7.4 Accounting records

Keeping Accounting Records

We didn’t think you’d want an accounting record photo!

We didn’t think you’d want an accounting record photo!

Basic Book-Keeping and Accounts

If (or when) you run a business, you will need, at the very least, to maintain some accounts. The level of detail and amount of information you need will depend on what type of business you have set up. These are the main categories in the U.K.:

  1. Sole trader - needs just to be able to present a summary of income and expenditure to HMRC in order to pay personal income tax. This is the simplest accounting requirement and it’s how most people start out. The business is fully owned by you, and so any excess of income over expenditure will be considered to be taxable income. If you pay yourself during the year, this will be included too. Although you don't need to present your accounts to anyone, you would need to be able to substantiate your tax returns if you were ever to be inspected. This would include evidence of all expenditure and income.

  2. Partnerships - are similar to sole traders in that the income after expenses will be seen to be shared as taxable income between the partners. There must be a partnership agreement to set out how profits will be shared. Aside from this, the accounting requirements are similar to sole traders.

  3. Limited company - has a different legal basis. You are protected from being fully responsible for the company’s debts, and so there are stricter regulations relating to registration of the company and directors, preparation and filing of accounts.

  4. Others - there are other forms of incorporation eg Community Interest Company, registered charities etc These will have specific accounting requirements and more info can be found via gov.uk.

All of the above may be different in non-U.K. jurisdictions.

There will also be distinct accounting and record-keeping requirements if you fall into other categories eg VAT registered.

We 3 are all trading as sole traders and we file our own tax returns, and use the simple accounting method for filing the tax return.  We all use online book keeping, Claire and Carol use Quickbooks, Paula uses Wave.

What records do I need to keep?

You need to keep evidence of all of your income and expenditure. If in doubt, imagine that a tax inspector is coming to check your accounts. Are you able to present a record of every item of income and expenditure e.g. a hand written account book, a spreadsheet or an accounting software package of some kind? Can you provide evidence to explain:

  • Date of receipt and/or payment or of invoice (and invoice number if issued)

  • How it was paid

  • Who the expenditure was paid to or who the invoice was made out to

  • What it was for - a description of the item/s

  • Non-receipted items - eg petty cash, cash sales, mileage returns for private car. Contemporaneous records are sufficient - either a separate cash sales sheet, or petty cash expenses book, or a diary of mileage. I have a cash sheet for all cash expenditure and cash sales, which I keep on a clipboard and we reconcile and add it in every month. We also have a small log book for business miles in our private cars, which we add up and reimburse every month

In pre-digital times, this always had to be a written document, ie. Physical receipts. Now, digital records are accepted e.g. emailed receipts, photos of paper receipts, mileage apps. In the UK you are required to keep these records for 7 years, and to be able to provide evidence relating to your tax affairs for this period. Anything older than 7 years may be destroyed.

Whatever type of business, you will need to set up your basic accounting structure, so that your expenses and income are separated into ‘categories’ or headings. This enables you to better understand where costs and income are going, and to start to manage them, set targets and to set budgets. There are accepted accounting ‘conventions’ for categories, but you can use pretty much whatever is meaningful to you. Here are what I use, but this is only an example. Use what suits your business:

Types of Expenditure:

  • Labour (wages and contract)

  • Plants

  • Seeds and bulbs

  • Horticultural supplies

  • Floristry sundries

  • Maintenance & repairs

  • Vehicles

  • Rent/heat/light/power

  • Travel & mileage

  • Training and development

  • Professional services, Insurance

Types of income:

  • Wholesale flowers (to florists or for re-sale)

  • Retail flowers (to end customer)

  • Wedding flowers inc DIY wedding

  • Funerals

  • Workshops

  • Talks, garden visits

  • Sundry - odd items that don't fit elsewhere e.g. surplus plants

Of course, if you use an accountant, they will do this for you. You will then be able to keep totals for each of these categories, to analyse your expenditure and income.

Managing your business

This level of detail will provide the basic information to keep your accounts in order, and to pay your taxes. it will also help you to analyse your business and to know where your money is coming from and where it is going. However you keep records, you need to be able to start to analyse these categories and make decisions. e.g.

  • How is my expenditure broken down?

  • What percentage of total costs is spent on each item?

  • eg What percentage of my totals costs is spend on wages?

  • How does this compare with last year?

  • How will it change next year?

  • If its going to increase, where is the income coming from to cover it?

Similarly, you will be able to understand and analyse your income e.g.

  • How is my income broken down?

  • What percentage comes from each category?

  • If I want to increase my total income by 20%, how will I be able to do this?

  • Will it be by increasing everything by 20%, or increasing one category only?

  • How will this affect my costs?

The more information you collect and record in your accounting system, the more information you will be able to extract and to analyse. You might want to consider recording:

  • Stem counts sold for each variety (included in invoices)

  • A sub-category split of weddings into bespoke, off the shelf and DIY

  • A sub-category split of workshops into different types eg Christmas, Flower growing, Leisure

Setting targets and budgets

Once you have all your categories and recording systems set up, you can start to set budgets for the future. Use the same analysis headings, look back at last and current years, and set the target for the next year. You can do this for the year as a whole, or break it down into months or weeks. I have a weekly income target in my head for the whole of the main growing season. I aim to have enough flowers ready to be cut each week to enable me to reach that target. If I look a couple of weeks ahead and I can see that a week is looking low - maybe no wedding that week, not many wholesale orders in yet, then I will actively plan for what I can do to meet my target. Not only will my income be low, but I will, most likely, have waste flowers if I don't sell them. So I will maybe post some pictures of great-looking flowers ready soon to get more wholesale interest, or do a local retail promotion, maybe a one-off open day. But I need the information and records to know when to act.

If your records are computerised, you can produce reports to see what you've spent/earned this year/month. How does this compare with last year or to your plans and budgets? What do you need to do now as a result of this information?

(If you want more details on this, Claire runs a separate Pricing, Costings, and how to make a Profit workshop.)

“Do you know where your business costs go and are you able to set targets and budgets?”