As a small business owner your time is limited and trying to get a handle of everything can be difficult. This can lead to errors in how you manage accounts for your company, however the most common accounting mistakes can be avoided with proper planning. Sometimes you may not even be aware of the impact these can have on the long term financial health of your company so it’s important to stay informed.
Avoiding these costly accountings mistakes can not only save you money but most importantly time and headaches or a visit from HMRC. It costs more to fix a problem than to prevent it in the first place, it’s also much easier when you know what to look for. By becoming aware of these five accounting mistakes you can be proactive and make the necessary changes in your organisation stop them from happening.
Mixing business and personal finances
One of the most common accounting mistakes you can make is mix personal and business expenses. Whether you’re paying for business items from your personal account or worst yet, paying for personal items out of your business funds.
This mix-up is often the case with micro businesses or even small businesses that have not yet set up a business bank account or simply forgot to use their bank card. Doing so will only lead to confusion and make it difficult for your or your accountant to sort things come tax time.
Remember that, you can only reclaim expenses that have been incurred wholly and exclusively while running your business. You also can’t reclaim expenses which have a “dual purpose”. Read our guide to allowable expenses for limited companies to find out what can you claim.
To avoid mixing your personal and business finances you need to get a separate business account as soon as you start operating and use it for all business related expenses.
Not keeping accurate records
As a small business owner it’s easy to get caught up trying to wear all the hats to make your business a success. You’re doing sales, marketing, customer service, filling in orders, completing projects and forget to keep your accounting affairs in order. It’s understandable with so much do and so little time.
Keeping accurate, complete and readable records for your company is an obligation. According to HMRC, you must keep financial and accounting records for at least 6 years, sometimes longer. They may also check to ensure you pay the right amount of tax. Failure to comply can result in a fine of £3,000 by HMRC or disqualification as a company director.
To make sure you keep accurate financial records it’s best to dedicate a set amount of time every month to take care of your bookkeeping or outsource bookkeeping to a professional. There are no rules as to how to keep records, although we highly recommend an accounting software.
Not Using Accounting Software
Using accounting software can bring wealth of benefits to your small business. It can help with maintaining accurate records, minimize mistakes, keep personal finances and business finances separate and most importantly save you time, lots of time. Something most business owners always seem to be lacking.
Some of the other benefits include helping you manage your cash flow to make sure you stay on top of your expenses. Streamline your invoices so you can see which customers have paid you and which have not. You’ll have access to reliable information and visual reports so you make informed business decision much faster. Come year-end you will be tax compliant and have you statutory accounts ready in no-time.
Remember don’t make the mistake of not using accounting software. There are a multitude of choices on the market and packages to suit all business needs. Some are even free to start with so do your research.
Registering for VAT too late or too early
The complexity of the VAT system in the UK can be difficult to navigate and feel overwhelming to most entrepreneurs. It’s understandable that small businesses make errors on their VAT returns. However, these are not only very costly but can also lead to a VAT investigation resulting lost time and productivity. With the coming into effect of Making Tax Digital for business on 1 April 2019, it’s now more important than ever to understand your VAT obligations.
One of the worst accounting mistakes you can make is registering for VAT to late or too early. Many companies don’t understand that they only need to register for VAT if they cross the registration threshold in a rolling 12-month period. The current threshold is set to £85,000 and includes total value of everything you sell or supply that isn’t VAT exempt, also called VAT taxable turnover.
To determine if you must register for VAT, you need look at your turnover over the past 12 months and see if your VATable supplies exceed the limit or if you anticipate to generate VATable income beyond the limit in a single month. If that’s the case you will need to register within 30 days of the end of the month or within 30 days of the day the liability arose for the later.
Getting help too late
As a small business owner you learned to rely on your intuition and know-how to get things or perhaps you just like to do it all yourself. In fact, you’re not alone as 70% of SME owners prefer not to delegate.
When it comes to accounting, if you’re trying to stay on top of things in an effort to save money it can lead to errors that will be more costly than if you would have gotten help when needed. Instead of trying to put out fires and clean messes you can be proactive by getting help before things get out of control. Establish a culture of prevention to avoid mistakes as much as possible before they occur.
The importance of having a financially compliant business cannot be overstated, let alone having accurate and reliable information that will allow you to make the right decisions.
Even if you have some accounting background, you efforts are best put where you can generate additional revenue for your company instead of spending it on mundane tasks like bookkeeping.
Growing your business should be your top priority so instead get some help and outsource accounting to a professional so you can do what you do best. Our small business advisors and accountants in London are ready assist you in your growth efforts. For more information feel free to contact us or request a quote directly here.