Formalities:
Setting up accounting systems
First, identify what transactions you need to record. Most small businesses have the following:
For each transaction, you need to record:
- The date
- The type of transaction
- The other person involved
- The amount involved.
Click on the links for each type of transaction above to get a sample spreadsheet that you can download and use.
Value Added Tax
With certain exceptions, VAT paid on purchases is recoverable, while you must account to the Revenue Commissioners for VAT you charge on sales.
This means that, if the amount you pay for purchases includes VAT, you can reduce the cost to your business by the VAT amount. Similarly, you must deduct VAT from your sales before accounting for them in your business.
Bank balance book
Your bank balance is one of the most important pieces of information in your business. You need to know what it is on a daily basis.
To save time ringing the bank every day, since you have all the information you need to calculate it yourself, keep a Bank Balance Book.
“Still due” file
In addition to your bank balance, you also need to know who owes you money and how much.
A simple way of doing this is to set up a “Still due” file – a folder into which you place a copy of every invoice you send out for sales on credit.
As you get paid, take out the relevant invoice and tear it up. Adding up all the invoices in the file tells you how much you are owed. And the thickness of the file provides a quick visual check of the effectiveness of your credit control procedures (see below).
“Still to be paid” file
Another piece of essential information is the amount of money you owe – particularly to suppliers, who may cut you off if they don’t get paid on time.
Open a file, into which you put a copy of every invoice you receive from your suppliers for goods or services you buy on credit from them.
As you pay your suppliers, take out the relevant copy invoices and staple them to the cheque you are sending. Whatever is in your “Still to be paid” file at any point is the total of what you owe.
In addition, your suppliers know exactly which invoices you are paying, since you have sent them a copy. Management information in two businesses, no less!
An information system
You can begin to combine, adapt and expand the “books” and files above to provide you with an information system, following your accountant’s advice.
As you become more familiar with the financial side of your business, you will identify figures that help you understand what is happening – sales each day/week/month, for example. Organise a system to extract and report these regularly.
Regular accounts
Every business is effectively required to prepare accounts once a year – some because they are limited companies and are required to do so by law, others because the tax authorities will need them to determine how much tax the business should be paying.
But annual accounts are not much help in running and managing a business because:
- They are too infrequent – A year is a long time not to know what is happening to the finances of your business
- They are prepared to a different format – One that often is not helpful for decision-making.
So you need to consider preparing more regular accounts. Monthly accounts may be too much of a burden on your time and not repay you with enough useful information but quarterly accounts are essential.
Now move on to consider the other aspects of formalities:
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