At the Hoxton Mix we think that being in control and knowing how to manage your finances is a fundamental element of making your business successful. But sometimes this can be a pretty daunting task of the business equation, particularly if you are the more creative type of personality and maths isn’t your strong point. Thankfully if you combine some fundamental principles of bookkeeping with some simple accounting software you’ll be encouraged to find it’s simpler than you think and realise you’re in a strong position once you know what you are doing.
The basic maths
Before we go into how to make your life easier by using simple accounting software to do your bookkeeping, let’s get the basic terminology under our belt.
Income (aka: revenue) comes from the sale of something, e.g. your service or product.
Expenditure (aka: outgoings) is everything necessary to make or provide and sell your service or product e.g. the cost of marketing or the cost of renting a London virtual office address. It’s worth pointing out that there are different categories of expenditure too, which ultimately have different accounting rules applied to them but if you use an accounting software package you’ll be able to put each item in the right category easily and even let your accountant access your records with a simple password so he can check you are doing it right.
Pre-tax profit is your income figure minus your expenditure and this gives you the figure on which you will pay the relevant amount of tax and National Insurance.
Post-tax profit (aka: net profit) is the money you have left after everything, including taxes has been paid and is often the most sobering figure. As a self employed person, net profit is one of the most important metrics to be aware of because it’s the net profit from which you are able to pay for everything you need in your life outside of your business; your rent, a pizza your bicycle or car, the gas & electric and your weekly shop.
So for example (annually):
If your revenue is £50,000
And your deductible business expenditure is £20,000
Then your pre-tax profit is £30,000
Your tax and N.I will come to approximately £6000
So you will have remaining as your net profit for living life, £24,000
And your net profit margin (£24,000 ÷ £50,000 x 100) is 48%
There is a bit more to it than that, particularly when it comes to categorising and applying expenditure so we strongly recommend seeking advice from a qualified accountant or at very least bookkeeper.
Now don’t forget, the above is just a very simple example. Your first year in business you might make £25k revenue but you manage to keep your business expenditure to £5k (for instance you might be a solo website builder and have very little outgoings other than the cost of your computer and access to the internet), so your net profit would be just under £17k and your net profit margin would be 68%.
Whatever the figures are, don’t shy away from them but embrace them and be sure you keep a log of all your income and expenditure and you’ll find yourself in a much more empowering position. And with that in mind there are ways you can keep everything organised that are much easier than a shoebox and an excel spreadsheet.
We’re not all great at adopting new technology but with this area of your business it’s really important to have a system in place that makes keeping the data in order and safe while saving you time so you can focus on what matters. So here are three reasons to get started with using some accounting software.
As part of your record keeping, you’ll not only need to produce invoices for income and receipts to prove your expenditure to the taxman, you’ll also need to match those units to line items in your bank account or business credit card, which is usually called doing a bank analysis.
The beauty of accounting software is that, you can create invoices using the software, you can scan in receipts for your expenses so that they are stored in the system but you can also automatically draw in your monthly bank statement and the system will match your income/expenditure items to the line items in your bank statement. This saves you a huge amount of time, leaving you with only the need to quickly review the monthly analysis and make sure everything is accurate.
Then at the end of each year you can simply export your records, already arranged for declaring your financial status.
Although there are some accounting platforms that charge there are some that are also completely free. The two we think worth checking out are Wave (which is free and great for people just getting started) and Xero which not only does everything we’ve talked about but also ties into other service providers for when you need to do some more advanced accounting (we use this at the Hoxton Mix). Both of these will also handle VAT processing if you’re at that stage in your business and both can enable you to take credit card payments too.
Involve your accountant
Finally, no matter how small you are it’s always a good idea to have an accountant review your accounts. With the system we’ve talked about instead of asking them to do all the work and rack up hours of costly work you can use the system to have everything prepared clearly for them in advance. Then you can give your accountant access so that they spend only the absolutely necessary time working on your accounts. They’ll be able to see all your entries, with the associated invoices and receipts. You’ll make their life easier and hopefully your accountancy fees will be less.
In closing, make sure you understand the basics and refer to a professional at least once to review this with you, particularly in relation to categorising your business’s unique type of income and expenditure. Choose a way of recording all your business activity that you think suits both your budget and the way you like to do it and then make sure you keep up to date so you’re not left with a lot to do last minute. Stick to this and you’ll find doing your accounts isn’t nearly as stressful as you thought.