You’re finding time to update your company accounts, but are you making potentially expensive mistakes?
As the owner of a promising start-up, you probably think you’re across all aspects of the business.
You have to be – it’s your firm and if something goes wrong the buck stops with you.
You may carry out some of the main functions – strategy, technology, marketing, human resources and finance – yourself and you feel pretty comfortable spinning all of those plates. Being the owner, founder or manager of a small-to-medium enterprise (SME) doesn’t instantly and automatically make you an expert in every field, however.
When it comes to keeping accurate finances, you may spend some evenings or weekends going through the books with a view to balancing them but you feel that’s a small price to pay for cutting costs on accountancy or bookkeeping experts.
Your finances are everything. It’s the clearest indicator of how your business is performing. Sales figures alone won’t tell you a thing on their own, you need to know what’s also going out and therefore how much you’re actually making. It tells you what’s working for your business and what isn’t and, ideally, what changes you can make to remedy matters.
So, is it worth freeing up your leisure time by bringing in an expert to maintain your books? Not only will you get your weekends back, your firm will avoid any nasty surprises when it comes to paying the right amount of tax. Business owners who try to muddle through can easily fall into one of the many traps involved in doing their own accounts. Here are some of the pitfalls you need to steer clear of.
Mixing personal and business finance
While it isn’t illegal to pay for legitimate business expenses out of your own pocket, it can cause you untold headaches further down the line. Providing the transaction is properly recorded as an expense claim and you remember to reimburse yourself through the firm, it’s not necessarily a huge problem.
Your company’s dedicated business account not only protects your own interests and assets, it should also clarify what money belongs to which party. If your personal finances, and those of your business, are kept separate it makes for cleaner records and ensures you’re not as stressed out when you’re submitting your tax returns.
Speaking of tax, if you take some of the company’s money and it isn’t a wage or dividend it’s classed as a director’s loan, which is repayable no later than nine months after the accounting period. Your business will then be hit with tax charged at 33.75% of the balance. Avoiding a mixture of the two should keep you out of trouble in this field.
Not reconciling bank statements regularly
It goes without saying that, as a small-to-medium enterprise (SME) owner, you need to stay on top of incomings and outgoings. An important part of that is reconciling your firm’s finances with its statements. It’s an essential aspect of running a company that, if you don’t do properly, will create numerous issues.
You could be inadvertently causing distortion in your financial records, and any discrepancy is likely to come back to bite you at some stage. You may find that your tax affairs won’t be in order, your funds
aren’t properly allocated or recorded, and that could even come across as fraudulent activity. While you may be able to prove it’s nothing more than oversight, situations such as these will still cause you no end of headaches to remedy.
Yes, it’s a tedious – and usually time-consuming – task but you could look into adopting one of the many software assistants out there to help you clean up and keep on top of your accounts.
Missing receipts
Your receipts are important documents for your business and are crucial to maintaining accurate books. It can be annoying having countless bits of paper lying around, if you’re into hard copies, that is, but you need to retain some proof of the legitimate purchases you make on behalf of the business. Not only do you need to keep abreast of your transactions, you may need to present them as evidence of your income and expenses to HMRC.
Standard practice is to retain accounting records for six years after the accounting period. Not doing so skews your finances and will inevitably backfire when it comes to completing your tax returns. If you can prove that your purchases were valid business expenses, you should find your tax calculations more accurate which, in turn, will help you avoid incurring any financial penalties.
Missing tax deadlines
Not filing your tax returns, or filing them late, has consequences. So can presenting incomplete records or returns with glaring holes in them. Even before you look at how much you owe the government, you need to make sure your affairs are in order and filed in good time. HMRC imposes fines for late payments and submissions.
Filing a day late will result in an automatic fine of £100, which is imposed even if no tax is owed. The longer the delay, the more the penalties increase – and that’s without the interest you’ll be charged on the tax that you owe.
Organisation is key here. If you’re going it alone with the bookkeeping, resist the urge to delay doing the accounts for weeks. Keeping on top of them will make it easier when filing time comes around, and you won’t be left scratching your head and wondering what a seemingly-random expenses claim from two or three months earlier was for.
Misclassifying expenses
Ensure you have proper documentation for your expense claims and that you’re allocating those expenses correctly, otherwise you could find yourself under the spotlight of an HMRC query. The rules around taxable deductions aren’t crystal-clear so it’s definitely worth seeking advice.
For instance, don’t fall into the trap of thinking your business expenses must be “wholly and exclusively” work-related to claim the tax deduction. Such expenses can still be allowable when there is incidental personal benefit, providing its primary purpose is for the business, that you can justify it and that the use for each is properly apportioned. A mobile phone bill is a good example of this. If you have one phone that you use for both, and you can apply percentages for business and personal use, it’s reasonable to make a tax saving on the calls you make for work.
