There is nothing like a new year to jumpstart the businessperson in you, starting a new business venture by yourself is incredibly exciting, but it can be daunting, too - especially when it comes to accounting and taxes. The sooner you begin to learn about accounting, the less likely you are to run into trouble, which is why we have put together a basic accounting guide for new sole traders, contractors and freelancers who need a nudge in the right direction.
Separate Business and Personal Bank Accounts
They say you should not miss business with pleasure, and this is especially true when it comes to banking. It is important to create a separate bank account for your business expenses and transactions, for several reasons.
Firstly, it creates a log of your business-related transactions. This saves you from having to comb over your records and try to remember whether each purchase was business-related or not when tax season rolls around. As a consequence, you are less likely to miss out on tax deductions and end up paying more than necessary.
A separate business bank account makes it easier to monitor your cash flow situation and understand how much you can afford to spend. It also helps to maintain business credibility, which is important when seeking financing.
It is also worth arranging a business credit card. Business credit cards typically have a higher limit than personal ones, which is useful since business expenses tend to be higher, too. This will help you to smooth out any cash flow issues you face without putting your personal credit score at risk.
Invoice Management
Invoice management is a simple but crucial part of effective cash flow management. Not only is it important to send invoices on time, with a clear itemised bill and the correct payment information, but you also need to be proactive about chasing up late paying clients, too.
Track Expenses
Track everything from client lunches and printer ink to office rent and software subscriptions. Carefully tracking your business expenses keeps your financial records crystal clear and helps you to maximise your tax deductions. As well as using a business bank account or credit card to keep your records, it is also a good idea to use a cloud-based accounting software so that you can upload and organise your receipts with ease.
Go Paperless
Of course, you will need to keep hard copies of certain important documents but going as paperless as possible is a fantastic way to stay organised and make accounting easier. There is really no need to store everything in a shoebox anymore.
Accounting software can do everything from generate invoices to storing receipts, eliminating your need for an overflowing filing cabinet, and accounting software is especially important with the introduction of Making Tax Digital, this regulation requires you to keep and preserve all your income and expenditure records electronically, and submit a quarterly summary of income and expenses, and an end of year report to HMRC.
Electronic payments are also much faster to process than old-fashioned cheques, which is great news for your cash flow.
Do Not Forget About Taxes
Employees with regular pay checks tend to spend a fairly minimal amount of time thinking about tax, but as a solopreneur you need to be much more proactive. For every invoice payment you receive, you need to set aside anywhere between 15-30% of that sum, depending on your annual earnings and business type. It is important to be aware of this and budget accordingly so that you do not receive a nasty surprise when the tax year ends.
Summary
Accounting and bookkeeping do not have to be difficult. By staying organised, being proactive and taking a common-sense approach, you can overcome many of the common pitfalls experienced by new solopreneurs.
Being proactive about expense tracking and invoice management will give you a huge leg-up. By separating your personal and business accounts and using accounting software, keeping your records in order becomes far easier. This will save you many headaches and sleepless nights, and also money overall.
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