Ep10: Accounting and Bookkeeping for Sole Traders

Ian Williams, Business Advisor at Outset Cornwall

When starting out, accounting and bookkeeping for sole traders and small businesses can be a minefield. From knowing what to record, file and keep, to setting up a system that works, it’s important to get it right from the start.

Ian Williams is a business advisor at Outset Cornwall, and has a lifetime of experience in finance for small businesses. Working in a range of different financial settings has given Ian a great insight and he has a wealth of knowledge on tax, bookkeeping best practice, legalities, and day-to-day finance for small businesses.

Ian chats to our host Rich Gunton about accounting and bookkeeping for sole traders and small businesses. He discusses the technicalities of filing your tax return with HMRC, plus various methods for maintaining effective bookkeeping. He also outlines the benefits of outsourcing some of the financial management aspects of your small business.

From what to think about when finding an accountant, to working effectively with a bookkeeper, small businesses can learn so much from this discussion. Ian also gives his advice on preparing for business loans or investment.

There’s a huge amount packed into this discussion, so we advise making some notes and referring back to them regularly!

We hope you enjoy this episode. Get in touch for more information on how we can support your business start-up journey.

For more in-depth information, latest news and guidance, visit https://www.gov.uk/government/organisations/hm-revenue-customs

Read the full transcript here

Announcer (00:01):

Welcome to the Outset Podcast, the business startup podcast from Outset Cornwall, for support and inspiration to start, run and grow your business. Here’s your host Rich Gunton.

Rich Gunton (00:15):

And on this week’s podcast, Ian Williams joins us. Hello, Ian.

Ian Williams (00:19):

Hello, Rich. Nice to catch up again.

Rich Gunton (00:22):

So you’ve had a varied career, which has brought you to the wonders of working in Cornwall in finance. Do you wanna give us a bit of a brief overview?

Ian Williams (00:31):

Thanks Rich. Yeah, I’ve worked basically all my life in finance; right from starting early on with Eagle Star and I’ve moved forward in, into working in different sort of companies, working in compliance. And then I’ve also set up my own independent mortgage broker business, as well as working part-time for Outset Cornwall. So as a sole trader, I have a very simple business model and having had a degree in accountancy, I’m quite happy to do my own self-assessments and I’m lucky that my wife’s a bookkeeper as well, so she can help sort things out on that side as well.

Rich Gunton (01:02):

Yeah, keeping it in the family, brilliant. And so the purpose of today’s podcast, or as it’s entitled Accounting and Bookkeeping. It’s interesting I think it’s one of the things that every small business owner, whether as you mentioned a sole trader or, even if you become a limited company or a partnership or any of the other structures, I think the accounting and bookkeeping is usually at the forefront of people’s mind in terms of: Okay, this is what I need to set up, but then it very often can get pushed to the side and without proper bookkeeping, and keeping your eye on the ball. It can become a bit of a hassle and a bit of a stress. Can’t it?

Ian Williams (01:38):

Yeah, very much. And, you know, I always think setting up a system is just as vital as marketing your business or dealing with customers. Depending on the size of your business, this could be as simple as just a straightforward spreadsheet, or you may need an accountant together with perhaps even full-time bookkeeper, but it all depends on the size of your business and the complexities. The beauty at the moment is that for basically sole traders, HMRC don’t specify any particular format, as long as you can identify clearly the income that’s coming in from the sales and customers that you deal with and the expenditure you have with the business. So basically then you can complete your self assessment. And if they ever ask you, you can prove where your figures have come from. So it is vital you set up some sort of system.

Rich Gunton (02:20):

Definitely. We’re gonna be looking at some of the software that’s out there a little bit later on, and talking about using a bookkeeper. The day to day then; Setting up your system, thinking about, I guess, your financial goals over that first 12 month period. And over the first couple of years. When it comes to thinking about the day to day, what are some good habits to get into then?

Ian Williams (02:44):

I think don’t put anything off. I always say get into the habit of recording your income expenditure. So that basically means finding any invoices that you’ve raised, putting any receipts, both physical and electronics safely into either little folder that you keep or electronically on your computer. And for goodness sake don’t wait until Christmas, then panic, trying to find them all to complete your self-assessment by the 31st of January. So as soon as you start get yourself organized, then the easier it is to actually come to do your self-assessment or pass it to a bookkeeper or accountant from there.

