Over the last several weeks, we have been going through our Cash Flow series. However, this week we will take a break from the series. We will focus on two key financial habits business owners need to adopt, to help make sense of their finances. Mastering these two financial habits will go a long way to making it easier to get an accurate picture of how your business is performing, ensure you are being legally compliant and allowing you to make well-informed decisions to grow your business.
1. Record Keeping
The first of the financial habits is – make sure you regularly input all invoices and expenses into your accounting software. Alternatively, send the information to your accountant for them to do it if that’s part of your package. As a business owner, you should be setting aside time each week to focus on the financial side of your business. A big part of that is making sure you are keeping accurate records. This means accurately recording all invoices and expenses (with receipts). It is a legal requirement to keep all receipts for 7 years. However, the UK government has plans to make it a requirement to keep all receipts stored securely online. So it’s a good idea to get into good habits now so you are ready for it.
In the past, this used to be quite an onerous task, but advances in technology over the past few years have made it so much simpler, easier and quicker to do. How? The integration of cloud accounting software and mobile apps. Let’s take the example of Quickbooks (the same applies to other accounting software like Xero). If you’re using Quickbooks as the accounting software, it is very important to download the Quickbooks app to your mobile. There are many things you can do with the app – but for now, we will focus on record keeping.
Let’s say you’ve just been for a meal at a restaurant with a customer. You want to record the expense there and then (or during your weekly finance focus time). All you need to do is log into the Quickbooks app, choose the ‘expense’ option, take a quick photo of the receipt and fill in a couple of details. It takes about 30 seconds and you’re done. The receipt is now stored online, and the expense is now recorded in your Quickbooks software. That’s all you need to do. Quick and Easy!
What if you want to send an invoice or create a new one for a customer there and then? Again, this can be done quickly and easily through the Quickbooks app. Simply log in, choose ‘invoice’ and fill in a few details. Then email it to the customer there and then. Again, a 30-second job. Record keeping has never been so simple!
You can create expenses and invoices quickly and easily in Quickbooks Online (or any other accounting software) too. However, we recommend using the mobile app for creating expenses because you can upload the receipt simply by taking photos. It saves you time and keeps HMRC happy too.
Below is a video explaining how to use the Quickbooks app –
2. Keep Business and Personal Separate
We get it, the rules on what you can and can’t claim through your business are complicated. Trying to keep up with these complications is what keeps us Accountants in a job. However, the second of the key financial habits will help make it a little simpler for yourself. It is this – Don’t put personal expenses through your business! Have a separate business account to your personal account.
But let’s start at the beginning. What is an expense? Why should you claim expenses? Essentially, expenses are what you spend out of your business. They are your running costs. They could be the cost of stock, the cost of marketing, the cost of fuel, office and stationery costs or any other cost you have in the day to day running of your business.
Why record your expenses? There are many reasons – they let you see how much profit you are really making in your business. They let you see how much you’re spending on certain types of expenses so you can find ways to cut costs where needed. They help you determine your cash flow – how much is going out of your business each month. And, quite importantly, they also affect how much tax you pay. When you pay corporation tax, the amount is based on your profits (i.e. all the money you bring in, minus all the money that goes out). So if you don’t want a massive tax bill, it is important to keep a record of any expenses.
But how do you determine what can and can’t be claimed? Well, the first thing to do is to use common sense – was it something that is clearly a business related cost e.g. did you buy that stamp to send a letter to a client? That was used for your business so claim it. Did you drive the car to a meeting with a customer? That was used for your business so you can claim the mileage or the fuel.
Then there is the other side of the coin – some things are clearly NOT a business cost – that holiday to Ibiza with your girlfriend – yeah you cannot claim that. Or your monthly Sky TV bill or supermarket shop – nope, you can’t get away with claiming that either. These things are quite obvious. If you follow our advice to have separate bank accounts for business and personal use, that will go a long way to reminding you each time you take out your bank cards while paying for something to think – is this a business or a personal cost. And stick to the rule – no personal expenses through the business account. Ever!
But sometimes things aren’t so simple – like what if you work from home – can you claim any rent costs or utility bills? What about telephone bills? Or what if you are driving a long distance to see a client and need to stop for lunch on the way – is that personal or business? That is what you pay your accountant for – to give you the advice on what you can claim or not claim in these grey areas (and if you don’t have an accountant, we know a pretty good firm who can help 😉 ).
There’s another advantage in keeping business and personal expenses to separate accounts – you accountant won’t be hounding you with lots of questions about the transactions going through your bank all the time. Your accountant provides services for you like Bank Reconciliations and producing your End of Year Accounts. During these processes, the accountant looks at what has gone through your bank and tries to match it to the transactions recorded by your business. If they’re unsure of what something is, they’ll need to ask you in order to correctly allocate it to the right type of spending. And different types of spending may or may not contribute towards reducing your tax bills. To save time emailing and answering questions, as well as to save money on your tax bills, it is always best to keep your business and personal expenses in separate accounts and not to mix them up.
Finally, if you want to get an accurate picture of what you are spending in your business, how much profit you are really making and allow you to make good decisions with reliable information, having a lot of expenses in there that shouldn’t be there (and won’t ultimately be allowed to be claimed in the end of year accounts) is going to mean your figures are way out. Not only that, but if HMRC decide you need to have an inspection, it’s going to look pretty strange to them – and that’s not a good thing.
So there we go, two essential financial habits to get into when it comes to managing your business – keep good records, and keep business and personal spending separate.
- If you haven’t already set aside a time to deal with your business finances each week, decide on and diarise a time now. Start creating invoices and expenses on a weekly basis.
- Download the app for your accounting software and check you know how to use it to create invoices and expenses.
- Set up a business bank account if you don’t already have one.
- Make a commitment to yourself that you won’t ever claim any obviously personal expenses through your business account again (nor obvious business ones through your personal account)
- Get an accountant – so you can get the advice you need on claiming any expenses you are unsure of.
Find Out More
We will return next time to our Cash Flow series and look at the question of minimising expenses in your business. To keep up to date with the series, don’t forget to subscribe in the pop-up box.
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