Bookkeeping and accounting probably weren’t at the top of your list when you were thinking of reasons to start your own business, but nevertheless, managing your accounts is a huge part of being a successful business owner.
New businesses can often struggle with cash flow issues and poor financial management, which is why it’s imperative that you take accounting seriously, no matter how boring it can seem compared to the more creative parts of your business.
Not only can getting to grips with accounting help you manage your finances better, but it can also help you apply for business loans, as banks want to be confident that you can monitor your business’s cash flow.
But where should you start if you have absolutely no experience with accounting? Here are the most important accounting skills you should learn as a new business owner.
1. Basic Bookkeeping
Diligently recording all of your transactions certainly doesn’t sound fun, but bookkeeping is a vital part of running a business. If you don’t know where your money is going and coming from, this will make it difficult for you to make sound business decisions.
But what’s stopping you from just hiring an accountant and letting them do all of your bookkeeping? Hiring an accountant is certainly an option, as long as you have the necessary funds, but overall it’s strongly recommended for new business owners to handle their own finances, at least in the beginning.
Managing your books will help you fully understand your business’s financial situation and learn how to make financial plans based on this information. This is an invaluable skill for new business owners.
When managing your finances, don’t forget to open a separate business account. This is a legal requirement for limited companies, but many self-employed business owners make the mistake of mixing personal and business finances.
It will be much easier for you to manage and record your business’s transactions if they’re entirely separate from your personal finances.
2. Calculating Taxes
One of the biggest challenges for new business owners who were previously employed is learning how to file tax returns. Employees’ taxes are automatically deducted via the PAYE system, but if you set up your own business, you’ll have to calculate and pay your taxes by yourself.
Self-employed business owners should use the Self-Assessment system to pay income tax on their earnings. Those who own a limited company will have to pay corporation tax in addition to income tax on their personal income. Furthermore, if your business is registered for VAT, you’ll also have to complete a VAT return.
Setting aside a percentage of your income each month is a great way to prepare for the tax deadline in advance. This means you won’t be struggling for cash at the last minute and potentially risking a late payment penalty.
You can also avoid penalties by staying up-to-date with changes to tax and accounting regulations. For example, the government’s Making Tax Digital (MTD) initiative is currently being rolled out, and those who don’t comply with MTD rules could face fines. To learn more, read this in depth article on Making Tax Digital.
3. Tracking Your Cash Flow
Cash flow, which describes the ‘flow’ of money through your business from customers to suppliers, is one of the most important metrics you need to measure as a business owner. In fact, cash flow problems are one of the leading factors contributing to small businesses going bust.
Doing the bookkeeping by yourself will help you identify the cash flows within your business, which will then inform your financial decisions going forward. Learning how to create a cash flow forecast will also be extremely helpful when making these decisions.
4. Monitoring Your Financial Health
Overall, monitoring your business’s financial health is a key skill to learn. This involves managing the books, tracking cash flows, forecasting finances and much more.
To monitor your business’s financial health, one of the most important documents you need to create is a balance sheet. In this document, your assets are listed on the left and your liabilities are listed on the right.
Assets include your cash and also anything you own (such as equipment), whereas liabilities consist of what you owe to others (e.g., money owed to suppliers and debts from business loans).
Naturally, you want your assets to outweigh your liabilities. Creating a balance sheet will help you determine the financial health of your business and prompt you to take action if the value of your assets falls.
5. Financial Forecasting
Not only can accounting help you ascertain the current financial position of your business, but it can also help you predict your future finances based on potential scenarios. This is known as financial forecasting.
To forecast your future revenue, growth and profit, you need to look at both your past performance and current trends in your industry. With these financial forecasts, you can then set appropriate goals for your business and allocate resources accordingly.
6. Choosing Accounting Software
If you need help with creating accurate financial projections quickly and easily, then you should definitely consider getting accounting software.
Instead of performing all the calculations yourself, you can simply input your data into the system and let it create financial reports and graphs for you. This can save you a lot of time and effort.
In addition to creating reports, accounting software can perform a wide variety of other functions, helping you keep on top of your finances and eliminate typical accounting errors.
For example, accounting software can help you calculate taxes, record transactions, generate invoices, reconcile bank statements and much more.
Managing your finances by yourself is a great way to get to know your business as a new entrepreneur, but this doesn’t mean you can’t use helpful accounting tools to lighten your workload.
7. Automating Accounting Tasks
The right accounting software will also fully automate certain accounting tasks, freeing up your schedule to focus on other areas of your business.
For example, modern cloud-based accounting software can automate payroll, allow you to accept payments on your smartphone, automatically generate invoices and let you scan receipts to create digital copies in your app.
Although high-quality accounting systems require a subscription, this investment is definitely worth it if you need to free up the time you’re currently spending on accounting-related administrative tasks. To reduce the cost, there are often basic plans that are suited to small businesses.
8. Knowing When To Outsource
When you’re just starting out, managing your own accounts is the best way to get an understanding of your business’s finances. Since your business will be small at this point, it also shouldn’t be too overwhelming to handle the accounting and bookkeeping yourself.
However, as your business grows, managing the finances could become a large and increasingly complex task. This is especially true if you start hiring employees, as you’ll then have to handle payroll and your employees’ tax codes.
Knowing when to finally outsource your accounting to a professional accountant is a great skill to have. By understanding your own strengths and limitations, you’ll be able to determine the best time to use your resources to hire an accountant.
Although this could be costly, it’s a worthwhile investment if your accounting is starting to take over your daily tasks or you’re worried about making mistakes.
Accounting For Beginners
Bookkeeping and accounting may not be glamorous, but they’re a crucial part of your business’s success. Indeed, those who don’t pay attention to their business’s finances could easily find themselves making poor long-term business decisions.
However, accounting can be difficult for those who aren’t usually comfortable with working with numbers. To learn more about accounting, make sure you check out online courses to get some extra experience.