What’s the best approach to small business accounting?23 Sep 2015
Broadly, there are three options available to small businesses when thinking about how to set up their small business accounting processes. We explore the three most common methods.
Spreadsheets: simple, cheap, but prone to errors
The first is to keep track of it all in excel. To set up your spreadsheet, it is a good idea to create four tabs: one for the invoices you raise, one for your expenses, one for your bank account and a summary sheet which will be your Profit and Loss statement.
On your revenue tab, it is best to record one invoice per line. You’ll need columns for the date, customer name, description, amount of invoice and VAT. It is also worth adding a 6th column to tick off against the corresponding entry on your bank spreadsheet.
You can set your expenses tab up in exactly the same way, but you’ll need to add another column for the type or category of expense. Once you’ve entered your expense details, you need to classify it into a category. Commonly used categories are: telephone, postage, advertising, salaries, travel, training, office costs, IT costs, rent, insurance, light and heat, accountancy, legal and professional, entertaining, bank charges and equipment hire.
Your bank account tab should just contain a CSV export of your bank statement, with dates and amounts. As you did for the first two tabs, it is useful to add another column to show where you can match a bank item against a revenue or expense item on the other two tabs.
Once this is done, you are ready to create your summary profit and loss sheet. Revenue goes at the top, and then your expense categories go underneath. Using a SUMIF formula, you should be able to link it all up so it displays a neat summary of all of the items on your first two tabs.
Your profit is shown on your last line, and this is earnings before interest, tax, depreciation and amortisation. On the next few lines, if you are confident with your SUMIF formulae, you can handle VAT, trade debtors and trade creditors, by comparing what has gone through your P+L with what has gone through the bank.
If this sounds tricky, we can help you get this all set up. Once the template is properly configured, it should all run quite smoothly.
Using this approach is cost effective and transparent – it is possible to see exactly what is going on. But unless you're careful, it is also prone to errors, misclassifications and the odd accidental deletion.
Online software: convenient and less prone to errors, but more expensive
Many of our small business clients opt for cloud based software like Xero.
The advantage of cloud based software is that you can enter and create your invoices from any mobile device, and photograph and upload your receipts.
A disadvantage is that it is much more difficult to see exactly what is going on – it is very difficult to follow the money in the same way as you can in a spreadsheet. However, most cloud based software allows you to share your information and collaborate with an accountant. This means that help is only ever a phone call away, and questions can be answered quickly based on real time information.
Classic desktop software: robust and scalable, but not very user friendly
Using software like Sage 50, you can enter your transactions into a sales and purchase ledger in much the same way as described if using a spreadsheet.
Accounting software like this will take care of working capital items, and automatically keep your balance sheet up to date as your profit and loss statement changes.
Accidental deletions are an impossibility, as data can’t be removed, just offset against additional transactions. But this sometimes feels like extra work, and accessing the data to sanity check it can be hard. In fact, the software is really geared up to produce statutory accounts, so it can be quite difficult to extract simple but essential reports like a cash flow statement.
And many small business owners find the process fairly impenetrable unless they have an accounting qualification or a bookkeeper to do it for them.
If you’re not sure which method suits you best, why not drop us a line or get an instant quote to find out how we can help you set up and grow your business.