tax return easier. If your year end is out of sync with these dates, you can produce a set of accounts for a specific date period and then start again with yearly accounts. By choosing a new date for your accounts to run too which might be more beneficial, then you can produce a set of accounts to that month end date from your year end and produce a period set of accounts instead of yearly accounts. These accounts will cover a set number of months. You will now have a new year end date and will produce yearly accounts from this date forward.
You must ensure that you keep all receipts and records supporting your income and expenditure. This needs to be retained for a minimum of six years.
You should now be in a position to understand any profit and loss accounts that you review and understand the figures contained within them. Many bookkeepers, financial and administrative assistants understanding profit and loss accounts are women bringing a range of experience and glamour to a business.
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