C4: Bookkeeping and Accounts

2. Essential Bookkeeping Tasks for Startups

Starting with good bookkeeping habits is essential for the long-term success of your CBD business. Here are the key tasks you need to carry out regularly:

2.1. Record Sales and Income

Track every sale made, whether through e-commerce platforms, retail stores, or business-to-business transactions. If you're VAT registered, ensure you record the VAT component of each sale separately.

2.2. Track Expenses

Keep detailed records of all business expenses, including stock purchases, equipment, office supplies, shipping costs, marketing expenses, and any business-related travel. Categorising expenses helps with tax deductions and financial reporting.

2.3. Manage Receipts and Invoices

Keep copies of all receipts and invoices. Invoices issued to customers should detail the product sold, the amount charged, and any applicable VAT. Ensure you also save receipts for business-related purchases to claim them as expenses during tax time.

2.4. Reconcile Bank Accounts

Regularly compare your bank statements with your financial records to ensure accuracy. This process, known as bank reconciliation, ensures that your recorded transactions match what’s reflected in your bank account.

2.5. Monitor Cash Flow

Regularly check your cash flow to ensure that your business has enough money to cover expenses, especially in industries like CBD where supply and marketing costs can fluctuate. A cash flow forecast can help you predict future inflows and outflows.

2.6. File VAT Returns (If Applicable)

If you're VAT registered, keep track of the VAT you've charged on sales (output VAT) and the VAT you've paid on purchases (input VAT). You’ll need this information when filing quarterly VAT returns with HMRC.

3. Accounting Methods: Cash vs. Accrual Basis

When setting up your accounts, you’ll need to decide whether to use the cash basis or accrual basis of accounting. Each has its advantages, and the choice depends on your business model and turnover.

3.1. Cash Basis Accounting

Cash basis accounting records income when cash is received and expenses when they are paid. This method is often used by small businesses with lower turnover as it is simple and better reflects cash flow.

3.2. Accrual Basis Accounting

Accrual basis accounting records income when it is earned (when the sale occurs) and expenses when they are incurred, regardless of when payment is received or made. This method is generally preferred for larger businesses and provides a more accurate picture of the company’s financial position.

3.3. Choosing the Right Method

The cash basis is ideal for startups and small businesses with straightforward finances and turnover under £150,000, while the accrual basis is better suited to businesses with more complex financial structures or those planning to scale.

4. Using Bookkeeping Software

Accounting software makes it easier for startups and small businesses to manage their bookkeeping, automate tasks, and generate financial reports. Many cloud-based platforms are affordable and offer a variety of tools to streamline bookkeeping.

4.1. Recommended Bookkeeping Software:

QuickBooks: Popular with small businesses for its ease of use, QuickBooks offers tools for tracking sales, expenses, payroll, and VAT.

Xero: A robust cloud-based platform that offers bank reconciliation, invoicing, and expense tracking. Xero also integrates with various third-party apps.

FreeAgent: Tailored to freelancers and small businesses, FreeAgent makes managing income, expenses, and VAT simple.

4.2. Key Features to Look for in Software:

Bank Integration: Choose software that connects directly with your bank account to automate bank reconciliation.

Invoicing Tools: Ensure the software allows for easy generation and tracking of invoices, including automated reminders for unpaid bills.

VAT and Tax Tracking: Opt for software that helps you track VAT, file returns, and calculate tax obligations easily.

5. Managing Payroll for Small Businesses

If you plan to hire employees or freelancers, you’ll need to manage payroll efficiently. This includes:

Paying wages: Ensuring employees are paid accurately and on time.

Deducting taxes: Deducting Income Tax and National Insurance contributions from employee wages and paying them to HMRC.

Payroll Software: Using payroll software like BrightPay or QuickBooks Payroll can simplify the process by automating tax deductions, generating payslips, and filing payroll taxes.

6. Setting Up a Business Bank Account

One of the first things to do when starting a business is to set up a separate business bank account. Mixing personal and business finances can cause confusion and make it harder to track expenses, profits, and tax obligations.

6.1. Benefits of a Business Bank Account:

Clear Financial Records: Separating business and personal finances makes it easier to manage income and expenses, especially when preparing for tax filing or VAT returns.

Professionalism: A business bank account enhances the professional image of your company, especially when invoicing clients or applying for business loans.

6.2. Choosing the Right Account:

Look for business bank accounts with features like low fees, easy integration with accounting software, and online banking tools for managing transactions and invoices.

7. Preparing for Tax Time

For startups and small businesses, understanding your tax obligations is crucial for avoiding penalties. Key taxes to be aware of include VAT, Corporation Tax, and Income Tax (if you’re a sole trader). Proper bookkeeping ensures that when it’s time to file taxes, you have all the necessary documentation to claim deductions, file accurate returns, and pay any owed taxes.

7.1. Tax Deadlines:

Corporation Tax: Due nine months and one day after the end of your company's accounting period.

VAT Returns: Due quarterly if you are VAT registered.

Self-Assessment (for sole traders): Tax returns must be filed by 31 January each year.

7.2. Claiming Tax Deductions:

Track all eligible business expenses throughout the year to reduce your taxable income. These may include:

Startup costs: Such as website development, office equipment, and marketing.

Operating expenses: Like utilities, rent, business insurance, and travel expenses.

8. Hiring an Accountant or Bookkeeper

While it’s possible to manage bookkeeping yourself when your business is small, many startups choose to hire an accountant or bookkeeper as the business grows or when finances become more complex. An accountant can:

• Provide tax advice and help you optimise your business for tax efficiency.
• Ensure compliance with VAT, payroll, and corporation tax regulations.
• Prepare financial statements and reports, such as balance sheets, profit & loss statements, and cash flow reports.

8.1. When to Hire an Accountant:

• When you’re preparing for your first tax return.
• If you’re VAT registered and need help filing returns.
• When your business is growing, and you need expert financial advice.