Receipts and Invoices:
When you start your business you will start spending money before you make any. That is a fact for all but very few businesses. For several reasons you will need to keep a record of those outgoings and keep track of all of your receipts. You will need to keep them to support the tax computations you (or your accountant) will make at the end of the business year and you will need them to refer to should you have payment queries or you need to contact your suppliers. You really must get organised from the start. The old fashioned idea of collecting your invoices and receipts in a shoebox is a good analogy to start with! If you are going to keep your own ‘books of account’, this is a good way to start... at least you can find them all in one place! Alternatively, you could file these and divide them up either a) alphabetically: so you can find what you are paying by supplier name or b) by month: so you can input (and later trace) them to your accounts on a month by month basis. You have now got a system for storing your paperwork. As you grow, you can develop more sophisticated systems with the help of a bookkeeper. For example, you may use a numbering system that is stamped onto the incoming document and logged on your ledger. In that way, you build your filing system and you trace those documents using the sequential numbers stamped onto them.
When you start your business you will start spending money before you make any. That is a fact for all but very few businesses. For several reasons you will need to keep a record of those outgoings and keep track of all of your receipts. You will need to keep them to support the tax computations you (or your accountant) will make at the end of the business year and you will need them to refer to should you have payment queries or you need to contact your suppliers. You really must get organised from the start. The old fashioned idea of collecting your invoices and receipts in a shoebox is a good analogy to start with! If you are going to keep your own ‘books of account’, this is a good way to start... at least you can find them all in one place! Alternatively, you could file these and divide them up either a) alphabetically: so you can find what you are paying by supplier name or b) by month: so you can input (and later trace) them to your accounts on a month by month basis. You have now got a system for storing your paperwork. As you grow, you can develop more sophisticated systems with the help of a bookkeeper. For example, you may use a numbering system that is stamped onto the incoming document and logged on your ledger. In that way, you build your filing system and you trace those documents using the sequential numbers stamped onto them.
Ledger book, Spreadsheet
or Accounts program:
At first, for a small start-up, this is not a major consideration. If you are computer literate and have a version of Excel, you can open a new file and set up three tabs (i) Income (or Sales) (ii) Expenditure (or Costs) (iii) Summary Income & Expenditure (Profit or Loss) Statement. I have shown a screen shot example of each below. The Summary uses links to the other two pages to calculate Income less Expenditure (Sales less Costs) giving you a figure for profit or loss. You can list items in a long column or you can try to track the type of sale or type of cost by using headings across the top of the page, in columns, with the Supplier or Customer name down the left hand side, alongside the date and cheque/invoice number. For some micro businesses, an accounting ledger book is sufficient and they are more comfortable with this method. The layout is approximately the same as the spreadsheet layout shown below.
At first, for a small start-up, this is not a major consideration. If you are computer literate and have a version of Excel, you can open a new file and set up three tabs (i) Income (or Sales) (ii) Expenditure (or Costs) (iii) Summary Income & Expenditure (Profit or Loss) Statement. I have shown a screen shot example of each below. The Summary uses links to the other two pages to calculate Income less Expenditure (Sales less Costs) giving you a figure for profit or loss. You can list items in a long column or you can try to track the type of sale or type of cost by using headings across the top of the page, in columns, with the Supplier or Customer name down the left hand side, alongside the date and cheque/invoice number. For some micro businesses, an accounting ledger book is sufficient and they are more comfortable with this method. The layout is approximately the same as the spreadsheet layout shown below.
The first example is showing a suggested breakdown for
Income (or Sales).
The second example below is showing a suggested breakdown
for Expenditure (or Costs).
When you hand over your metaphorical shoebox of invoices to someone, this is an example of what they will do with them in order to produce a Summary for you for the period under review. An example of the Summary Income & Expenditure Statement is below:
If your invoices remain in the shoebox you are missing out on summaries and analysis that will positively influence you in decision-making for the future of your business. “I know what my costs are, even if they are in a shoebox. I know what I have spent”… this approach does not separate out the true costs of your product/service going forward. The figures you have in your head could well include the costs of your business cards, the deposit on your office, the cost of your website set up and your hosting costs. How you apply those costs to your product/service will greatly affect your pricing and your expectations of profit. This is exactly where a few hours with a management accountant offering decision support would be beneficial as that insight and coaching would serve you well for the future of your business.
Inevitably as your business grows, the range of
products/services you offer may become more extensive, or perhaps you may reach
the VAT threshold (currently £81,000) and you feel that you need to have more
in-depth financial analysis and greater financial control. In this case you would consider accounting software
packages. There are a number of
well-known brands out there: Sage and
Quickbooks, for example, have been very dominant in this market over many years
and traditionally have been set up on a standalone computer. But with the
growth in cloud accounting, others like Xero have risen to prominence. Entry prices for cloud based packages start
at £6 to £9 per month. Each package will have their advantages and
disadvantages and some of the features will be useful to you and easier to use whilst
some provide a Rolls Royce when a Mini will do (a common expression used by
accountants!). You may have specialist
needs such as multi-currency or stock control so you have to choose wisely, as
not all packages are equal. Of course, if you need help with choosing the right
package, the Scirum team is here to help!
Our aim in this article is to demonstrate to you that you
can get on with developing your business whilst spending very little effort setting
up and running adequate financial ‘systems’.
Always remember that sophistication comes at a price, so make sure you
cut your coat to fit the cloth but remember also that with good financial analysis
and control you can recoup those costs through improved financial management
and decision making.
The next article in this blog series on Financial Management
will look at the challenges of controlling your cash. Keep following the blog for further useful
articles on the essential aspects of financial control or follow us on Twitter
or LinkedIn. If you have any questions, just call us on 01264 860060 or send us a message. We are a
friendly bunch and happy to help and talk through any challenges you may be
facing.
Mary Proctor
Commercial Financial Controller
For more useful tips and answers to common questions from SMEs, visit www.scirum.biz or follow us on Twitter and Google+, like us on Facebook or join our LinkedIn group.
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