Up and running
Why do I need to keep books?
Once you are up and running, you will need to control the day-to-day management of your business.
No business can succeed without a methodical approach to financial housekeeping.
You need an effective bookkeeping and accounting system because of the tax laws, but it will
also give you the following information whenever you need it:
- Cash position
- Variable costs
- How much working capital you have
- Stock levels.
What is bookkeeping?
There is nothing mysterious about it. It is just a filing system for figures, which help to show how
well your business is doing.
But why keep books? To satisfy the tax authorities? To keep your accountant happy at the end of the
year? Yes, but your books are much more important than that. Without them, you can't hope to stay
on top of your everyday business life.
What books should I keep?
It is important that the records you keep should be permanent and long lasting.
The following are some of the books you should always consider keeping:
This is used to record the business's income and expenditure. The more detailed the record the better,
and remember to have columns for VAT under both income and expenditure. The end- of-month totals and
the difference between the bank columns is your bank balance at any time. It should match your bank
statement when it arrives. Remember that your bank statement will usually be behind your record.
It will not include your most recent transactions.
If you give your customers credit, or you get credit from your suppliers, you will need to record
the transactions in Sales and Purchase Day Books. You must transfer the figures to your Cash Book
when you make or receive payments.
Sales Day Book
This shows who owes you money. You have sold goods to a customer and sent them an invoice.
Make sure you keep a copy of the invoice. You can use it to write up your Sales Day Book.
If you decide to offer a discount for early payment, you must add another column. When you
have written up the invoice you can file it, usually in a ring binder. Give your invoices a
number and keep them in the right order. This will make them easier to use. When the bill is
paid, make a record of it in the invoice file and transfer the paid invoice into a permanent file.
Purchase Day Book
This shows the money you owe. You have been supplied with goods and you may have a credit period
before you need to pay.
As in your Sales Day Book, record your transactions immediately. Don't let them build up.
File the incoming invoices in a ring binder, in the order that you get them. Also, set up a
diary system to make sure you pay the invoices on time.
Petty Cash Account
This is where you record all of your minor spending, such as postage and small office supplies.
Take the float out of your bank account and enter it into your main Cash Book. You now have a
petty cash account. Always replace the cash taken out with a receipt that shows exactly how it
was spent. If VAT is included in the receipts, you might want a more lasting record.
It is a good idea to have a separate book, which shows any spending from petty cash and has a column
for VAT paid. Make sure that whoever controls the petty cash, balances it regularly and that someone
else checks it once a month.
Your accountant can also give you advice about other record-keeping tasks, such as inventories,
stock records and 'replenishment' systems.
If your business grows and needs a more sophisticated system, you may need a computer and appropriate
software. If so, make sure it suits your needs. Talk to your accountant first.
How do I monitor my performance?
Once your systems are in place and you have made your Business Plan and financial forecasts,
you need to monitor your performance. You should use the information you have gathered to compare
your actual figures against your projections. They will hardly ever match exactly. But if there
is a significant difference, you need to find the reason and decide what to do about it.
There are many reasons why variances occur between forecasts and actual performance. These reasons
- Using more materials than estimated
This will reduce the gross profit margin.
- Suppliers increasing price of materials.
Again results in a gross profit margin reduction.
- Customer buying less.
This will reduce sales and so gross profit as well as
perhaps increasing stock levels.
- Customers took longer to pay than anticipated.
- Production may have fallen behind schedule.
- Interest higher than predicted
Perhaps because the overdraft used is larger than originally expected.
Debtors and creditors
Slow payment is a big problem for small businesses. It is also one of the main reasons why
businesses fail. If your customers do not pay on time, you may be late paying your own creditors.
This usually increases your overdraft. Then you will have to pay extra interest, which will cut
into your projected net profit. This is a simple enough circle of events, and a vicious one.
