Creativebias Helpsheet: Keeping Financial Records

Keeping Financial Records

This helpsheet explains the basics of keeping financial records for a start-up creative business. To produce records which can be used to calculate your tax liability it is recommended that you meet with a business advisor or accountant. Due to the complexity of financial law and practices this sheet can not provide you with everything you need to know. There are links at the end of this helpsheet to websites which provide much more detailed information on tax laws and financial issues. Your bank can also provide financial and practical advice.


A successful business depends on accurate record keeping. Without good records it is impossible to determine the financial condition or profitability of a business. You may also be breaking the law - limited companies have to submit audited records or face a £5,000 fine. Tax laws change regularly and you must keep an eye on these developments.


The broad principle of an accounting system is to track the money coming into, and going out of your business. You can then use that information to determine your marketing strategy and pricing policy. Complete and accurate financial record keeping is crucial to your business success for a number of reasons:

• Good records provide the financial data that help you operate more efficiently - therefore increasing your profitability.
  
• Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information, when compared to appropriate industry averages, helps you pinpoint both the strong and weak phases of your business operations.
  
• Good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with any investors. They also present a complete picture of your total business operation.
  
• Good records are needed for tax purposes. Poor records could cause you to underpay or overpay your taxes. In addition, good records are essential during an Inland Revenue audit. NB This government department is now known as Her Majesty's Revenue and Customs (HMRC).

The specific records a company needs depends on a number of factors, such as the type of business, the company's goals, and cost factors, but might include:

• Income (sales ledger) - money you bring in
  
• Expenditure (purchase ledger) - money you pay out
  
• Asset Register
  
• Tax Paid information

Some smaller companies may be exempt from including certain details in their accounts. Whether you are a small or large business depends on your:

• Turnover
  
• Balance sheet total
  
• Number of employees
  
  

Based on the relevant factors, a business advisor or accountant can help you determine what records to keep and what information they should provide. Some of the questions that might be considered in assessing your record keeping needs are:

• How much income are you generating now and how much income can you expect to generate in the future?
• How much money are you owed and when is it due?
  
• How much do you owe?
• What are your expenses?
  
• How much cash do you have available to spend? How much cash is tied up in investment? What is your actual working budget?
  
• Which of your products or services are making a profit, which are breaking even, and which are losing money?
  
• What is your gross profit? What is your net profit?
  
  Gross Profit - doesn't include overheads, tax or interest payments. Doesn't include any costs that are not specific to that product.
  
  Net Profit - profit left over after paying all the expenses of a product and running your business. Used more for monthly and annual accounts.
• How does your financial data compare with your competitors?
  
• How do all of the financial data listed above compare with last year - or last quarter or last month? How do they compare with the projections in your business plan?

It is essential that you try to determine the precise financial condition of your business.

Computerised and manual systems available

There are a number of different options for keeping your company's financial records:

Microsoft Excel Spreadsheets - This program provides an ideal environment in which to keep track of your records, and can be programmed to do much of the work for you in terms of adding columns and working out totals. There is the danger of losing all your work if the computer crashes, so always back up your financial records on separate hard disks or CDs.

Paper-based spreadsheets - This is initially less expensive then computer programs but in the long run involves a lot more work. This method may be useful in the short-term if you are learning computer-based skills, but for organised and easily readable accounts the use of computer software is advisable.

Sage Line 50/100 - due to its complexity and cost this software is better suited to developed businesses. The program is pre-written by accountants and is particularly useful for generating reports on specific income and expenditure in a short amount of time.

External accountant or bookkeeper - If you do not possess the skills to manage your own accounts, you can pay an accountant or bookkeeper to do it for you. Although this option may appear attractive because of the amount of work that is taken off your hands, it has its negative sides. To truly understand what your business needs to do to improve, you need to understand and keep control of your finances. By handing the responsibility to someone else you are risking losing touch with the internal running of your business. Analysis of financial records can point out weaknesses and strengths in a business, and show opportunities for growth and expansion.


A basic record keeping system, whether on paper or using a computer software program, should be:

• simple to use
• easy to understand
• reliable
• accurate
• consistent
• designed to provide information on a timely basis.

There may be certain months of the year when your business always records more profit. Your product or service may depend on seasonal factors. For example, a small t-shirt design company may notice increased sales in the summer; your records will help you predict how much money you need to save to cover the loss of income in winter months. You may need to invest more money in marketing and advertising during the quiet periods, which will also require extra funds.

