Bookkeeping 101: your guide to fab financial management

small business manager doing the books at a | Bookkeeping 101: your guide to fab financial management
By Conrad Emmett | 18th July 2023 | 5 min read

You probably didn’t start a business because you wanted to do bookkeeping.

Well, fear not! With a bit of knowledge, you can take managing your books and make it a seamless part of your business cycle.

Let’s get you started.

What exactly is bookkeeping?

Bookkeeping encompasses all activities around recording and managing the financial transactions in your business.

Balancing all those numbers can reveal the extent of your success... or show you where all the cash has gone.

Why even do bookkeeping?

If you’re not a “numbers person”, then bookkeeping can feel like you’re climbing an enormous snowy mountain.

Don’t worry! Let’s get you back in the warm.

Help dismiss those chilly feelings towards bookkeeping by counting the ways it helps your business:

  • You can accurately check that you are making more than you’re spending
  • You can budget better
  • You’re more likely to find incorrect payments and avoid fraud

Still not in love with the idea? There’s more:

  • You’ll be much more capable of filing accurate tax returns
  • You can forecast when cash might be running thin (and take steps to avoid it)
  • You’ll have a much easier time dealing with third parties like accountants or lenders

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What does bookkeeping involve?

Bookkeeping involves a host of activities, such as:

  • Making payments (e.g. bills), also known as managing the accounts payable (the money you have to pay to suppliers or service providers)
  • Chasing payments from clients and customers, also known as managing the accounts receivable (the money you’re to receive from clients)
  • Ensuring your business pays the right amount of tax
  • Claiming back VAT for your business (e.g. on purchases and other expenses), if you’re VAT-registered
  • Managing payroll to pay your staff and HMRC correctly

How to get started with bookkeeping

If bookkeeping is now something you want to try, there are three types of financial records you need to keep a keen eye on:

  • Cash, recording everything going in or out of your bank account
  • Sales, recording everything you have sold, and every invoice sent, paid or otherwise
  • Purchases, recording what you’ve paid for and what method you used

You can always track more financial records, but these three are the minimum.

Once you’ve set up your record keeping, here’s how to keep your head and manage everything effectively.

Track every payment!

Your records won’t be of much use if you only track finances sporadically – diligence is key.
Here are some top tips:

  • Store all invoices in a secure location and organise them by date and by unpaid/paid
  • Alphabetise customer records, helping you chase your payments if needed
  • Keep personal and business expenses separate, so you don’t end up understating or overstating your profits and paying the wrong amount of tax
  • To make life a little easier, get yourself bookkeeping software. The software will automatically group cash, sales and purchase transactions for you, keeping track of any VAT to be paid over to or reclaimed from HMRC

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Choose an accounting approach

To make the most of your bookkeeping data, consider the following two accounting approaches:

Traditional accounting records the transaction at the date of the invoice, no matter whether it’s been paid yet or not.

Cash accounting records payments when they are actually made (the day the money leaves or enters your bank account). This approach is great for small businesses, as it avoids paying taxes on money you haven’t received yet. Be cautious, though, as only businesses with a turnover of £150,000 or less can use this method.

Regularly reconcile every transaction

To “reconcile” means cross-checking all your transactions with your bank statements, ensuring you’ve accurately recorded all your sales and expenses.

It's up to you whether you reconcile weekly or monthly.

However, the more regularly you do it, the easier it is to spot and correct mistakes.

So… what’s the next step?

With bookkeeping, there’s a lot to get to grips with.

For example, you have to understand cash flow, know how it differs from profit, what Making Tax Digital (MTD) means for you and more.

Our complete guide to getting financial management right is here to help and available now - download now.