Ignoring accounts receivable follow-ups
Securing timely payment for work you’ve carried out, services you provided or product(s) you’ve sold is pivotal to your SME’s success. Failing to follow up unpaid invoices promptly will hit your income hard. It’s something of a tightrope to walk as you need to balance the need to procure payment with maintaining good working relationships with your client.
Timely follow-ups can be the key to preventing your receivable finances from bottlenecking. The longer an invoice goes unpaid, the less likely you are to get any recompense for the product or service you’ve provided. The knock-on effect of that is disrupted cash flow, which can prevent you from meeting your own bills on time.
You should start a habit of reviewing your accounts receivable each week to identify, and act upon, outstanding invoices. Accounting software can help to automate these tasks, providing you with reminders and your debtor with timely nudges.
DIY bookkeeping without appropriate software
Keeping accurate books is crucial if you’re to comply with HMRC. It can also be a useful guide for yourself, too. If you’re aware of approximately what you’re likely to be paying in tax come the end of the financial year, you can plan accordingly and eliminate the likelihood of nasty surprises cropping up.
If you’re not up to speed with all of the nuances, needs, priorities and pitfalls of maintaining company accounts, help is out there in the form of software that can automate much of the work. Bog-standard spreadsheets will work for a while but they’re always prone to human error and you may find it a struggle to scale up as your SME grows.
It’s worth considering enlisting a professional bookkeeper before you opt for an accounting program. This avoids creating a situation where you decide to employ someone further down the line, and it could be time-consuming and costly to migrate to a system they’ve been using for years.
Not backing up financial records
We don’t need to spell out the importance of backing up all records and data relating to your business – it’s simply common sense. However, failing to back up your finances could lead you down a path upon which you lock horns with regulators.
As an SME owner, you’re legally obliged to keep records that support your yearly financial statements – invoices, bank statements, receipts and so on. You should also have these documents available should an audit crop up. If HMRC or Companies House officials need to ensure your company is a tightly-run ship, you need to be able to prove your claims. And if you don’t have the required, completed paperwork you could end up getting hit in the pocket with non-compliance fines or incorrect taxation.
Don’t keep everything relating to your business’s finances on an ageing laptop without an online backup. Losing it, breaking it or using it until it goes bust can cause you a host of issues. There’s really no excuse not to sync your vital information using one of the many cloud storage options available.
Losing track of cash sales
A surefire way to throw money down the drain is to omit transactions paid in cash. You need to document each and every one – record the payer or payee, the date and the amount and reason for the sale. You can then reconcile your transactions with the business account to eliminate any
discrepancies, but be diligent – record these transactions as you go along so you don’t lose track of who paid what, why, when and to whom.
If and when HMRC identifies unrecorded cash transactions (something they’re much better at than people give them credit for), whether it’s income or outgoings, there are likely to be financial consequences for you and your business. Missing documents that you require as proof of your legitimate activity are essential for eliminating suspicion of fraudulent goings-on. Claiming ignorance, human error or neglect isn’t a reliable excuse where your tax affairs are concerned.
So keep receipts, log everything and keep yourself on the right side of those nice folk at the tax authorities.
Not reviewing financial performance regularly
Your finances should form a major part of your growth strategy. You may have ambitious plans for your SME to expand, but you need sustainable revenue and for your profitability to climb if you’re to do that.
If, for example, you neglect to regularly go over your statements, you might miss crucial information and early warning signs that your financial health isn’t as rosy as you thought. Costs that you’ve overlooked might be eating away at your profits, an oversight which needs fixing quickly. You’ll also be able to make better-informed decisions and shape your strategy with number-led data and statistics.
Get into good habits and use regular reviews to accurately assess your progress.
You may feel that, by opting not to act, the problems your business faces can become tomorrow’s issue. Doing that just means you’re kicking the can down the road without remedying the problem. And that could lead to increased stress, financial penalties, bad strategic moves and a bleaker future than your SME deserves.
Your business’ finances shouldn’t be a sticking point for you. Nor should you feel that you have to navigate the keeping of reliable, accurate books on your own. So, take heed, avoid these 10 pitfalls and protect your SME’s bottom line.
Aurelian has the experts who can provide reliable, trustworthy bookkeeping advice for SME owners. Outsourcing your accounting to Aurelian’s fully-qualified advisers is a cost-effective way of keeping your financial affairs in order, whether you’re a start-up, a fully-established business that just needs its affairs overhauling or you’re just not clear on how best to meet your tax obligations.
Contact Aurelian at info@aurelianltd.com or click here for more information on how we can help you get your books in order.