Complete Guide to Small and Medium Business Accounting

When it comes to merging personal and professional ambitions, there’s nothing quite like being your own boss. Recent years have seen a boom in people ditching the 9-5 and putting their passions to the test. This is especially true of the UK, where small businesses contribute enormously to the economy.

Check out these stats from the UK Federation of Small Businesses:

● At the start of 2020 there were 5.94 million small businesses (with 0 to 49 employees), 99.3% of the total business. SMEs account for 99.9% of the business population (6.0 million businesses).

● SMEs account for three fifths of the employment and around half of turnover in the UK private sector.

● Total employment in SMEs was 16.8 million (61% of the total), whilst turnover was estimated at £2.3 trillion (52%).

● Employment in small businesses (with 0 to 49 employees) was 13.3 million (48% of the total), with a turnover of £1.6 trillion (36%).

The numbers speak for themselves: small businesses are a force to be reckoned with!

Along with the creative rush of starting something new comes a labyrinth of decisions. Some of these decisions - like naming your company, approving a logo or styling a product - are fairly straightforward. Others - such as how to manage your finances - can feel a lot more complicated.

A survey revealed the following factors are considered barriers to starting a small business:

1. Finance – 50.6%

2. Knowledge – 17.7%

3. Confidence – 9.4%

4. Legal – 5.3%

5. Idea – 4.4%

6. Time – 3.2%

7. Customers – 2.9%

It’s no surprise that financial issues topped this list. That being said - they don’t have to be a barrier.

Of course, you need capital to start a business, and revenue to keep it going. But sales aren’t the only way to boost your income. Understanding where your money comes from and where it’s going, knowing how to file your taxes, and accessing all support available - all these things contribute to your bottom line.

When it comes to small business accounting, there’s no better source of information than those who do it for a living. We’ve put together a simple, five-step guide to SMB accounting to help you navigate this process - and set you on a pathway to success!

First thing’s first...

1. Open a business bank account

You’ve heard the saying “Never mix business and pleasure.” Whether or not this timeless (and somewhat cynical) adage is true for every situation, it definitely applies to managing your money.

Keeping your business and personal finances separate is critically important for a number of reasons. The benefits of doing so - as well as the risks of failing to - can be found in detail here. Think about your closet or kitchen pantry. When it comes to finding that key ingredient, or pulling out that favourite shirt, organisation is key. While keeping cupboards tidy might be easier said than done, separating personal and business transactions is usually more straightforward.

Most High Street banks offer business bank accounts. Newer digital challenger banks also offer business bank accounts and some, like Tide, exclusively cater to SMEs.Your current personal bank likely has a range to choose from.

Some people find it easier to have both personal and business accounts with the same bank. Having said that - it’s good to shop around. Banks often have different rates, including fees and overdrafts. Do you research to make sure you’re getting the best value for money!

Once you’ve opened an account, it’s time to make use of that new debit (or credit) card. Paying for company expenses using your business bank card will help build your credit profile - handy if you ever decide to take out a business loan. You should also use this account to pay yourself a salary. That way, you can claim your own wage as a business expense, and knock it off your end-of-year profits (For more information on how to pay yourself, see our respective guide for Sole Traders and Limited Company owners)

Top Tip:

There are different accounts available depending on your registered business status. For more information, head over to our blog about Sole Trader vs Limited Company status to see which works best for you.

2. Get Tax-compliant

This is arguably one of more confusing (and less pleasant) aspects of running your own business. Some of the most pressing questions are:

● What forms do I need to complete?

● What taxes do I need to pay?

● When and how do I need to pay them?

The answers to these questions vary depending on your registered business status. Tax regulations differ for sole traders and limited companies. It also depends on which accounting system you decide to use: Cash Basis or Traditional (accrual).( If you’ve yet to make this choice, you might find our guide on the topic helpful).

Here’s a quick peek at the most common forms you’ll need to complete:

Self Assessment forms and helpsheets for self-employment and partnerships

Self Assessment: Partnership Tax Return (SA800)

Self Assessment: self-employment (short) (SA103S)