A new company must keep adequate accounting records to form the basis of the annual financial statements. The company is legally required to maintain financial books and records that give an accurate picture of the financial affairs and these records must by law be retained for six years. Although the main accounting can be done using appropriate software it is still necessary to keep documents such as invoices that can be used as evidence to back up the figures shown in the accounts.
The accounting records are also necessary to give an up-to date and accurate picture of the financial state of play for the people managing the company. Although some small businesses consider they can just check the bank balance to see how the business is progressing this can be highly misleading. A large payment or liability may not yet appear in the balance and when it does it can overturn the picture of the company’s business. There should be an accurate record of transactions giving a picture of the profits or losses of the company.
Cash flow is also very important for start-up companies. Many new companies fail even though they have a profitable business model, because they do not have an accurate picture of their cash flow. The company management needs to know what cash will be required in the coming weeks and months, and needs to do cash flow forecasts to ensure that the cash will be there when it is needed. A new business may need to purchase new assets; make payments to protect inventions or begin paying loan interest and cash must be available to cover all these potential liabilities.
The forecast may indicate that the business needs to arrange to borrow money, for example through an overdraft or bank loan, to tide it over a difficult period. This needs to be arranged well in advance. Failure to obtain a clear picture of the company’s profits and cash flow will lead to bad decisions by management. Incorrect decisions in the early years of a company’s life frequently lead to business failure.
Accounting records and forecasts could be kept using appropriate accounting software, always remembering that invoices and other documents must be filed in support of the figures. Spreadsheets such as Excel could be used for cash forecasting. Depending on the type of business the essential records are of cash going in and out, invoices issued and received and cash payments. Some essential basic checks should be done such as comparing cash records to the bank statements and ensuring that cash is received or paid in respect of invoices issued or received. The company should also record its assets such as office equipment or machinery, and should have an accurate record of liabilities such as bank loans.
In the early years of a business the management needs to give attention to core business operations and may not have enough time to spare to look after accounting records. It may then be preferable to delegate this to a third party service provider. An agent could ensure that records are kept property or give advice on suitable accounting software. The agent could also ensure that appropriate accounts are sent to Companies House each year and advise on tax consequences of the company’s operations, so that all appropriate tax allowances are claimed. Using an agent such as an accountant or other adviser is likely to save both time and money for the company.