There are about 3.4m sole traders in the UK and they make up almost 60% of the total business population (source: FSB). Sometimes they and others use the alternative tag of “self-employed”.
There are many good reasons for setting up as a sole trader business, as opposed to registering a business as a private limited company (the UK has about 1.9m companies, making up about 34% of the total population).
Becoming a sole trader remains the simplest way to set up a business. There can be much less tax admin, too, but there’s no avoiding keeping financial records (aka bookkeeping). So, if you’re a sole trader or considering soon becoming one – what key facts should you know about keeping financial records?
1. All businesses must keep accurate financial records…
It’s a legal requirement, for sole traders, too. You must detail all sums entering and leaving your sole trader business and retain them for six years. HMRC can ask to see your “books” to verify figures submitted via your tax returns, to ensure that you’ve paid the necessary amount of tax. HMRC can visit your business to check your financial records, and if they’re not accurate and complete – there can be financial penalties.
2. You don’t have to love bookkeeping…
Few people start their own business because they want to spend their days crunching numbers and entering data into accounting software. Bookkeeping (especially the more routine stuff) can be boring for some.
And not everyone has a head for figures, which means basic bookkeeping tasks can take longer, when you would rather be doing something else. But, at very least, you should appreciate how important it is to maintain accurate, up-to-date financial records. As well as being a legal requirement, it can benefit your business in other ways.
3. Bookkeeping requires taking care of many tasks…
Bookkeeping involves recording and storing all of your sole trader financial transactions, in other words, all money entering and leaving your business. But bookkeeping includes many other tasks, too.
These can include: recording and keeping safe sales and purchase receipts; verifying, recording and paying supplier invoices; bank and petty cash reconciliations; managing payroll and PAYE; invoicing clients and chasing overdue payments; and (possibly) preparing profit and loss accounts, balance sheets and financial reports. Having access to such data can enable you to forecast future costs and sales, so you can better manage your cash flow (a key challenge for businesses great and small) and plan for the future.
4. Accounting software makes bookkeeping simpler…
Maintaining your financial records is much easier when you use accounting software. It can save you lots of time and enable you to quickly find out key numbers, so you can more easily understand how well your business is performing. And it’s very easy to learn how to use accounting software.
Using cloud-based accounting software can also enable you to better manage your cash flow. Moreover, you can share latest data more conveniently with others who work for your business or your accountant, or access your accounts when you’re away from base via your smartphone or laptop. Very few businesses now use manual bookkeeping systems.
5. Adopting a “little and often” approach can help…
You might not like updating your financial records, but you cannot neglect if you want your business to succeed. And putting it off will only mean it builds up into something more daunting that you actively avoid. If you set aside regular time each week to update your books, it will ensure that your books are more valuable to you, because the information will be more current. If you don’t look at key numbers and try to understand them after updating them, you’ll be missing a trick.
6. Accuracy and diligence are essential to sound bookkeeping…
Mistakes in your financial accounts can prove costly. At one end of the scale, they can mean that your tax returns aren’t accurate, however unintentionally, which can cost you a lot of time and money (HMRC can fine you and charge interest if your Self Assessment returns are submitted late or they’re inaccurate). And you won’t properly understand how your business is performing financially, so, you won’t be able to control your cash flow.
7. Staying organised makes bookkeeping much easier…
Good organisation is essential in business, but it’s especially true when it comes to bookkeeping. Thankfully, accounting software can really help to ensure that you enter data in the right places, but good organisation also extends to recording and storing purchase sales and receipts, invoicing; bank and petty cash reconciliations; and managing payroll.
If you’re disorganised, bookkeeping takes much longer, while your financial records can even get out of control. Lack of organisation can also mean having to pay higher fees to an accountant if they complete your returns.
8. You don’t need to be a bookkeeping expert…
You don’t need to know everything there is to know about bookkeeping; just enough to take care of basic bookkeeping tasks, if you do them yourself. For more complex accounting requirements, you can reach out to others for advice and support. One really good tip is to have a separate bank account into which you pay a percentage of your earnings (eg 20%). Then you won’t need to panic when it’s time to pay your tax bill.
9. You can get better at bookkeeping…
If you’re new to being a sole trader, to begin with, you may struggle with certain aspects of financial record keeping. You may not. But, the more practice you get, the more experience and knowledge you’ll gain, which can soon mean that you’ll need to spend less time maintaining your books.
10. You can always use a bookkeeper or accountant…
Budget permitting, instead of doing your own accounts or employing someone to do them, you could find an “out-of-house” part-time bookkeeper or accountant. You might do some of your own bookkeeping and pay someone else to do the rest. You might only need their services for a day or two a month. They might work at your base or from their own. Reaching out for external support can help to ensure compliance, which brings peace of mind. Many bookkeepers provide a range of services, freeing you up to get on with other things that you enjoy or that contribute to your business value.