Invoicing, receipts and payments

If you are buying a product you should keep all receipts, which must include:

• The date
• Amount bought
• Price bought
  
• Seller

Every sale you make or service you provide has to be invoiced. For example, an independent record label should record purchases for every aspect of pressing up a 7" vinyl release. They should record details of how and who they paid for recording, packaging, pressing and distribution.

If you are providing a service you must record:

• Your company name and address
• The date
• The client's name and address
• Exact details of the job
• Payment agreed for the job
• Invoice number

Additionally:

• Make two copies of invoices, one for you and one for the customer.
  
• Keep copies of all letters between you and the customer.
  
• You should do the same with contracts. When you originally make an agreement with a customer to provide a service, you should both sign a contract detailing the above as well as an expected date for delivery of the service.
  
• File your invoices and contracts in order. This is helpful not only for keeping your records tidy, but it means if you do not receive payment for a service, you can quickly access exact details of the original agreement.
  
• To keep records accurate you could staple all invoices for one month to your bank statement for that period.
  
• Payments must always go straight into your business bank account, to avoid confusion. Keep personal and business accounts entirely separate.
  
• All money received must go through your accounting system. Don't take shortcuts and pay money you have received directly to someone else.
  
• Each transaction must be accounted for.
  
  
  
  

How do I use financial records for monitoring?

Your financial records should be able to tell you:

• When you asked for payment
  
• When you were paid
  
• How much you make weekly
  
• How much you make monthly
  
• How much you make quarterly
  
• How much you make annually
  

A simple way to do this is to set up a spreadsheet with all your expenditure listed in one column, with rows such as:

• Advertising
• Telephone bills
• Rent
• Marketing
• Transport
• Electricity
  

This means at a glance you can see how much you spend each month and it should be easy to pick out what you are spending too much money on. Within the same spreadsheet, have all your income in a column so you can compare the amounts coming in to the amounts going out. Your records will help you find patterns within your expenditure and income enabling you to make predictions for coming months.

Your records should enable you to:

• Pinpoint problems
• Make plans to change problems
• Profit prediction/expansion
• Tell you whether you are charging enough for your service/product.
  

E.g. Through analysing her records, a photographer notices that a certain client always pays for photographs late and therefore delays processing of other clients photos. She decides to issue invoices earlier to this particular client in order to make her business more efficient.

It is also important to remember to save. If you can afford it, save a reasonable amount of money each month. However much you try and predict your finances, you must be able to adapt to unexpected events. If you have some financial reserves you may be able to cover unforeseen expenses.

You must also set aside a certain sum each month to pay tax. This amount can vary and depends on many different factors. Talk to a business advisor or follow links to Her Majesty's Revenue & Customs (HMRC) website at the end of this helpsheet.

How do I use different accounting periods and financial years?

A fiscal year or financial year is a 12-month period used for calculating annual financial reports. Tax laws relating to accounting require reports once per twelve months, but do not require that the twelve months constitute a calendar year (i.e. January to December). A new company or business has to decide on which month their fiscal year will start.

Limited companies must submit accounts and tax returns annually.

Sole traders need to submit tax returns, but not accounts. However, they must still keep detailed financial records as they should be prepared for an auditing visit from Her Majesty's Revenue and Customs (HMRC). If your accounts are not in order or do not add up you will be investigated more thoroughly and could be charged with fraud.

You must normally register for VAT when the value of your taxable supplies and/or the goods or services you sell exceeds £60,000.

For more details on VAT and the taxes your business should pay please check the Creativebias Understanding Tax and National Insurance helpsheet.

Links:

www.businesslink.gov.uk Business Link provides advice on financial issues for businesses over the phone - 0845 600 9006

www.hmrc.gov.uk/home.htm - HMRC is responsible for collecting the bulk of tax revenue. This site provides official information and guides on paying taxes. Also includes online tax assessment forms. You can download forms, leaflets and guides on paying tax and registering your business. They have a specific helpline for the newly self employed - 08459 15 45 15 - and a specific helpline for advice on self assessment - 08459 000 444

www.companieshouse.gov.uk - extensive information on registering businesses and lots of advice and help for small companies.

www.kashflow.co.uk - accounting software website.

www.bcentral.co.uk/finance/tax/tax-faq.mspx - Particularly strong on tax information for small businesses. Contains information on what accounts businesses have to keep and on claiming back expenses and VAT on goods and services.

www.taxcafe.co.uk/business-tax.html - Detailed tax information for sole traders and small businesses.