Why do bookkeeping?

Keeping an accurate record of all your business transactions is a legal requirement. So “to bookkeep or not to bookkeep” is a bit of a no brainer since you could well end up being detained at her majesty’s pleasure if you don’t!
Whilst bookkeeping readily lends itself to being viewed as a bureaucratic chore, it should really be utilised as a powerful navigational tool for your business. It’s your financial compass and like it’s nautical counterpart essential for your survival. Reporting for tax then is a mere by-product of this system, not an end in itself. Put another way: let’s reclaim bookkeeping from HMRC and use it for ourselves. Take ownership of bookkeeping and you take ownership of your finances and therefore your business.
Bookkeeping, as well as meticulously recording everything for tax purposes, can be used as an operational tool to effectively manage stock and cash flow etc. Furthermore bookkeeping can form the basis of useful analysis of your financial situation at any given point in time thus enabling you to steer your business into the most profitable channels and safely around such financial obstacles as tax. Cash flow forecasting with reliable actual bookkeeping data and methods can enable you to make informed decisions. They say that “failure to plan is planning for failure.” With good bookkeeping practices and simple but solid analysis you can decide which of your dreams you should pursue. Up to date books are key to good decision making.
Bookkeeping is also necessary to show your income when applying for a mortgage or for you bank manager when applying for a loan/overdraft. Preparing accurate records will give you a much better chance of obtaining finance in these credit crunched times. Banks lend to realists, not optimists! One loan is better than two so borrow the right amount of money to begin with as subsequent loans are much harder to come by. No loan is better than one. Use bookkeeping to help you manage cash flow better thus eliminating some of the need for further credit.
Well kept, timely and accurate books will increase your credibility with HMRC if you run into a tax dispute with them. This is especially important for cash based businesses as HMRC look at these much more closely because there is so much more scope for misdeclaring income in a cash based business. It then becomes essential to clearly separate cash income and cash expenditure in the books so that HMRC can see that you are keeping a true record.
PS Keep your personal and business finances separate! Failure to do so results in confusion and might even cost you money especially if you’ve forgotten what your outgoings were spent on: personal use or business use? And this sort of confusion has the potential to attract HMRC interest. You don’t really want them crawling all over your records because it’ll make running your business much more difficult for a while.

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