Common Bookkeeping Mistakes Made by Small Businesses

Small businesses often believe, rightly or wrongly, that they can’t afford a professional accountant. For this reason, they collectively account for their fair share of bookkeeping mistakes both big and small. A lot of these are easy to avoid if you only know where to look. Some of the most common mistakes are:

Common Bookkeeping Mistakes Made by Small Businesses

Not Understanding Cash-flow or Profit

Many smaller businesses fail to understand these two concepts properly, and in particular, there is a tendency to assume they are the exact same thing. It is true that if you have a positive bank balance that this can be a good indicator of health however if you haven’t considered your creditors and potential liabilities such as tax then, you might find that you bank balance is giving you a false sense of security.

On the other hand, your reported profit could also give you a false sense of security. Take for example the levels of closing stock, a common error is for businesses to value all stock at cost price. However if we scrape beneath the surface, we often find a fair amount of obsolete or devalued stock.

This net effect is that the profit isn’t what it appeared to be initially.

HMRC do allow the micro entities to report on a cash basis which is very helpful to the smaller cash businesses, but this is only reserved for sole traders and partnerships but not limited companies. As accountants we always recommend accruals accounting as this helps to ensure you that you have considered all transactions in assessing your profit.

Overlooking the Basics of Bookkeeping

It is easy to overlook the basics which could prove costly down the line.The double entry system of bookkeeping is the backbone of accounting and in its most basic form, we talking about recording the sales and then the cash that comes in from the sales, as well as also recording your purchases/expenses and then recording the cash used to pay for items. In today’s world, we all use PayPal, credit cards, personal bank accounts, business bank accounts and cash to manage our affairs. If you don’t track each of your accounts regularly, you will soon find it becomes unmanageable, and you are more than likely to miss genuine business expenses that ultimately show how profitable you actually are.

Mixing Business and Pleasure

Or, more particularly, allowing the finances of your business to mix with your personal finances. Even the smallest business, right down to the part time sole trader, should keep their business finances separate from their personal ones by using a separate bank account for their business. All money coming into the business should go into this account, and all outgoing should come from it and not directly from a personal account. Mixing the two is the number one reason why profitable businesses fail over cash flow. It is, unfortunately, a common scenario where business owners will pay for personal items from his business account and when it comes to paying the business debts, (particularly tax and VAT) they do not have the available funds. Discipline is required to ensure you keep separate your business and personal finances.

Not Keeping on top of the Petty Cash

Many businesses maintain petty cash for basic and ad-hoc spending. This could be used to purchase anything from new stationery to a fresh supply of teabags to fuel the office through the afternoon. This is useful, but many businesses fall into the trap of thinking that this kind of spending is too small to really matter and failing to keep track of it in detail. With the odd small amount here and there, this mindset might look quite correct (though overlooking even the smallest expense is definitely not recommended), but over time all those little bits of spending can add up and result in discrepancies that can be hard to reconcile later on. To demonstrate this further imagine you had £20 worth of magazines, office supplies, and canteen expenses a week. This would equate to £1,040 over the year and would save you £301.60 in tax if recorded correctly.

Not Getting Help

Many businesses believe they are too small to need an accountant really or to justify the expense of getting one. This may be true in the very, very early stages (though even then it’s not necessarily the case). However, it’s important not to write completely off the idea of getting professional help, especially as the business grows and becomes more complicated. Even if doing your accounts yourself is the right step while you get your business off the ground, it is important to recognise when this task grows beyond you or becomes an unnecessary distraction from other duties.

Tax, PAYE, and VAT

Not knowing the financial impact of taxes can be fundamentally damaging to business. Firstly be aware of the VAT threshold. Going over the threshold will bring all your income into VAT accounting and not just the amount above the threshold. If you supply services or products to registered businesses, then you could be making a fundamental mistake by not registering for VAT. There is a healthy fear amongst smaller businesses regarding VAT, which isn’t misplaced for the most part, but some business will benefit from being VAT registered despite being below the threshold. Payroll provides another challenge. There is nothing more painful watching a client negotiate cash in hand figure with their employees and then realising the impact on PAYE or National Insurance later. If for example, you negotiate a net cash in hand figure of £300 the tax and National Insurance on this is circa £70. In this instance an additional 23% in the cost.

Negotiate on a gross wage and be mindful of Employers National Insurance and the national minimum wage.

The accounting Do’s and Don’t

There are a number of things that you can do to help yourself and your accountant to achieve the best results.

1 Don’t miss expenses. Always ensure you keep your receipt and claim for it.
2 Ask about more obscure expenses such as home office use, publications, and subscriptions
3 Use an accountancy package. There are online packages starting from £5 per month.
4 Don’t wait until the last minute to file your taxes, an unexpected bill here could be significant
5 Spend time with your accountant to analysis your figures and ask for suggestions
6 Consider the tax implications of each decision you make

Author Bio: Javeed Baig is the founder and Senior Chartered Accountant at Gower Accountants Leicester. Having trained and qualified in Central London, Javeed set up the Leicester office in 2007and feelings of pride himself on offering the highest level of customer service to businesses of all sizes. With a reputation for a professional and personal service tailored to his clients’ needs, Javeed specialises in all areas of accountancy including bookkeeping, tax and VAT planning, PAYE, Self Assessment tax returns and Entrepreneur visa applications.

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