There are many benefits of working for yourself. Being your own boss, and setting your own hours and schedule, are certainly up there with some of the top reasons to go solo. And not having to ask for a day off is surely a perk as well. But there are always two sides to a coin, and with advantages comes disadvantages. The major downfall of working for yourself is managing your own finances. It can be overwhelming at the best of times – and even more so if you’ve recently branched out on your own.
No one likes admin, but unfortunately it is a necessary part of business. Of course you could invest in an accountant to handle your affairs – but that costs money. And when you’re just starting out, you want to be saving wherever you can to keep costs as low as possible.
Whether you’re a sole trader doing it for yourself, or a partner in a new business partnership, we’ve got you covered with our top tips for managing your accounts and keeping your finances in cheque - see what we did there?
This comprises anything from sales and income figures, to business expenses and information about your personal income, to VAT records or PAYE records if you employ people. Types of proof include: receipts for goods and stock, bank statements or slips, chequebook stubs, sales invoices, or till rolls. Remember, if in doubt, don’t throw it out.
You don’t need to submit these records with your tax return, but they are used to work out your profit or loss – or to show HM Revenue and Customs (HMRC) if asked. So be sure to keep hold of them for at least five years after the 31 January submission deadline for the relevant tax year.
When it comes to accounting, there are two different methods to follow. With traditional accounting, you record income and expenses by the date you invoiced or were billed. On the other hand, cash basis accounting means you only record income or expenses when you receive money or pay a bill – this way you won’t have to pay income tax on money you haven’t yet received in your accounting period. This method is especially useful for small businesses with an income of £150,000 or less.
You can choose when your accounting year is to end, but remember that taxable income for sole traders and partnerships is calculated on a 6th April to 5th April basis – so it makes sense for your accounting year to reflect this.
It’s a good idea to keep your business expenses separate from your personal ones, to make accounting procedures more streamlined. Keeping an eye on spending is also much easier when expenses are funnelled into separate accounts. You can claim back for any costs incurred ‘wholly and exclusively for business’ as well – so make sure you keep all receipts.
Creating a zero-sum budget, and sticking to it, is a must. To do this, list all of your fixed monthly expenses, such as rent or mortgage payments; then track what you’re spending on things like groceries or petrol for the next three months, to see what your variable expenses are. Once you’ve worked out a number that works for you, transfer the amount into your personal account – this is your income. Anything else, or any new money that comes in, then goes straight into your business account.
And if your income tends to be sporadic depending on what jobs you get that month, it can be helpful to work out your average monthly income. This way you’ll have a good idea of how much you can expect to receive – and you’ll be able to put the extra amount into savings to fund less lucrative months if you have a month where you earn more than average.
For most people, tax can be pretty confusing, and well… taxing. As a sole trader, you’ll be taxed between 20-45% depending on your income. But for business partnerships it’s a little bit more complicated. HMRC provide a whole host of free and useful e-learning tools to help you get your head around tax and self-assessment forms – as well as other topics, such as VAT and running a payroll. So be sure to check them out!
Regardless of whether you’re a sole trader or in a partnership, we’d advise you to set up a tax savings account. You should aim to transfer between 15-30% of your profits, depending on your income, into the account every month. This way you won’t get a massive shock when the taxman comes knocking!
Most people will have some basic Microsoft Excel skills, and this is a perfectly good and simple way to keep track of basic income and expenditure. But there are a whole range of cheap and readily available software designed specifically for managing your accounts. Here’s just a few…
One of the very earliest providers of accounting software, QuickBooks provides basic packages to help you track your self-employed income, whilst small businesses can use it for thinks like payroll and VAT, reporting and monitoring. Subscription prices start at as little as £6/month, and reduced rates are frequently available for the first six months.
Often praised for being highly customisable, Zoho Books helps you to issue invoices, sort expenses, and track inventory. It doesn’t currently have a payroll feature, but it can connect to your bank account for real-time updates on cash flow. Prices start at £6/month.
Great for helping you with things like invoicing, inventory, payroll, and expense claims. Xero can also import your banking, credit card, and PayPal data, and there’s an app that works on both iPhone and Android. Prices start at £10/month.
One of several providers offering free finance software, Wave Accounting includes things like invoicing and receipt scanning. You can also get additional services, such as payroll, on a pay-as-you-go basis.
Online cloud software experts, Cloudwards, also wrote a great article which reviews the best accounting software – mainly for small businesses or freelancers – and explains a bit about how they work. Take a look if you want to gain a more in-depth understanding of the ones we’ve mentioned above, as well as a few others…
Working for yourself comes with a whole heap of benefits – and you don’t want the worry of tackling your finances to outweigh the advantages. So we hope that we’ve helped make the prospect of managing your accounts a little bit less daunting with these handy pieces of advice.