Cashflow

Do I need to set up a different bank account?

Nobody needs to set up a separate bank account to conduct their business. Practically, you would be a fool if you didn't. I can't imagine that it would be possible to keep track of your separate company money from your personal money in an easy way that you could look at later if you didn't keep separate accounts. I would definitely say have a separate bank account.

What are accounts?

Accounts vary hugely in their complexity, depending on whether you are a very small business or a sole trader, or a much larger corporation. If you are a sole trader or a small business, then they could be relatively simple, in which case it will be more like bookkeeping. It will have all of the expenses that you spend on the business on the one side, and all the money you have had in from your customers on the other, and hopefully you will show a nice profit at the end of it. If it is a very complicated business, then that will be multiple times over, but also with a series of allowances made for tax and legal purposes, and that is more likely to be the case with the big companies.

What would be the effect of poor book-keeping?

The most likely effect of poor book-keeping is that it will be detrimental to you, the owner of the business. If you haven't kept proper records, you may find that you're paying too much tax or not realizing that you can qualify for various tax benefits. Another point is that if you don't know what your financial incomings and outgoings are, then it's quite possible that you've been running your business all year and it's actually not making any money, when you thought that it was.

What would be the effect of no book-keeping?

The effect of having no book-keeping at all would be complete chaos. Not only would you not know if your business was doing poorly, well, or any point in between, but also, by the time you get to the end of the tax year, you're essentially in an illegal position. You would be incapable of telling the tax man, or any other body like company sales, if you're a limited company, or what the state of affairs of your business was.

Should I get an accountant?

Everybody should get an accountant. Many people think they can start a business on their own and muddle through. In fact, they often get into difficulties later on. The benefit of having an accountant is that they know the law fantastically well. They can usually find ways to make your business much more profitable than you can.

What is an audit?

An audit is a process that happens once a year, where the accountants or an accountant comes in and analyzes your business and looks at every financial aspect to provide a report on what went on in the last tax year. If your business is very simple, that won't take very long, and it shouldn't be a very onerous task. If you're a massive corporation, then sometimes that will take a fleet of accountants two months to complete.

What are receipts?

"Receipts" has two main meanings. One is, receipts into the business - money received by the business; a lot of people will have receipts as a list of things that they have received, or money paid to them. On the other hand, of course, you get a receipt when you take a cab ride, if you want one, and they have a completely different relevance in meaning to businesses. If you keep all of your receipts, then these pile up to be quite a large amount, usually of expenses, and a lot of these expenses can be claimed against your tax. All businesses should always keep all of their receipts, because they are essentially the outgoings of their company and they should not be paying tax on them.

What is petty cash?

Petty cash is a slightly old fashioned notion these days. It comes from the french word petite, which means small, and it means small change. In old fashioned offices, that would be a float of money that employees might want to take out in order to pay for bits and pieces such as cabs and the odd meal and so forth. In the case of small businesses, it is a moot point whether you actually need any petty cash, because what sole traders tend to do is pay for everything out of their own pockets, keep the receipts and then claim that back from what is their own company. You could have petty cash around the place as a sole trader, but it is really probably sitting in your pocket.

What records do I need to keep?

Records that you need to keep are all those that are to do with the money that comes into the company, and the money that goes out. It is very similar in principle to book-keeping or accounts - in essence, you need to be able to say at the end of any given trading year: this is what I spent on everything, and this is the money I got paid, so that the two things can be reconciled.

What is a Business Expense?

A business expense is something that can legitimately be claimed as something the business was really doing. It is a bit of a gray area, because lots of people wish to claim something that is “a business expense” when in fact they were having lunch with the wife. Lots of different sectors have been investigated for that type of semi-abuse over the years. A business expense has to be something that is completely legitimate - you couldn't have done your business without it. It was a direct part of you winning a contract, or something fundamental to the business.

What are the pros and cons of other people investing in my company?

The pros and cons of having other people invest in your business are many and varied. On the pro side, the good news is that if you don't have the money yourself and you have a good idea, but one that needs money up front, then clearly that money is going to have to come from somewhere else - and that gets you underway, and it could lead to wonderful things. The con side is that it's not your money, and at some point it's going to have to be paid back. This takes lots of different forms, but one very common one is when the business idea doesn't work as well as people hoped, and even though the business hasn't generated much money, it has got to pay the money back, and that can come as a massive shock to people. The other occasion on which it is a problem, is more psychological. If somebody only put in what is seen to be a very small amount of money at the beginning, and yet strangely the company does brilliantly well. Hypothetically, someone has put in five thousand pounds and suddenly at payout day they are due a million - at this point you'll find that the person who borrowed the money will have a lot of trouble handing the money over, and says it wasn't very much in the first place. They forget that they couldn't have gotten underway without it.