7 Steps For Setting Up A Small Business Bookkeeping System


When it comes to setting up your new business, your initial focus will likely be on getting your product right, then getting it out there.

While this is obviously a top priority, it’s important that you’re building your business on the sturdiest foundation possible. Having a bulletproof financial system that tracks your income, expenses and general information in real-time is crucial for success.

Not only will keeping tabs on the numbers help you tackle Self-Assessment – it will also give you a better understanding of where your business is at, as well as where it’s headed. 

In this blog, we’ll break down the process of creating a bookkeeping system into actionable steps.

1. Choose Your Accounting System


Depending on the size and annual revenue of your business, there are two main systems you can use when registering with HMRC: Cash basis accounting or Traditional (accrual) accounting. 

Use Cash Basis accounting if:

  • You have an annual turnover of £150,000 or less.
  • You have Sole Trader status

With Cash Basis accounting, you only pay tax on income that you’ve actually received.

For example, if you’ve invoiced a client, but they haven’t paid by the Self-Assessment deadline, you won’t need to declare this as income.

If they do pay it later, you can roll this over into your profits for the next tax year. 

Traditional (or accrual) accounting works best for:

  • Limited Companies
  • Businesses turning over £150,000+ annually

Traditional Accounting means that you must declare (and pay tax on) all income that you’re due – regardless of whether it’s been paid.

However, if the invoice is never honoured, you can deduct it from your profits the following tax year. 

While it might seem like the lesser of two options, Traditional accounting actually offers better business rates and more flexibility. It’s worth noting that, once your annual turnover hits £300,000, you’ll need to swap to this method, regardless. 

TOP TIP: For a clearer understanding of these two systems and which one is best for you, head on over to our blog on the topic

2. Set Up A Business Bank Account


A separate business bank account is a must-have for your company – regardless of its size.

Arrange for all income and expenses related to your business to flow through this account. Keep your personal outgoings – such as household utility bills, council tax or rent – tethered to your private bank account. 

Doing this will help keep you out of murky waters in more ways than one. Here are the main advantages:

  • Using a business account ensures that each transaction is related to the company – meaning no unpleasant surprises.

  • Many bookkeeping apps allow you to automatically import data from your bank account into their system. Having a separate business account will save you the hassle of sifting through each individual transaction to divide them into business and non-business categories.

  • Keeping your business and personal accounts separate will score you major brownie points with HMRC. It shows transparency and professionalism – and is an all-around no-brainer.  

3. Choose A Bookkeeping App


In today’s digital age, recording information has never been easier – or more complicated…depending on who you ask! 

You might be tempted to stick with the old Excel sheet, especially if your business is only starting out.

While manually inputting your data is certainly one way to do it, it’s the least efficient way. Not only is this method incredibly time-consuming and inefficient – it also leaves a much wider margin for error. 

The good news is: there are lots of affordable, user-friendly bookkeeping tools on the market. Some of them (like Crunch) even offer free start packages if your budget is tight.

4. Create A Chart Of Accounts


This is a list of all the accounts you’ll have in your bookkeeping system.

Typically, these accounts should have a name, a type, a description and a number.

The most common categories are: asset, liability, expense, and income. For example:

NumberAccount DescriptionAccount Type
1150Facebook AdsExpenses
1200Wages PayableLiabilities
1250Mobile salesIncome

Each of these categories should break down into subcategories (this will be the ‘name’ of each account).

This structure is essential for staying organized, and most bookkeeping apps will have a standard template to help you out with this. Of course, you’ll need to adjust it to suit your needs – especially as your business grows!

5. Set Up An Expense Tracking System


As you get your business started, it can be very easy to lose track of your outgoings. Businesses expenses can be deducted from your profit report at the end of the tax year. Having an accurate, streamlined process for logging expenses will help determine how much you can claim. 

The simplest way to do this is to store receipts. While it’s probably a good idea to keep the paper trail as well, no one wants to sift through a year’s worth of receipts come January.

Fortunately, there are plenty of useful apps to help you log and track expenses. Software like Expensify, Zoho or Quickbooks is great for this. Quickbooks, in particular, will automatically input the data from a snapshot into a spreadsheet. These sheets can then be sorted by date, transaction type etc. 

Whichever app you choose, make sure its easy to navigate. If it isn’t, the temptation to put off logging receipts can take hold. Procrastination is no man’s friend!

6. Prepare Your Bank Reconciliation Process


Bank reconciliation means comparing your monthly statements from your business account with your own records (your Chart of Accounts). Making sure they’re both accurate is essential to keeping tabs on your finances. 

While many bookkeeping apps offer this as an additional service, you might decide to do it yourself.

If so, here’s how it goes:

  • Once you’ve gotten your bank statement, add any outstanding items (such as checks that haven’t cashed yet or direct debits that have yet to come out that month) and write the new total at the bottom. 

  • Carefully check the transactions in the bank statement for any errors (if you find any, make sure you contact your bank immediately). 

  • Adjust your Cash account (this should be under ‘Assets’ in your chart) to reflect bank-generated transactions such as service charges or interest payments. 

Hopefully, it all adds up. And if it doesn’t, you’ll be able to narrow the issue down to the past month, as you’ll have been reconciling monthly.

If things continually seem out of balance, though, you might consider bringing in an accountant to find the issue before it spirals any further.

7. Set Up Your Reporting System


Monthly reports are an excellent way to assess the financial health of your business. They’re also good to have when pitching investors, or applying for a business loan.

Most bookkeeping systems have a number of free reporting templates available to help you get set up.

While there can be dozens to choose from, the three basic reports relevant to your business are as follows: 

1. Balance sheet

Balance sheets reflect your business assets, liabilities and equity at any given time. Balance sheets are helpful when ascertaining your company’s net worth, as well as weighing assets against liabilities. 

You can also use balance sheets to calculate your business’s solvency and liquidity ratios.

All of these are key factors to determine whether or not your business is in good financial health. 

2. Income statement

Income statements – or P&L (profit and loss) statements – will show you how successful your business was over a fixed period of time.

With income statements, you can compare your revenue (money you made from selling products or services) to your expenses. If your revenue was higher than expenses, you turned a profit. If the reverse has happened, you’ve made a loss. 

Even if you’re in the minus, it’s not all doom and gloom. Income statements provide a clear picture as to which products and services have been most and least profitable.

Knowing this will help you decide on which areas to expand, and which to remove – or, at least, restructure. 

3. Cash-flow statement

Cash flow statements tell you how much actual cash you’ve received over a fixed period. 

You might be wondering how this is different from an income statement. Income statements are based on traditional (or accrual) accounting systems – meaning its revenue includes invoices that might still be pending.

While your business might show significant income according to your Income statement, you might still be short on cash.

Cash-flow statements are also a key indicator of your business’ overall performance.

If your cash flow is consistently lower than your income, take a closer look at why you’re having issues getting paid.

Want Some Help With That?


A good bookkeeping system helps your business save money, prevents losses, and outlines potential areas for growth. However, getting it right requires a good deal of time and effort on a regular basis.

If you’d rather focus that time and effort on expanding your business, consider outsourcing your bookkeeping and accounting to a professional. Our CORE plan handles your bookkeeping, tax compliance and reporting from just £199 a month. Find out more about CORE.

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