Keeping Financial Records Guide

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Cultural Enterprise Office,

2005


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T: 0844 544 9990


Keeping Financial Records Guide

Recording and summarising financial activity.

Introduction

Good financial management includes three essential elements


realistic budgets, up
-
to
-
date
financial records and healthy cash flow.



Budgets

illustrate the predicted income and expenditure of a company or
project over a specific period of time, e.g. a twelve
-
month period.



Financial records

and accounts illustrate the actual income and expenditure

over that same period of time and what the company owns and owes at the end
of it.



Cash flow

relates to the activity of the bank account over that same period of
time and how well the account can maintain a positive balance.

All three elements will provid
e a full and detailed picture of how the business is doing
financially and how it is likely to do in the future. They are essential tools in managing
the business on a day
-
to
-
day basis, providing information to support key decisions,
highlighting potential

problems and providing an opportunity to avoid them. They are
also powerful tools with which to persuade others to lend or give you money and to
show that you have a viable and successful business.


This guide focuses on the second element
-

financial re
cord keeping, and how to
produce a summary of these records throughout the year.

Financial records

Typical financial records include the following:



supplier invoices (charged to you)



customer invoices (charged by you)



petty cash receipts



written proof of
any funding or loans



bank statements, cheque books and paying
-
in books

Make sure you get some form of documentation for every financial transaction to do
with the business and file them carefully, sorting records by calendar month and
financial year.


As w
ell as the actual documentation, you will also need to record them in a series of
‘books’, (hence the term ‘bookkeeping’), kept either manually or on computer. These
normally comprise:

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a sales ledger (itemising all income earned by the business)



a purchase

ledger (itemising all costs to the business)



a nominal ledger (which itemises both under headings e.g. grants, materials,
postage etc., which are ideally the same headings as those used in your
company budget)



a cash ledger (recording all receipts and pay
ments through the bank account)

Summary information from all of the above will then assist you in producing your
management accounts.

Management accounts

Throughout the year, a suitably trained member of staff or a freelance bookkeeper can
prepare the mana
gement accounts. Monthly management accounts are useful for
senior management and boards to monitor how a business is doing during the year and
whether any action is required as a result. Many companies use accounting software,
(e.g. SAGE) to do this, but
small companies can record the same information and
produce the same reports using a spreadsheet package, (e.g. MS Excel), or using a
manual system on paper. Although the latter can be practical and easy to use, it is
strongly advised that a computerised s
ystem is adopted when the business becomes
more complex.

Management accounts are made up of two parts:



the profit and loss account



the balance sheet

The profit and loss account

The profit and loss account (P&L account) shows the actual income and expendi
ture
over a given period e.g. monthly, quarterly or annually, and the resulting profit or loss.
All the information recorded in your nominal ledger is summarised on the P&L account.


As a starting point, the structure of your P&L account should closely fol
low the structure
of your company budget, (see our
Budgets Guide
). This will enable you to com
pare
the actual income and expenditure against your original budget


often a useful
analysis for you, your board and / or funders. All individual records of income and
expenditure will be summarised on the P&L account. As in your budget, separate
expendit
ure into ‘direct costs’ for those costs that relate directly to the work you’ve
carried out on projects, commissions etc. (and where you’ve earned money as a result
of this work) and ‘overheads’ which relate the cost of running your business on a day
-
to
-
da
y basis e.g. your rent, office costs, insurance etc. (An example of a small arts
company’s monthly profit and loss account is shown at the end of this guide.)


There are certain conventions that require you to include and exclude particular
transactions,
for example:



The P&L account will show income earned during the month that you raise the
invoice, not the month that you receive payment. Similarly, it will show
expenditure during the month that you incurred it, not the month you paid it.
Although the cas
h aspect of this is not shown here, the balance sheet (see
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below) will reflect the fact that monies are still due to be received or paid after
the period end.



The P&L account will not show any loans made from the business or to the
business. Again, this is

because loans are not concerned with actual trading.
However, they will be reflected on the balance sheet.

To create a monthly profit and loss account, add up all income and all expenditure that
relates to that month and record the totals against the rele
vant heading. Your standard
formula will be:

Total income less expenditure (direct costs + overheads) = net profit (or loss)

At the end of the year, add all months together and you have a full year’s profit and
loss account.

The balance sheet

For most peop
le, the balance sheet is not as straightforward as the P&L account, but it
can give a far more illuminating picture of how well the company is doing. Rather than
illustrate how much business the company has brought in and how much it has spent
doing that,
the balance sheet is a snapshot of how much money the company has at a
particular point in time: how much it owns e.g. cash in the bank, property, equipment;
and how much it is still due to be paid. It also shows how much money is owed to other
people e.g.

suppliers, lenders and the HM Revenue & Customs. It takes into account
any money that has been invested in the company and any profit (or loss) achieved in
the year so far.


To the trained eye, a company’s balance sheet can show whether the company is in
financial difficulties, or is likely to be in the near future, and could, therefore, be too high
a risk for lenders or funders. Conversely, it can show that the company has money in
the bank, is good at getting paid and paying its own bills quickly and, th
erefore, an
attractive prospect to lenders and funders.