Rich Gunton (03:16):

Definitely, and I think, again, talking from personal experience, self-employed for nearly 20 years, absolutely keeping books and accounting and financial side of things, isn’t really my forte. I would say a lot of people go into, a trade or if you’re into baking or carpentry or into services, you’ve usually got a real love and desire for a particular type of business. And the added hat of the accounting and bookkeeping is often reluctantly worn, I suppose, without giving the accounting and bookkeeping a harsh time. Unless you’re like your good self in the financial world or from an administrative background, it can be something to really curve that habit in, on a day to day basis, as much as you possibly can. I think it’s an interesting one. I know when we talk with some of the Outset clients over time management and those sorts of things in terms of wearing all different types of hats, usually maybe setting aside a day a week, msybe not a full day, but a particular day each week, where you open that door on your bookkeeping: where are your receipts? Where is everything? How are you arranging everything? It might only take an hour or two on a weekly basis rather than like you say, leaving it to the end of the month, or even the end of the year where things will get an awful lot more stressful. And, you’ll never be able to find that that Costa coffee receipt for three pound, the overpriced coffee that you bought.

Ian Williams (04:42):

Very much. And I think it’s really important to look at your own strengths and skillset and play to those. So if you are busy, like you said, you running your own business. And if, unlike me, you don’t necessarily like finance or you don’t have the time. Then that’s a really good indicator to perhaps get yourself a part-time bookkeeper, becuase they can do things so much quicker than you can. And they can keep on track of everything. I mean, having a good bookkeeper can send out your invoices, chase late payments or take your bills, keep you updated with your balances, you know exactly where you are with your business, how things are going and they can liaise with your accountant as well. So you’ve always got your hand on the pulse as to what’s happening financially with your business, but you don’t have to physically do it. So it is really good way of doing that. Then you can get on with the bits you are good at and finding customers and looking after them.

Rich Gunton (05:28):

With regards to keeping those receipts and what you may then pass over to a bookkeeper. We do obviously live in a world of electronic devices and digital records. Now you mentioned before about sort of HMRC. Do we need to be keeping the physical receipts anymore?

Ian Williams (05:43):

Well, that’s the really good thing with this nowadays in that with HMRC, they are very straightforward in that. Basically they have no requirement that you have printed receipts, basically. Don’t forget when you do your self-assessment, unless they call to look at your figures, they don’t actually need any verification. Don’t have to upload any sort of invoices or receipts or anything like that. But obviously you do need to have them in some format, whether that’s printed ones in your drawer, in your filing cabinet or as electronic ones on your computer, just so if they ever did call for it and say, there we go, Mr. Williams, you would like to see how you’ve derived your income and expenditure. Could you please verify this? I could then upload and send them the data to prove what I’ve done, my self assessment based on. So yeah, certainly worth keeping all of that information to hand, but you don’t have to actually print it all out. But if you do just keep it on computer then for goodness sake, make sure you do actually have a backup up safely for it.

Rich Gunton (06:39):

Looking at the use of a bookkeeper then versus doing it ourselves. I mean what are the sort of pros and cons would you say?

Ian Williams (06:46):

I mean, again, HMRC are pretty straightforward. They say you’re perfectly entitled to do your own accounts, but then don’t forget that’s the same as you’re perfectly entitled to do the servicing on your own car, but are you capable? You know, you might, might be happy to check the oil and the water in your car, but could you change your brake pads or get it MOT ready? So you have to think about, again, what we talked about earlier, your own skillset, you know, you might be quite happy to put together your invoices, receipts, get everything all organized, but could you then pull it all together, work out what your tax liabilities are, what other things you can claim for how it all works. So if you’re not sure, then the best thing you can do is get somebody in as a professional who can actually help you on that side of things from there.

Rich Gunton (07:25):

I think that’s a really, really good example. You know, you wouldn’t go and fix your own car unless you, you were that way inclined. And so why try and do something in terms of the bookkeeping and the accounts? I think that’s totally valid. So, often if you watching TV or social media and you see adverts with regards to software for keeping books and accounting and that type of thing, what’s your thoughts? Is it worth it?

Ian Williams (07:51):

