Best Practice for Small Business Accounting

Running a business can be both rewarding and challenging. Whatever the type of small business you’re running, it’s essential to keep your financials in check. Small business accounting might seem overwhelming, but following best practices can save you time, reduce errors, and ensure you’re compliant with UK tax regulations. Here’s a guide to help you stay on top of your accounting while focusing on growing your business.

1. Separate Personal and Business Finances

One of the most important steps you can take as a small business owner is to keep your personal and business finances separate. This not only makes tracking business expenses easier, but it’s also essential for tax purposes.

• Open a business bank account: Not only is this a legal requirement for limited companies, this also makes it simpler to manage transactions and create a clear audit trail. It also looks more professional to clients when payments are made to/from a business account.
• Use business credit cards: If you need to use a credit card for any expenses, use a credit card linked to your business. This can help categorise and track spending. Loyalty points that are earned on business credit cards can be used for the benefit of the user as well as the business.

2. Stay on Top of Invoicing

Efficient invoicing is key to maintaining cash flow in a small business. Late or incorrect invoices can lead to payment delays, which can disrupt your financial health.

• Use accounting software: Invest in a reliable accounting software like Xero or FreeAgent. These tools automate invoicing, track payments, and generate financial reports. For sole traders, you could also look at Coconut.
• Set clear payment terms: Specify payment due dates and late payment penalties on all invoices. It’s common to set a 30-day payment term, but ensure this works for your business cash flow – it may be more suitable to reduce this to 7 days.
• Follow up on unpaid invoices: Don’t be afraid to chase up late payments. It’s your right as a business owner to be paid for services rendered. Do it regularly – a reminder a couple of days before a due date can often be a helpful nudge.

3. Track Expenses Diligently

Keeping a close eye on your expenses is crucial to ensuring your business remains profitable and compliant with tax regulations.

• Log every expense: Whether it’s travel, software subscriptions, or office supplies, make sure you record everything. This will be useful when it’s time to claim expenses and reduce your taxable income.
• Store receipts digitally: HMRC allows digital copies of receipts, so you can scan and store them. Many accounting software packages have apps that let you upload receipts instantly, reducing paperwork. We primarily use Dext, but you can also use the receipt capture facility in Xero, FreeAgent and Coconut instead.
• Categorise your expenses: Breaking down expenses into categories helps with budgeting and understanding where your money is going. Most softwares have a ready-made list of categories (known as a Chart of Accounts), but you can always add more if there are specific categories that you wish to monitor.

4. Set Aside Money for Taxes

Many small business owners, especially sole traders, are caught out by tax bills they weren’t prepared for. In the UK, you’ll need to account for income tax as a sole trader or partnership, corporation tax as limited company, National Insurance contributions (NICs), and possibly VAT.

• Estimate your tax liability: As a rule of thumb, set aside at least 25-30% of your income for taxes. This will ensure you’re not scrambling when tax deadlines roll around.
• Consider opening a tax savings account: Some business owners open a separate account just for tax savings, ensuring they always have funds available for payments. Some of the newer banks such as Starling and Monzo have pots that you can siphon money out of without creating a separate account.
• Use accounting software for tax estimation: Many platforms can estimate your tax liability based on your earnings, giving you a clearer picture of what you owe.

5. Understand Your Tax Deadlines

UK tax deadlines can vary depending on whether you’re a sole trader or limited company. Failing to meet these deadlines can result in fines and penalties, so it’s crucial to stay organised.

• For sole traders and partnerships: The self-assessment tax return is due by 31st January each year, covering the previous tax year which runs from the 6th April to the 5th April.
• For limited companies: Corporation tax must be paid within nine months and one day after the end of your accounting period. Your annual accounts and confirmation statement must be filed with Companies House within 9 months of your year end date (this is slightly earlier in your first year as it is 9 months from the date of incorporation).
• Register for Making Tax Digital (MTD): HMRC is rolling out MTD for VAT-registered businesses, requiring digital record-keeping and filing. Ensure your business is compliant with the latest regulations. This will also be coming for anyone who is self employed or a landlord, and has income exceeding £50k from April 2026.

6. Hire an Accountant

Managing your accounts while running a business can be overwhelming, especially when you want to focus on delivering services to your clients. Hiring an accountant can help you with everything from tax planning to bookkeeping.

• Expert advice: An accountant can offer guidance on allowable expenses, tax relief, and ensuring you remain compliant with UK tax laws.
• Save time: Outsourcing your accounting means you’ll have more time to dedicate to growing your business.
• Avoid costly mistakes: Accountants ensure your financial statements are accurate and filed on time, helping you avoid penalties from HMRC.

7. Monitor Cash Flow Regularly

Cash flow is the lifeblood of any service-based business. Without a clear picture of your cash flow, your business could run into trouble, even if you’re making a profit on paper.

• Set a cash flow forecast: Regularly updating a cash flow forecast allows you to anticipate any shortfalls and take action before problems arise. This can be a simple spreadsheet and doesn’t need anything complicated.
• Keep a cash reserve: It’s advisable to have at least three months’ worth of operating expenses saved up, especially in a service-based business where payments can be delayed.
• Review your accounts monthly: Take time to review your financial statements, including cash flow, profit and loss, and balance sheets. This helps you identify trends and potential issues early on.

8. Plan for Growth

As your business grows, so will your accounting needs. It’s essential to review your financial strategy regularly and plan for expansion.

• Create a budget: A well-structured budget helps you allocate funds for marketing, hiring, or investment in new tools and technology.
• Review pricing regularly: As your business scales, your service offerings and pricing should be reviewed to ensure you remain competitive while covering your costs.
• Seek professional advice: An accountant can help you understand how growth impacts your tax obligations, cash flow, and long-term financial health.

Conclusion

Effective accounting is vital for the success of any small business, especially in small businesses where cash flow can be unpredictable. By following these best practices, you can keep your financials in order, stay compliant with UK tax regulations, and make informed decisions to grow your business.

Remember, investing time into setting up the right systems, or hiring a professional accountant, will pay off in the long run. When your financials are organised, you can focus on what truly matters – delivering exceptional service to your clients.

This blog post is intended for informational purposes only. For personalised advice, consult with a qualified accountant. You can book in a Discovery Call with us here.