Understanding the financial processes of bookkeeping and accounting

by Inna Kaushan, co-founder of Solna

As a female business owner, it is likely that you will be very busy. We understand!  Projects and customers requests come one after the other and the pressure piles up. In this situation it can be tricky to focus on all the other aspects of running your business but, as we know, if we get behind things can come back and bite us. Think what it is like when you suddenly realise that you’re approaching the deadline for a self-assessment tax return and you don’t have your records up-to-date!

To make sure this doesn’t happen there only two things can help you: accounting, and bookkeeping. These are important financial processes that’ll assist you with financial control and end-of-year tax affairs. They are different and it’s important you understand how they differ as you move ahead with your business.

Let’s look at bookkeeping 

Bookkeeping is the process of keeping accurate records of business transactions. All financial transactions are recorded and stored in your ‘books’. Additional activities include verifying and recording invoices, paying suppliers and keeping receipts. 

A bookkeeper is a data entry professional. A bookkeeper’s role is to maintain accurate business records. The ‘books’ a bookkeeper maintains are then used by an accountant to prepare finance reports and file tax returns. Some accounting practices offer bookkeeping as part of their service, so everything’s under one roof. 

Do I need a bookkeeper? 

You can practice good bookkeeping yourself with software. There’s a plethora of tools out there, such as Rydoo. If you’re already on top of your books but are struggling to keep tabs on your invoices, you can track invoices with Solna. 

If you don’t want a hand in maintaining your books, outsourcing to a bookkeeper is the only way. Bookkeepers typically charge £50 an hour. Most freelancers will need three to four hours a month, so the outlay will be around £200 per month. If you earn way more than this then it makes sense to outsource to free up your time. 

Moving on to accounting

Accounting is the process of presenting financial information in various reports. A relevant example is the end of year self-assessment. Simply put, accounting is the art of presenting information in different forms, such as balance sheets and income statements. 

An accountant is a finance expert who manages your tax affairs on your behalf. Your accountant exists to provide up to date monetary business advice and help you run a tax efficient operation. Bookkeepers, by comparison, crunch data. They don’t provide advice or assist with the creation of financial reports or tax returns. 

Do I need an accountant? 

You don’t need an accountant to file your self-assessment tax return. You can do this yourself online in a matter of minutes. However, in doing so you run the risk of paying more income tax than you should. For example, you might not make proper use of your allowable expenses or setup a tax efficient payment structure. 

Accountants are worth their weight in gold because they can advise you on the most tax efficient structure for your business. For instance, they might set up a PAYE scheme for you and note some payments as dividends. This is all complicated stuff if you’re not familiar with accounting – which is why you need an accountant. 

Working together

It is important, in your business, that you bring bookkeeping and accounting together. Both jobs are separate but there need to be a close relationship between the two of them. Whether you do the bookkeeping yourself, or bring in someone to do this for you, accurate bookkeeping will make your accountant’s life easier (and reduces your bill in the process) and good accounting ensures all your hard work is put to proper use when the time comes for financial reports or returns to be prepared. 

And finally

It’s important to remember which regular tasks bookkeeping covers and which it doesn’t. Bookkeeping doesn’t send out invoices for you nor does it automate payment reminders if they become past due. And, while bookkeeping will help you make informed business decisions, it won’t track your customer credit scores so that you stay in the loop about their risk profile. For these tasks, you will need to use an automated system that can generate invoices, chase them automatically and will allow you to check credit scores of your current and potential customers.  This is valuable information which can tell you which customers are likely to be the biggest risk when it comes to being paid when you should be.

ABOUT THE AUTHOR

Inna Kaushan is co-founder of Solna, a smart invoicing platform powered by credit score data. Solna speeds up the invoicing and payment process for freelancers and small businesses. Through leveraged credit data that is overlaid on the platform’s invoicing and reporting functionality, users get a clear picture of their customer’s financial health and their overall exposure to risk. The system’s automated credit control functionality automatically chases overdue invoices – freeing up time and ensuring faster payment. 

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