Yeah, certainly can be a great way of streamlining and automating your record keeping. A lot of them have some great functions where you can use your smart phone to take copies of receipts and automate all these things. So, yes, as a tool, it’s a very, very useful thing. However I always say to clients, it’s a couple of things you need to remember if you have, or you intend to use an accountant, make sure you choose a system that’s compatible. There’s probably four or five systems out there at the moment. So last thing you want to do is choose one and then start using it and then speak to your accountant. And they go, oh, sorry, we don’t, work with that one. And you end up duplicating the amount of work. So that’s something to just bear in mind who you might be using from that side of things. And something I always say as well to clients is “remember the old IT saying of garbage in and garbage out”, because the biggest thing with the automated software and my wife who is the bookkeeper uses several different ones, is the failure of the automatic features, which act a bit like predictive text. They try to be too clever sometimes. So for instance, it sees a hundred pounds coming into the account and it’ll try to do is reconcile it with an invoice you’ve raised, for say a hundred pounds. Now that might be true. But equally, if you just do auto allocate or you just click yes to that one, it’ll allocate that a hundred pounds to that invoice, but it might not have been that particular invoice. It might have been a part payment from a client or it might have been some cash that you’ve deposited, but because you’ve allocated it now, you don’t always know what’s going on. You think, great, it’s all sorted. It’s lovely. And then six months down the line when you’re accountant or you are going through it thinking I haven’t been paid by somebody fully, or there’s a query with it. So always say to people, be very careful with the auto functions on these things that make sure you don’t end up in a mess with it.

Rich Gunton (09:37):

I think that’s technology all over. Isn’t it, use it for all of its wonders, but make sure you’ve ultimately got the understanding in the background of it all. And when it comes to shopping around, are there any particular brands or bits of software that you’ve used that you would recommend? I mean, I suspect there’s free versions and there’s fairly affordable versions. It’s gonna save us time and money in the long run.

Ian Williams (09:59):

Yes. You don’t necessarily want to just look for something that’s free, because it might not have the functionality you need. But if you are, like I said, gonna have an accountant, have a word with a few different people to see what they use because you know, they’re obviously naming names. There are some software systems that are out there that advertise quite heavily on TV that they have to advertise their heavily on TV because perhaps they’re not as good as other ones that the accountants use. So, you know, it’s worth finding out what the professionals use and then stick with something that they find works well.

Rich Gunton (10:30):

A little bit later on in the podcast we’re gonna talk about being ready to for funding and for loan applications and those sorts of things. And I guess that ties really well into what we’ve just said in terms of keeping records, but potentially a third party keeping hold of those records for you and making sure they’re in the correct format will only, as and when your business grows and develops, put you in a, probably a stronger position to have all those records to hand to evidence a future application for loans and funding and that type of thing.

Ian Williams (11:00):

Yeah, certainly from my mortgage brokering role, it is very vital that clients do have good, accurate, bookkeeping systems in place because the first thing a lender is going to ask is a) what’s the latest accounts that the client has, but b) who were they done by? I mean, they’re not necessarily gonna say that we won’t accept a client doing their own bookkeeping, but from a lending point of view, if they’re gonna lend you X hundreds of thousands to buy a property, they want to know that the accounts have been done professionally. And see if you can say X, Y, and Z chartered accountants have done my books for me and been submitted to HMRC, and here the tax overviews to back that up. They’re gonna look at it from an underwriting point of view, a lot more favor then yes, I did something myself.

Rich Gunton (11:40):

And I think moving from the use of a bookkeeper to the use of an accountant and perhaps we’re getting some clarity on the difference between those two in a moment. Talking about the loan applications and I suppose walking along the road of starting to talk about banks and bank accounts, there’s a temptation isn’t there to mix up your own income versus the business income. I guess you’d always suggest right from day one, as soon as possible to get a separate account. Is that right?

Ian Williams (12:12):

Very much. I mean, again, the revenue don’t specify that you do have to have a separate bank account, but it would be foolish not to because it gets so messy. It’s much easier to be able to identify exactly what is your own income and expenditure for your own business, rather than trying to sort out your shopping debits, your cash withdrawals, random credits, or from your business once when you come to do your self-assessment at the end of the year, or even if you pass them onto your accountant or bookkeeper, they’ll be looking through. And then the first thing they will do is go back and say, was this a business expenditure or was this a personal expenditure? And so you need to be able to have that differentiation nice and clearly for whoever does it.

Rich Gunton (12:47):

I think it’s good for a budgeting point of view as well isn’t it? When we talk in the early days of your personal survival budget or your living costs and startup costs and the overheads of the business. At any one point in time, you know, if you’ve used the appropriate separate business bank accounts you are able to log in on online or via an app for Starling or any of the web based bank accounts that you have now. They’re so useful in order to be able to export a spreadsheet or into a piece of software, um, without really needing to even think about it. So I think from a budgeting point of view, and from a clarity point of view, separating them is a really, really useful way to go. Isn’t it?

Ian Williams (13:32):

Yeah. It’s definitely key to keep things separate, makes life much easier. And although you might think, oh, I’ll do it on my bank account now then later on, I remember to change it. Then three or four months down the line, you’re looking at it thinking, what was that for? Was that for business? Did I buy that for myself? So again, if you can get into that habit from the day one to have it separated out, it just makes life much easier for you going forward.