Always try to negotiate the best possible terms for your business, but be careful not to put off
either your customers or suppliers. Once you have agreed terms, they must be kept to. To help
you keep control, it is useful to look at your debtors and creditors on an 'aged' basis. That is
to say, 'How long ago should they have paid or been paid?'
You need to monitor how well your business is doing and keep track of performance.
You can spot changes by using the following quick calculations:
Gross profit margin.
This shows the difference between value of sales and variable costs as a percentage:
x 100 = %
Net profit as a percentage of sales
This ratio shows what percentage of each sale is being converted into profit:
x 100 = %
Rate of stock turnover
This calculates how quickly stock is being used:
Cost of stock sold
Average stock at cost
Net working capital (current assets - current liabilities) as % of sales
This is used to calculate how well assets have been utilised to create the sales:
Net working capital
x 100 = %
This calculation shows whether it would be easy to sell your business using only assets
that could be quickly sold or realised. It also shows whether your business can pay debts
as they are due. Your debtors should only be trade debts from which you will receive payment
within a few months. In this calculation, do not include any stock unless you can sell it
quickly for cash.
How Can I Get The Best From My Employees ?
There are a number of ways in which you could recruit new employees:
Advertising locally or in special papers.
Write to colleges and schools for candidates.
The Job Centre, The Job Club, the local Careers Office (if you are looking for a teenager)
An employment agency
Job Centres and Careers Offices give their services free, but an employment agency could cost you
as much as 20% of the employee's first year's salary.
Training is necessary to make sure that staff know why and how a job has to be done.
It can also make them more efficient and help increase productivity. (Investing wisely in
staff and training really does pay off in the long run!)
The better you treat your employees, the better they will treat you. If you are well-mannered,
punctual and committed, they probably will be too. Show them that they are valued,
encourage their interest in the business and ask them for suggestions.
Have confidence in your workforce and allow them to get on with the job. Checking everything
they do creates resentment and not much else. All good managers are able to delegate.
In fact, there is an argument that says that good delegation is really what management
is all about.
You could also set targets and give bonuses. This way, you will encourage your employees to
work harder. As a result, you will increase productivity and waste less time.
Payment - you must always pay wages on time and at competitive rates.
Show appreciation - praise for a job well done is a real incentive. But try not to be
over-friendly. This is difficult when you are working one-to-one, but it might reduce
your authority and it will be difficult to take a firm line if you ever need to.
It is important that you care, and show you care, if someone is often late or idle. There is
usually a hidden cause. Try to get to the heart of the matter, but don't pry. If you find out
what the problem is, deal with it as soon as possible. Positive action will give you a positive
response and your employee may try to improve. Try to encourage employees to be open with
problems so that they are willing to discuss them with you.
Broadly speaking, your relationship with your employees depends on your personal approach.
But administration is what you actually do. Of course, they are often difficult to keep separate.
Maintaining accurate and up-to-date staff details is a prerequisite to all your dealings with
employees. Apart from confidential personal details, records should also be kept of complaints,
reviews and appraisals.
When employing people there are a number of issues to address:
- Determine the exact skills needed, working hours and the wage you will offer.
- Work out a simple application form for candidates to fill in before you see them.
- When interviewing, give candidates exact written details of the job.
You can learn more this way and it helps to structure the interview.
- Sleep on it.
- Sleep on it for a bit longer after telling the candidates when you will make the decision.
- Once you have decided, draw up the contract.
- Include a clause that will let you end the contract after a trial period.
- It is against the law to discriminate against candidates because of their disability,
race, colour, nationality, ethnic origins, sex or marital status.
- Make sure you are working within health and safety regulations. Contact the Health and
Safety Executive for information about safety standards and to arrange a site visit by one of
- Do you know your own rights and your employees' rights concerning trade unions?
- Do you know the rules about dismissing an employee?
- You cannot sack someone on the spot unless you have a very good case.
- You must take tax and National Insurance contributions from your employees' wages and
send the money to your local Tax Office, following instructions the Inland Revenue will give you.