Small business owners and managers routinely wear many hats. As a result, accounting duties are often left unattended for and that can lead to business problems down the road.

This is an unfortunate scenario and one that can be prevented by growing awareness of potential accounting issues before your business goes bust. In this post, we’ll cover the top 5.

Common accounting challenges and how to avoid them

1. Not understanding basic accounting

Understanding the basics of accounting is crucial to know how well your business is doing. It is common for the terms bookkeeping and accounting to be used interchangeably and while the two are essential business functions, there are differences.

Bookkeeping is the process that provides the data by recording and organizing financial transactions such as income and business expenses. The accuracy of your bookkeeping will directly impact the quality of your financial information.

Accounting is the process of interpreting and analyzing the data the bookkeeper or business owner has compiled. The reports generated are used to give you a clear picture of your finances such as profits or the amount of tax you owe so you can make informed decisions.

If you decide to do keep your own accounts it’s crucial to keep accurate, complete and readable records for your company because this is a financial obligation. Failure to do so can result in being disqualified as a company director and a fine from HMRC.

Additionally, if in doubt or accounting seems overwhelming to you, it’s best to seek help early on. This will not only free up valuable time to focus on your business but also give you peace of mind knowing your finances are in good hands.

2. Poor cash flow management

Cash flow is the lifeblood of any business, “cash is king” as they say. Knowing what is flowing in and flowing out at all times could mean the difference between your business doors being open or closed.

A survey of small business failures in the US shows that 82% were due to poor understanding or lack of cash flow management. The situation is no different in the UK.

The recent collapse of Carillon shows that even large companies can come to struggle with cash flow problems. It was found that Carillon was left with just £29m while owing a staggering £1.3bn to banks.

By keeping track of cash flow, you will be able to identify potential issues before they develop into major problems such lacking the funds pay your creditors or covering unforeseen expenses. Here are 10 cash flow rules to follow that will help you keep your business afloat.

3. Managing payroll

Handling payroll appropriately requires knowledge of HMRC’s Real-time-information (RTI) and PAYE systems as well as all facets of reporting. You’ll need to know what tax code to put your new employees on, how to stay compliant with auto-enrolment duties and how you’re going to pay them.

Common payroll problems that occur within small businesses include the following:

  • Failure to pay staff on time or correctly. This affects staff motivation, morale and loyalty if they fear you are having liquidity problems.
  • Inadequate backup systems of crucial payroll history and records.
  • RTI compliance and incorrect deductions from employee’s pay.

Businesses that fail to stay compliant could incur penalties and interest, which would negatively affect your company’s cash flow and operations.

Using payroll software can make the reporting process easier by automatically calculating tax and NI, offer auto-enrolment and RTI submission but you still need to understand the basics.

Managing payroll can be a major accounting challenge because of the administrative strain and compliance burden it places on a small or growing business. If you have been handling your own accounting so far — ask yourself if payroll is really something you want to take on or continue doing.

4. VAT

Navigating the UK’s complex tax and VAT (Value Added Tax) system can be difficult and overwhelming for most small businesses. With MTD for VAT (Making Tax Digital) coming into effect as of 1 April 2019, it’s now more important than ever to understand your VAT obligations.

When to register for VAT is a primary concern. Most business owners register either too early, taking on additional admin, or too late, potentially facing VAT penalties.

You only need to register for VAT if you cross the threshold in a rolling 12-month period which is currently set to £85,000. You don’t charge VAT unless you are registered.

Sometimes it’s best to register earlier, also called voluntary registration because it can improve your cash flow by allowing you to claim input VAT on your costs. Check with us first if you’re in doubt or need help. Once registered you will need to start sending VAT returns to HMRC.

There are other areas for consideration and VAT pitfalls to avoid like calculating the correct rate to charge, using a flat rate scheme or not and reclaiming the correct amounts.

Due to the knowledge required to ensure VAT is accurately paid and reported, many businesses opt to outsource this portion of accounting to avoid the headaches, confusion and potential penalties that could incur from errors in reporting.

5. Lack of capital

Whether you’re looking take your business to the next level or are just trying to manage your day-to-day operations. Having sufficient capital available is crucial to the viability of your business and preventing your company from failing.

Without it, you could be missing out on opportunities or not have enough to replenish inventory in order to conduct business.

A good rule of thumb is to save up three to six months’ worth of funds available to cover immediate obligations like rent, inventory, supplier bills and short-term debts.

Additionally, you also want to make sure you can cover your accounts receivable, that is customers you’ve invoiced but haven’t paid you yet. How much capital you will need depends on your situation and your goals.

If you have a lot of money tied up in accounts receivable and your customers have a longer paying cycle there are options to free up capital. One of them being invoice finance which comes in two forms.

The first is referred to as “invoice factoring” whereby a business owner will sell unpaid invoices to a “factoring company” for a percentage of their total value.

The second is called “invoice discounting” and is the process of using the unpaid accounts as collateral to secure a loan for a percentage of their value.

If you want to learn other methods of generating capital for your business read our post on how to raise finance without giving up equity.

In summary

Having firm knowledge and understanding of all aspects of accounting in your business is essential and does require time and effort. In the long run, it’s best to address issues early so you can avoid dealing with major problems unexpectedly.

If you’re currently facing some of the accounting challenges discussed in this post and need assistance our team of small business accountants is ready to help. For more information feel free to contact us or request a quote directly here.