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Beyond the balance sheet

How to set up the sales ledger & the purchase ledger

Joe Lennon 21/11/2016 5 minute read

The sales ledger and the purcase ledgerJoe Lennon explains the process of logging transactions for start-ups and the transition to automated software.

If you’re just launching your start-up business but don’t have a financial background, then you might not be sure where to start when it comes to recording your sales and purchases. Besides, you’re bound to be pre-occupied with establishing your brand, delighting customers and developing new relationships to generate growth.

The thing is it’s important to have an effective system in place to record all these activities in your organisation. This then allows you to monitor accurately how well your business is doing. The only way to achieve that is through an accurate and efficient record of business transactions (via bookkeeping) that are documented in the sales ledger (money you have received and what you’re still owed) and the purchase ledger (what you have paid for and how much you still owe).

What kind of system you need to implement to achieve this will depend on the business you’re operating, your specific needs and where you’re at in the growth cycle. Ultimately understanding your circumstances and reporting requirements will provide clarity as to how to best go about documenting this information.

[Free guide] Why you need to set up ledgers for start-up survival

Why you need bookkeeping?

Quite simple really, it’s essential to have a system in place that processes all sales and purchases so that financial information is accessible on a regular basis and you can monitor both performance and cash flow. Without bookkeeping, creating management accounts would be a mundane task and producing your annual accounts would be near enough impossible!

Aren’t these transactions simple?

As a start-up entrepreneur you’ll probably think that what you need to record appears quite basic. It’s just a case of keeping a tab of all your transactions, informing HMRC that you’re trading and remembering to pay your tax and national insurance. This can be covered off by a simple spreadsheet, can’t it?

Unfortunately you’d need to know exactly what you’re doing. If you do, great. If you don’t, then you should understand that knowing when to record certain things, how they should be treated and why, is anything but a simple process. It’s also very time consuming.

Even if you did get a grasp of bookkeeping eventually, you might well still miss opportunities. For example, there are certain expenses that you can claim for against your taxable income. So you’d also need an in depth knowledge of the tax system to understand exactly what is tax deductible and when.

Having a manual spreadsheet to record these transactions is fine if you have a financial background and know the legislation or if you have an accountant guiding you. Alternatively you may use some form of accounting software. Again though the same rules apply, you’re likely to need an advisor if you don’t know exactly what you’re doing.

Spreadsheet versus software? Which one is right for you?

In the early days of starting out what should you do, set up your own system by using a spreadsheet and thereby save money? Or, invest in software and an established system that’s proven to work albeit at an added cost to your business?

Consider the below example and diagram (the Stages Model, a concept originally developed by Shirlaws) to help inform your decision making in this area. Ultimately an accountant will be best placed to help you choose the option that’s best suited to your needs.

The stages model Shirlaws official version.jpg

As an example, if you’re the owner of a tech start-up then it might seem obvious to go straight onto accounting software. After all you’re in the tech space! However, you might have raised finance (at the “1st brick wall”) courtesy of investors buying into your new idea for the market. Now you need to develop it over the next year or so and use these funds wisely before launching your solution. 

It’s then a case of priorities and where to best allocate budgets in these early days. Thus the first year of your company’s existence might be all about developing the brand and testing your new software/website product through market research. In this case a spreadsheet system could be preferable.

The reason being your company wouldn’t be generating any sales for the first twelve months or so. From a bookkeeping and accounting perspective the transactions taking place in the business would be relatively simple because it would just be a case of recording all purchases. Why then spend much needed funds on accounting software at a time when you don’t need it yet?

Once your solution is on the market, you’d then expect the business to start making sales (“good times”). To start with the spreadsheet system might suffice, you’d simply add an extra column to reflect customer transactions. If however, you entered a period of rapid sales (“payback” moving into “fast growth”), you could soon outgrow such arrangements.

The vast number of transactions means the bookkeeping could become complex and you’ll get to a stage where you can no longer monitor it via a spreadsheet. There’s a risk you’d lose control of what’s happening in the business.

It’s as you enter this exciting phase of development that you’d need some form of automation in the form of software to achieve efficiency and maintain the rate of growth your business is currently experiencing.

Remember, the above is just an example. Ultimately there is no template answer to this question. All businesses are different. Any move to software will depend on your circumstances, the complexities of your sector and where your business is at in terms of trading.

The costs of getting the bookkeeping wrong

Even if you take on an accounting software system, you’ll need to know what you’re doing in terms of the transactions otherwise:

  • You’ll be unaware that you’re making costly mistakes resulting in inaccurate accounts and possible fines as a result of incorrect tax records
  • You’ll miss opportunities to reduce the cost of your tax liability or take advantage of tax allowances
  • You’d compromise your ability to raise money in the future as potential sources of finance wouldn’t have confidence in your accounts and the performance of your business

Why you need an accountant?

Considering how crucial bookkeeping is to the production of your annual accounts, generating your tax return and paying HMRC, it would very wise to  seek the services of an accountant. That’s especially the case if your strengths and focus in the business aren’t around the finances.

If the relationship with your accountant develops as it should from the start then you’ll find their fees more than make up for the time, cost and hassle of doing it all yourself. So choose your advisor wisely and consider them to be both a very valuable investment and intrinsic part of your business.

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The content of this post is up to date and relevant as at 23/09/2016.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

[ Date Posted: 23/09/2016 00:00:00 ]

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