Record Keeping Best Practices for Small Businesses

During this month’s Facebook Live, I talked about best practices businesses can put into place to help them keep their financial documents organised and why it is so important.

The backbone of keeping your accounts up to date is keeping accurate financial records.  This includes keeping copies of sales invoices, purchase invoices, receipts, bank, and credit card statements. Using these vital pieces of information will help you to have a better understanding of the financial picture of your business, and you will have proof of transactions if HMRC ever does an inspection.

Every business within the UK is required to submit information to HMRC.  It could be submitting regular VAT returns, weekly or monthly payroll information as you are an employer or end-of-year tax returns.  The information that you submit to HMRC needs to be accurate and complete, and without ensuring that you have the documentation to back up those transactions, you won’t be able to do this.

For a business that is just starting out, getting into the habit of keeping the required documents is beneficial as when the business grows and has more records that need to be kept, you will already have all the necessary processes in place and be used to them.  If you are an established business and you don’t have any processes in place for keeping your financial documents, it isn’t too late to start.  You can start out by ensuring that you keep copies of all purchase invoices/receipts, and once you have those processes sorted out, move on to keeping the sales records.

HMRC now doesn’t require you to keep these records in a paper format, you can store them in a digital format!  This makes it even easier for a business to store the necessary information, as you don’t need to find places to store physical paperwork, you can save the documents to your laptop, in the cloud or even in your account’s software (if it’s an available feature).  While you don’t have to keep your purchase invoices/receipts and sales records in digital format, there are some documents like the C79 VAT Import Certificate, that HMRC does still require you to keep in paper format.

Tips for keeping your records:

  1. Set up a file system to store your receipts on your computer or a cloud-based system like DropBox, Google Drive, or One Drive.  You will want to have a folder for each tax year, and within that folder, a folder for each month.  That will help you to be able to keep track of the information better.  You could even have a separate folder within each month for sales and purchases, and then a folder within those ones for what you have processed.  You can make this system as simple or as complicated as you want and set it up in a way that suits your business.

    As soon as you have been sent a receipt or invoice via e-mail, save it to the correct folder.  If you get any invoices or receipts in paper format, take a photo of them, or scan them and save them to the relevant folder.  If you have items that you pay for on a regular monthly basis and you aren’t sent an invoice for those, but you can download the invoices from an online portal, make sure to build that step into your processes so that you don’t forget to get those invoices each month as well.

    It is a very good idea to ensure that however, you choose to store your files digitally, you do have a backup copy, just in case something were to happen to the original.  If you upload the items to a cloud-based storage system, you could save them to an external hard drive.

  2. If you are using cloud-based accounts software, you may be able to attach a copy of your invoices or receipts to the individual transactions.  With the requirements for MTD coming into force, you will be required to provide proof of each transaction, so what better way to do that than by attaching the documentation to the transaction?  Not only will you be able to provide proof to HMRC about what a transaction is for, but it also doubles up as a storage system for the records.

  3. Perhaps you have a bookkeeper or accountant that does the regular bookkeeping work for you?  As well as storing the documents yourself, make sure you get into the habit of sending the information to them straight away so that they can keep your accounts up to date.  Talk to them and find out if they already have a process for receiving and storing the information from their clients that they need.  Include those processes into your own business processes so that everyone within your business knows how to get the financial records over to the bookkeeper or accountant.  For example, I ask clients to upload their documents to specific folders on Accountancy Manager or to e-mail them to a specific e-mail address.  By sending the information to your bookkeeper or accountant, can also provide you with some redundancy if something happens to your copies.

  4. With the majority of the cloud-based accounts software that’s available, they will either have an in-built receipt capture software that you can send or upload your invoices and receipts to, or have the ability to use a 3rd party app like AutoEntry, Dext or Hub Doc – to not only send the information to your accounts and attach the document directly to the transaction, but again it can also act as a backup storage system.  Have a look at your accounts software or speak to your bookkeeper or accountant if they do the regular bookkeeping work and see if either of those features are available.  Being able to upload or e-mail the information directly to the account’s software or a 3rd party app, will make your processes a lot more streamlined and efficient.

Once you get into the habit of saving your documents, and/or sending them to your bookkeeper/accountant or the software, regularly, you will find that it saves a lot of stress as you won’t need to worry about the paperwork being lost or forgetting what something is for.  It will help you to ensure that your accounts are being kept up to date and are accurate.

How long do accounts records need to be kept?

The length of time you need to keep your financial records for depends on the type of business you have.  If you are a sole trader, you need to keep your records for 5 years.  If you are a limited company, you need to keep them for 6 years.

A lot of people assume that it’s 5 or 6 years from the date of the end of your tax year, but you need to keep the documents from January 31st the year after the tax year ends.  This takes into consideration that tax returns don’t need to be submitted until January 31st following the end of the tax year.  For example, for the 2022/2023 tax year, you will need to keep your records for 5 or 6 years from January 31st, 2024.

If HMRC does an inspection on your business, they could ask for all records dating back to 2 previous decades, so the longer you keep your records for the better.  Being able to keep the records digitally can help with this as you won’t need space to store the physical paperwork.

Why is it important for a business to keep good financial records?

There are many reasons a business should ensure that they are keeping good financial records. 

These are the top 4 reasons:

  1. By keeping good financial records, you will be able to keep your accounts up to date and ensure that the information within the accounts is also accurate.  This will then allow you to make better-informed decisions about the business.  You will know when you need to register for VAT, if you can afford to hire staff or even if that marketing campaign worked.

  2. You will have a much better idea of the cash flow of your business.  It will make it easier for you to see who owes you money, and also who you owe money to.  You will be able to better plan for future expenses that the business will have.

  3. Your stress levels will be greatly reduced by keeping your financial records straight and up to date.  Getting into the habit of storing your documents and providing them to your bookkeeper or accountant straight away, means that when your annual tax return is due, you won’t be scrambling to try and find the necessary documentation or trying to remember what a transaction was for.

  4. As mentioned earlier, keeping good financial records can help with any inspections HMRC does.  You will be able to provide the information the inspector is looking for quickly and easily – especially if that information is attached to the transactions within your account’s software.  It can really help to reduce the chance of any errors HMRC might be looking for.

If you would like to talk about how you can ensure that you are keeping good records for your accounts, please feel free to e-mail me.

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