The Most Dangerous Accounting Mistakes For Your Business
Starting your own business is an incredible experience even though it does come with risks. While you may be excited about the pursuit of new customers or getting to spend the days doing what you love, it can be tempting to forget about the important back office work like accounting! Good accounting is crucial to the financial health of your business so having the wrong systems or even no systems can be devastating, especially in the early days. We’ve produced this quick guide so that you can avoid the most dangerous accounting mistakes for your business.
1. Bad Bookkeeping
The most common mistake we see is the lack of good bookkeeping. It’s understandable as running a business, especially for the first time, can be overwhelming. However, it’s a lot easier to keep your accounts up to date as you go along rather than at year end just in time for your tax return.
Doing your bookkeeping isn’t just about your tax returns. It’s about having essential up to date records of all of your earnings and expenses. Without this data, you won’t have a clear picture of how well the business is performing financially, which can lead to a big problems. Staying on top of the books allows you to stay one step ahead and put out any fires before they start.
2. Confusing Cash Flow and Income
Understanding that the money that comes in has to cover costs before it can be counted as income is key. What your customer pays has to cover costs such as staff, utilities, rent, your insurance, your unpaid hours doing the books!
If you know what your overheads are each month, when the money comes in from sales, you’ll be able to allocate the proportion needed to cover your running costs and quickly see the real profit you’re making.
Without clear and up to date records, you won’t see this. Often that means people just check the bank account and think that everything is ok. A sale of £100,000 might have required you to spend £30,000 on equipment, insurance and employees to make that money, leaving £70,000 profit. You’ll then have to pay tax on your gross profit, so the net amount will be smaller again.
Stay grounded in reality and know how much you’re really making so that you don’t overspend.
3. Using Outdated Practices
Spreadsheets have their uses but the way we live now requires agility and collaboration. People are on the go, travelling and needing to be able to access information in a different way to 20 years ago. Online accounting software such as Xero is faster, easier and dramatically more efficient than ledgers and Excel spreadsheets.
It’s not difficult to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means that you’re much less likely to make mistakes on your tax return. It also reduces the risk of making the wrong financial decisions due to inaccurate information.
You’ll save both time and money by using efficient software that you can access anywhere on any device. All you need is an internet connection.
4. DIY Accounting
There’s a reason it takes accountants years to fully qualify. Trying to manage your accounts when you are not an accountant is guaranteed to cost you time and create stress. Accounting is complicated and while it’s good to have a grip on how it works, the knowledge you need to look at your tax planning for example, or to create a real cashflow forecast with advice takes skills and experience handling accounts.
Minimise the risk of costly errors and fines from HMRC by investing in the services of a qualified and chartered accountant. It is one of the best decisions you can make for the success of your small business.
Avoid the above accounting mistakes in order to set your business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it’s best not to take any risks. It is tempting to put accounting off until later, especially in the start-up stage but getting it right from the start is essential. You need to make it a priority because good businesses and bad accounting just don’t go together.