Rich Gunton (13:52):

On bank accounts, what should be looking for? Have you got any words of wisdom?

Ian Williams (13:58):

If you are gonna get a business bank account, then certainly as you mentioned, there are a lot of online ones that are actually a lot more competitive than some of the commercial high street banks. And they’re offering some quite good deals on setting up. So it’s worth having a check around to what they all do. It depends on what you might want to do. So if you have a high number of online transactions, then you’ve gotta look at the charges perhaps that the banks put on. Or again, in the old days, when we have more physical transactions, people doing lots of shows and things like that, where they took a lot more cash, some banks charge a lot more for their banking transactions. So you’ve got to weigh up what you think you’re gonna be doing, and then work out which banks and which services have got the best sort of cost benefit for what you are doing.

Rich Gunton (14:41):

I think that’s really valid. Even in the last five years or so, how transactions and the changing of money has evolved dramatically with the rise of smartphones and apps and those sorts of things. Talking from personal experience, I’ve had HSBC and Lloyd’s bank and Barkley’s bank, all of the main players in business bank accounts. But now I actually have an app based one, which is Starling. It’s really easy to have payments going into that account. It’s really easy for them to come out. You still can access it online and export it into QuickBooks and other pieces of software. So, and that doesn’t actually cost anything. So I do think that the world of business banking across the industry is changing and evolving as well. Isn’t it?

Ian Williams (15:24):

Yes. It’s certainly been going online with a lot of our clients. They’re actually finding the few high street banks that are still around. They’re not actually getting any help and service from them, being directed to go online anyway. So thinking, well, if I’m going go online with one of the big major banks, and I’m not getting any support in the branch. So why don’t I go to perhaps one of the Starlings or some of the other ones who are a lot better pricing and a bit more flexible and are geared up for online banking a lot more with it.

Rich Gunton (15:54):

It’s the Outset Cornwall podcast, we’re talking to Ian Williams, all things, accounting and bookkeeping today. We’ve talked about setting up a system and the day to day bookkeeping. And we were just talking about the bank accounts and the use of a bookkeeper just before there. Onto looking at software and all things tax and perhaps being application loan ready. But first off, Ian, we’ve talked a little bit about choosing and using an accountant, where do we even start with this? And why do you think we should use an accountant?

Ian Williams (16:26):

A good accountant can be a very valuable asset to running your business, but you’ll be a bit careful cause a bit like averages. They do vary to the quality of their service and the prices. So I would always try to find a reputable local accountant by word of mouth, then meet them to see if they have the experience in your type of business. Because accountants do, nowadays, tend to specialize a little bit in the types of businesses and the industries that they work in. So you want to find somebody that has expertise in your particular field, so that way they can give you the best advice on how to progress your accounts, to look for any ways to minimize your tax liability. Nothing illegal, but things that they can do to think, oh, you haven’t claimed for this that’s perfectly allowable and they can fine tune things that you perhaps wouldn’t have ever thought about. So that’s where an accountant can certainly help with you from there. And a good time tax advisor can certainly save you potentially more tax than their fees. So it’s certainly worth finding out who can help you on that side of things.

Rich Gunton (17:21):

It’s really about the processing of the financial transactions. And essentially you mentioned about tax, making sure that we pay the right tax. I remember a statistic for sole traders, and I don’t where it came from, perhaps business crunch or something where the majority of sole traders actually paid more tax than they needed to through the kind of slight concern and worry of putting for things that were actually tax deductible. And of course, even the use of a bookkeeper and a tax advisor and accountant are all tax deductible as we would, we would describe it. So in terms of, you know, the relationship with an accountant, I suppose it’s really down to a personal thing on whether they specialize in what you are doing, whether they’re local to you, whether they’re a big organization, whether they’re a one person business, I suppose it’s kind of a personal thought process to go through. Do you think?

Ian Williams (18:08):

Yes, it’s very much, I mean, people buy from people as we know from the businesses that we’ve been involved with. And I think you just have to find somebody that you feel that’s gonna be on your side to try to help you get the best out of your business. And like I said before, sometimes not just be a number cruncher, because the end of the day, it’s very easy to just add up the income that’s going in the expense of going out, and then basically HMRC want to know what goes in, what goes out and what’s left is taxable profit. But an accountant should be able to add more than that in terms of looking at your overall business and being able to work out, actually you could you claim for this, or have you thought about financing things differently this way? And the bigger the business grows, the more an accountant could add value to how you can actually run your more efficiently. So that’s what you’re really looking for from a good accountant.

