There is a lot of freedom that comes with self-employment—being your own boss, flexible work hours, and commanding higher rates. However, this career path is a double-edged sword.
On top of all the hats you need to wear—the operations manager, the HR, the business developer, and your own motivational coach—you also need to work on your books. Otherwise, you run the risk of negative cash flows, government penalties, or financial loss.
Here’s a fantastic guide to good bookkeeping practice from Nick Brown, director of UK based accountancy firm Plummer Parsons:
1. Keep All Financial Documents
It’s easy to underestimate the need to keep all financial documents down to the smallest receipt. However, your business purchases over the course of the tax year can reduce your taxable profit—given, of course, that you prove these were essential to your business. For instance, you can declare your laptop or car as a business expense if the HMRC can cross reference them.
But for this to be possible, there are a number of records that you need to keep track:
- Bank statements
- Sales and purchase invoices
- Sales and purchase receipts
- Any pending invoices
- Remittance advice
- VAT records
Keep these records on paper or have digital copies. Then, file them chronologically for easier referencing.
On top of tax deductions, good record keeping will help you earn the trust of banks in case of loans. You would also be able to prove to the HMRC (should they look into your business) that you pay proper taxes, since you have all the facts and figures needed.
2. Separate Personal with Business Assets
It’s always best to open new accounts (e.g. bank, credit cards) for all business transactions.
This would allow you to know how much money your business currently has, budget accurately, and come up with proper costing. When tax season rolls in, it would be easier to track all business activities, since all your personal expenses would not be confused with business expenses.
3. Track Income, Expenses, and Net Income
If you don’t know how much money is coming in or going out, you may one day find yourself at the brink of bankruptcy.
Here are some tips to avoid that:
- Keep track of all the money that’s coming in. In your case, your revenue would mostly from invoices settled by your clients.
- Expenses include anything that’s bought for your business. This includes office rent, supplies, health insurance, mileage, etc.
- Net income. To calculate your net income, deduct your expenses from your revenue. You’ll then see how much money you’re earning and if you’re actually profiting.
4. Make Sure Invoices Are Settled
Compared to full-time employees, you won’t have regular pay checks coming in bi-monthly. To make sure that your business has consistent cash flow, follow up with clients that have yet to settle your invoices.
Remember: your livelihood and business operations depend on cash flow. Have hard copies of settled invoices or upload them in a private cloud storage in case your computer fails you.
5. Develop a Routine
Flexible work hours do not always translate to having enough time for all aspects of the business. However, putting off compiling paperwork would only end up being a bigger problem once tax seasons starts.
To avoid this, set aside half an hour every week to look at and update your books. Develop this routine, so you won’t end up scrambling once you find out that the deadline is only a few days away.
6. Invest In Accounting Software
Automation will help make bookkeeping easy for you. For one, you’ll be able to get an overview of your current financial standing, minimise any errors, prepare and send out invoices quickly, and ultimately, save you time that you can invest in other activities.
Secondly, Making Tax Digital requires the use of accounting software to modernise the country’s tax system, remove inaccuracies, and make it more transparent. The right accounting software should, however, cater to your business’ specific needs.
The government recently released a list of MTD-compliant software suppliers, including Quickbooks and Xero.
7. Know Your Deadlines
UK’s tax year starts on April 6 until April 5 of the following year.
For the remainder of tax year 2018/2019, keep track of the following deadlines:
- October 5 –Register for Self Assessment as self-employed or sole trader
- October 31 (midnight) –Paper tax returns (missing this would mean penalties even if you don’t have to pay for any tax)
- January 31, 2019 (midnight) –Online tax returns (missing this would mean penalties even if you don’t have to pay for any tax or if you’ve already paid all the tax you owe)
- January 31, 2019 (midnight) – Pay for the tax that you owe (amending any incorrect information in the last 12 months)
8. Educate Yourself In Finances And Taxation
Even if you hire someone to iron out your finances, at the end of the day, you’re still running the show. Knowledge and information is vital to making the right financial decision.
You don’t need to get formally educated on accounting. There are plenty of guides available online, often made for those who are just starting out in their self-employed journey.
A business with no system is a bad business. This rings especially true for your finances, which is the lifeblood of your business’ operations. Develop the habit of regularly documenting your income/expenses and learning more about proper bookkeeping.