The balance sheet, like the P&L account, always follows a set format and it always
balances (see the example below), which is a useful test of whether you are doing it
properly! It is strongly recomm
ended that you get some help with producing your first
balance sheet and it may be worth getting some initial advice on how to structure and
maintain your accounts. Consider employing a bookkeeper on a part
-
time basis if you
really find it difficult to do
this on your own, but there is no reason why you cannot do
this in
-
house, as long as you take the time to set things up properly from the start and
you allocate time once a month to update all your records.

Financial records and the law

Anyone who becomes
self
-
employed, or forms a partnership or limited company must,
by law, keep accurate financial records and submit a summary of these each year,
either in the form of a self
-
assessment tax return or corporation tax return to the HM
Revenue & Customs. In add
ition limited companies must submit statutory accounts to
Companies House and file an annual return.


As soon as you start trading, you must keep accurate records of all income and
expenditure and any other financial activity relating to the business.
You

are required to
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retain financial records for the longer of either
15 months or 12 months after your last

31 January return if you are self employed, and at least six years for compani
es, s
o
don’t throw them away
. Limited companies must also set up a separ
ate bank account
in the name of the company and use this account for all company transactions. The
governme
nt, through

HM Revenue & Customs, want
s to make sure it

is
collecting the
necessary tax incurr
ed by your business and is

entitled to inspect your fin
ancial records
at any time, so it is essential that you take the time to maintain your records properly.


Limited companies must produce statutory accounts each year and these are
submitted on an annual basis to Companies House. Once submitted, these becom
e
public documents available to anyone
on request (for a small set fee). Due to the
complexity of UK tax law, companies normally use a qualified accountant to prepare
their statutory accounts at the end of the year. Companies with a turnover of over £6.5
m
illion must have their accounts audited, (a much more in
-
depth analysis), by a
registered auditor each year. Charities with a turnover of more than £250,000 require
an audit, while those with turnover between £90,000 and £250,000 require an
independent acc
ountants report.


Individuals and partnerships are only required to complete a tax return each year rather
than a set of statutory accounts, but many prepare sole trader or partnership accounts,
both to enable them to complete their tax returns, and also a
s an effective means of
monitoring and reporting trading during the year.

Balance sheet glossary



Fixed Assets



this is typically anything that you have bought but are not likely
to sell within twelve months e.g. property, equipment, vehicles and computers



Current Assets



anything that either is or can be released into cash within
twelve months



Stock



any materials / goods that can be sold or made into something that can
be sold within twelve months



Debtors



anyone that owes you money i.e. customers that you have sent
invoices to



Creditors



anyone that you owe money i.e. suppliers that you have received
invoices from



Current Liabilities



anything that you owe that is payable within one year



Net Current As
sets



a useful figure to calculate as it will show whether you
could pay your short terms debts quickly if they were all called in at once



Long
-
Term Liabilities



anything that is due to paid off beyond twelve months
e.g. a loan



Equity / Investment



any

money put into the business to help set it up initially



Profit / Loss



the total brought across from the profit and loss account on the same
date



Remember, the balance sheet must
always

balance:





Total Assets less Total Liabilities = Total Capital and Reserves
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Example

Monthly Management
Accounts for a Small Arts Company


Sample Profit and Loss Account


Sample Balance Sheet








Income


May 10


Fixed Assets


31 May 10

Grants

£10,000



Property

£0


Tutor Fees

£3,000



Equipment

£2,000

£2,000

Workshops

£5,000

£18,000









Current
Assets



Direct Costs




Stock

£0


Materials

£2,000



Debtors

£1,000


Project Staff

£2,000



Cash in the Bank

£1,360


Equipment Hire

£500

£4,500


Petty Cash

£25

£2,385







Gross Profit
1


£13,500


Short
-
Term Liabilities






Creditors

£550


Overheads




HM Revenue & Customs

£260


Staffing

£8,000



Bank Loan (10/11)

£400

£1,210

Rent, Rates, Insurance

£2,000






Heat & Power

£400



Net Current Assets
3


£1,175

Telephone & IT

£400






Stationery & Postage

£500



Total Assets


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£3,175

Travel & Subsistence

£800






Bank Charges

£75

£12,175


Long
-
Term Liabilities







Bank Loan

£1,600

£1,600

Net Profit / Loss
2


£1,325









Total Assets


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1
Income


Direct Costs = Gross Profit


Capital & Reserves



2
Gross Profit


Overheads = Net Profit / Loss


Equity / Investment

£250


3
Current Assets


Short Term Liabilities = Net Current Assets


P&L Account

£1,325

£1,575


Next steps

Please refer to our other two financial management guides:
Budgets Guide

and
Cash
Flow Guide
. Our ‘
Cash Flow Template’

provides MS Excel workbook with cash flow,
profit
and
loss
,

and balance worksheets.




Disclaimer:
Cultural Enterprise Office

is not responsible for any
advice or information provided
by any external organisation referenced in this document.