Every small business is required to keep bookkeeping records to produce at the end of the financial year a set of accounts to show the sales income, business expenses and the net profit for tax purposes. Medium and larger businesses employ accounts clerks, bookkeepers and accountants to maintain the financial records and produce regular accounting information.
Small businesses and in particular self employed business have a choice in how the financial accounts are prepared and produced. A small business may employ the services of a bookkeeper to produce the accounts while another similar business may keep a manual record of financial transactions while a third option is to use a bookkeeping software system.
Small business has a choice as to how it produces its financial records. Some simply do nothing but the best option is to make a finite decision regarding the path to take. Financial accounts, financial control over the business activities and the knowledge of how well or badly the business is performing is crucial to success in the business environment.
The underlying necessity is that if the small business does not take a decision on its financial accounting then at the very least it must accumulate documents of prime significance such as sales invoices, purchase invoices and possibly bank records during the financial year and assemble these into some sort of order after the end of the financial year for tax purposes. Failing to keep financial records often results in a succession of administrative burdens and often also leads to financial penalties if taxation deadlines are not met.
If the small business owner chooses not to go down the route of using bookkeeping software or outsourcing the financial function to a bookkeeper or accountant then manual financial records must be kept. Producing an income and expenditure account for the business using the prime financial documents of business is not rocket science and most businessmen capable of running and managing a business have the skills required to producing the bookkeeping records.
The major disadvantage of a small business keeping manual records is that documents get lost which may result in profits and taxes being over declared, fines and penalties through inaccuracies and often when accounting is produced in this way it is done at the end of the financial year purely for tax purposes rather than as an essential tool of the business and that reduces financial control within the business during the financial year to a minimum and often zero.
If a manual bookkeeping system is adopted then disciplined recording of the financial information on a regular basis should be enforced and regarded as an essential function and not an administrative burden. An understanding of the detailed accounting records and the effect on the business allows effective management decisions to be taken earlier than if someone else performs the bookkeeping function.
Other alternatives include utilising bookkeeping software which is effectively often a manual system in itself but within definite parameters to produce the essential information. A bookkeeper might be employed whether a manual system is used or bookkeeping software adopted.
Using bookkeeping software has many advantages. First of all any small business that has purchased bookkeeping software is more likely to keep regular up to date accounts than one that has not. And secondly the bookkeeping software is likely to provide a fixed set of disciplines and produce the type of records a small business requires for both the preparation of regular financial statements and the end of year tax returns.
Another major advantage of bookkeeping software is that records tend to be less likely to be lost or mislaid; the packages can be backed up as required but essential financial performance can be improved by greater financial control. All businesses work towards producing a satisfactory bottom line and only by producing regular financial statements can the business obtain the earliest information to achieve that satisfactory performance.
Bookkeeping software comes in many different formats from simple spreadsheets to more complex data based accounting software. For a small business the bookkeeping software of choice is often a simple system requiring limited accounting knowledge but must also be a package that produces the desired end result.
The worst bookkeeping software is a complex program requiring prior accounting knowledge that the small business either does not fully understand, cannot be bothered or does not have the time to learn and having tried the system then abandons it. Better to avoid the wasted time and effort by choosing the appropriate accounting package at the outset.
Bookkeeping software in effect automates the manual keeping of financial records. The most important aspect of using a bookkeeping package be it a da6tabase accounting system or a simpler set of bookkeeping spreadsheets is the enhanced financial control and the effect that intimate accounting knowledge can have to influence the net profit.
Bookkeeping can be outsourced to an accountant or bookkeeper and there advantages in doing so. A quality outsourced finance function does produce accurate timely financial records. If the small business has a volume of paperwork that becomes a burden to process and keep on top of then a bookkeeper may be the best solution.
Employing a bookkeeper becomes essential when the paperwork burden reaches a stage when it distracts the small business owner from getting on with the main task of operating the business. A bookkeeper has to be paid and that cost should be viewed as the cost not of producing the financial records but as the amount to be paid to release the time of the small business owner and also to produce the financial statements on which action can be taken to improve profitability.
A major disadvantage in using a bookkeeper is that the small business owner may remove themselves from the detailed records. A small business manager who prepares the financial accounts tends to see every transaction several times both when the trnasaction is made, the paperwork received and also when entered in the financial accounts.
This second view of the accounts can be important, errors in management judgement can be noted, mistakes and bad practises become more apparent. Missed documents are much more likely to be noticed if the small business owner produces his own bookkeeping records than if the task is carried out by a third party such as an accountant or bookkeeper. Nobody knows the business as well as the small business owner knows his own business.
The conclusion and decision each small business should take is doing something. A manual bookkeeping system may suffice but the business may be better served using bookkeeping software to increase financial control and performance. If the administrative burden of maintaining the paperwork detracts the small business from its main operations then an accountant or outsourced bookkeeping services is a logical solution.
Terry Cartwright a qualified accountant at DIY Accounting designs UK Accounting Software on excel spreadsheets providing complete Small Business Accounting Software solutions with single and double entry Bookkeeping Software for both limited companies and self employed business