Rich Gunton (18:53):

I also think that of course, tax laws change on a regular basis, don’t they? And I think trying to keep a breast of all of those things on a personal scale could be quite difficult but we will talk about DIY in a moment. Just one of the things I suppose I want to tick off in some respects is with an accountant. It may well be us at home as a sole trader, but depending on what else is going on in our life, you know, whether we’ve got a part-time job or whether there’s benefits or whether there’s a spouse or a partner that we live with and what their income structure is, and if they’re PAYE for instance, and their involved in the business. I do think that’s where an accountant comes in from a holistic point of view, to see where the structure of what you do and how you do it is best for your personal situation. Isn’t it?

Ian Williams (19:42):

Yes, it is important to have an accountant. And like you said, holistically, there’s a lot more to it than just filing your tax return. Like I said a good accountant should be able to look at the overall picutre of you, your family, how your business is set up. And as it grows, potentially whether even setting up a limited company, because that may be a more tax efficient way of running it and all the rest of it. A good accountant can help you on that side of things enormously.

Rich Gunton (20:03):

Okay. So we’ve looked at keeping records, we’ve looked at using a bookkeeper and an accountant and bank accounts and all that sort of stuff. And we’ve certainly talked about the word of tax and the Revenue, et cetera. I mean, there’s a number of tax calculators out there, online that we can use. But when it does come to tax would you direct us towards the HMRC website then when it comes to national insurance and those types of things?

Ian Williams (20:31):

Yeah, I must say personally, I used that quite a bit and when I was doing my own self assessment recently first thing I did was look on the HMRC website, check the tax year that I was gonna be doing my submission for check what sort of levels the thresholds were, what levels of actual tax and national insurance. So when I did my own self-assessment tax return, although they do the calculation for you, I could then check it against what I thought I was gonna be paying tax on and think yep that tallies, now that makes sense. And I could submit it and pay my tax and be done with it. I don’t have to check it, but by checking it, I know then that I haven’t, like you said, potentially overpaid underpaid or anything else. It gives me a good way of making sure that I’ve done it correctly.

Rich Gunton (21:10):

Absolutely. And as you say with our previous Outset clients, and if people are listening to this and they’ve not engaged on the Outset programme, then obviously they can find us, Outset Online and all of the details are listed on the podcast. It can be confusing because of course you only pay a tax on the money that you make. And I think that’s one of the things when we first start out is to try to get that structure, right. And even just from a forecasting and a budgeting point of view from the get go is to have a look on the HMRC website, just have a bit of an introduction as to how it works. I think it can only be a good thing, can’t it?

Ian Williams (21:44):

Yes, and to be fair, their website is fairly useful. They’ve got a lot of information and there’s quite a few webinars on there as well to help guide you through setting up the self-assessment, what taxes you can claim. There’s all sorts of guides and things that you can pull down, read through and sort of immediately digest what applies to you, what doesn’t. And if you find that quite fascinating and quite interesting, you understand it, then there’s nothing stopping you doing your own self-assessment on that basis.

Rich Gunton (22:09):

So if we’re listening to this and we’ve got an idea and we’re thinking about setting up a business, or we’re already in business and perhaps the last 12 months, 18 months or so has been fairly tough. And we’re looking at the way that we can develop and change and be as dynamic as we possibly can. And we are looking at loans and funding, where would you suggest we start? If we perhaps need to work backwards and make sure we get our books in order, is there people that can help us with that? What should we prepare for?

Ian Williams (22:36):

Yeah, well certainly from Outset’s point of view as well, I also work with Outset Finance, who are one of the authorized delivery partners of the government back Startup Loan. So we can help Outset clients who have perhaps gone through the programme, they know that potentially they might want some funding at the end of the day to be, to buy tools, equipment, whatever it is that they need to get their business set up, or maybe they actually got their business running slightly. And they think actually I need some more stock because things are going better than I anticipated. So I can get economies to scale by buying X, Y, and Z and things from there. So often work with clients, looking at their cashflow forecasting, putting together a business plan, which is part of the Outset program. And then we can help them then apply to the startup loans to get them that bit of funding to get a leg up on the sort of business ladder.

Rich Gunton (23:22):

Absolutely. Well, I think that pretty much covers everything that we are looking at in terms of accounting and bookkeeping for this podcast. Ian Williams, it’s been a pleasure. Thank you so much for your time.

Ian Williams (23:33):

Thank you, Rich. Thanks very much.

Announcer (23:35):

Thanks for listening to the Outset podcast, brought to you by the Outset Cornwall program, which is funded by the European Regional Development Fund, HM Government and The Outset Foundation, supporting people to become self-employed and start their own business. For more information, visit www.outset.org/cornwall