There’s no magic or mystery to running your own business, it’s simply a case of being methodical, and it really is true that 30 seconds spent dealing with something when it happens can save you hours at a later date. Simple habits of good housekeeping will pay huge dividends at the end of the year when you come to collate your invoices and receipts, as well as being worth a fortune in tax-allowable expenses. Even the most experienced accountants cannot be expected to know the ins and outs of every piece of camera equipment for example, and simply taking a few seconds to write “camera equipment purchase” an a receipt for a lens, could be worth a couple of hundred pounds off your tax bill at the end of the year.
Business and Personal Accounts.
Although it’s not a legal requirement for a sole trader, the way many people choose to deal with the difference between business and personal expenditure/income is to have 2 different bank accounts. As long as you actually keep things in their relevant place, everything is very straightforward. The usual method of making “owner’s drawings” in this case is to pay yourself money from your business account to your personal one. Don’t get too paranoid about keeping things separate between the accounts, it’s largely for the convenience of yourself and your accountant that things are set up this way, and nobody’s going to penalise you if you buy your week’s food shopping from your business account, just as long as you don’t try and claim it as a business expense! As far as the banks are concerned, having a business account means they can hit you with more bank charges, but in return they often give you an oversized cheque book. Actually, on balance I think they might be screwing us there. Some things never change.
Some Simple Habits that will make you Attractive to the Opposite Sex.*
Writing on each invoice as it’s paid into the bank, the date, method, and if you have one, the number of the paying in slip. This makes it very easy for your accountant to track exactly what’s been paid and what hasn’t, as well as identifying any bad debts.
Dividing your receipts into payment methods, e.g. cheque payments, petty cash, credit or debit cards. This is something a lot of accountants ask for, and if nothing else, helps to keep their fees down.
Keep receipts in separate envelopes for each month, and at the end of each year divide them as above (if you’re really thorough you could do this monthly as you go along!)
Keep a simple petty cash record. This needs to be no more than an exercise book with columns for the date, payments in/out, description of the item, and the running balance. Some of the expenses may seem pitiful (buying stamps for example) but if you don’t list them you can’t claim for them against tax.
Get into the habit of issuing invoices for jobs as soon as you have all the necessary information (your expenses, purchase order numbers and so on.) You can expect clients to take anything up to 90 days to pay FROM THE DATE THEY RECEIVE YOUR INVOICE! Obviously it’s in your best interests to get the invoice on their desk as soon as possible.
As bills are paid, write on them the date and method of payment, with the cheque number if applicable (otherwise put “direct debit/BACS/Visa” etc). It’s also handy to duplicate this information on your cheque stubs if there’s room. Besides helping your accountant out at the end of the year, they can help clear things up in case of any dispute with your suppliers.
At the end of each job, or at least weekly, go through and collate your receipts. If you’re particularly busy it can be easy to forget what a certain receipt was for, and since some things are more tax deductible than others it’s important that everything ends up in the right place.
As soon as you receive the money from a job, before you even pay your suppliers and the rest, siphon off a portion of it to a savings account. Exactly how much you choose is up to you, but I generally put around 20% away. For the most part this is to account for the fact that if you’re VAT registered you’ll get billed every quarter, and will need to have the money to hand when the bill comes in. Beyond this, there’s also your annual tax bill, which you should be expecting so it’s not too unpleasant a surprise. Anything you save beyond the needs of the taxman becomes your own savings of course, which you can employ for any purpose you choose, so it’s a pretty good habit to get into.
*this might not actually happen, and it’s certainly never happened to me. Mind you, these habits could save you money, and how sexy is that?
I’ll get my coat.
Besides keeping your annual accountancy bills down (and your accountant happy!) the more fundamental reason for practising these habits is that they keep you in touch with your business, which is a good thing, as we don’t like nasty surprises. If your accounts are computerised it can often be very simple to find out how much money is outstanding, but otherwise you’ll need to be maintaining a constant vigil over things like unpaid invoices, otherwise you’ll be out of business before you know it.