For many start-ups trying to save money, DIY accounting can be a financial necessity. But get it wrong, and you could find yourself in serious trouble. Here are five of the most common mistakes that small businesses shouldavoid.
1. The shoebox approach
When times are busy, it’s easy to find yourself shoving all your paperwork in a shoebox or drawer, thinking you’ll deal with it later. Apart from the obvious risks and problems the come with leaving everything to the last minute and not keeping proper records, failing to keep your accounts up-to-date means that you don’t know how your business is performing and are unlikely to identify trends in your sales, income and expenditure over the course of the year. Once you finally come to look at your accounting properly (probably, if you’re honest, in the days before the deadline) it may suddenly become clear that you’ve been overspending or overpaying in some areas and under-investing in others, or that there are much more efficient ways of billing your clients. Staying alert to these issues as you go can save you time, money and stress.
2. Not keeping receipts
Failing to keep hold of receipts can mean losing track of spending and missing out on legitimate expenses claims. For a small business, mistakes like this can be terminal. If you’re unsure of what expenses you can claim for, take a look at our Complete Guide to Business Expenses.
3. Not reconciling
It’s essential to ensure that your bank statements have been reconciled to your cash book. This will help you to ensure that all of your outgoings, expenses and payments have been recorded in your accounts. Failure to do this could mean serious headaches when it comes to submitting end-of-year financials to HMRC – especially if you find yourself being audited. Inconsistencies and lack of proof over what money has been spent of could be interpreted as deliberate fraud.
4. Mixing business and personal expenses
Try to make sure that your business and personal expenses are kept entirely separate. Sole traders in particular are often guilty of moving between business and personal bank accounts, or may not have a business bank account at all. Blurring the lines can make it hard to remember or establish which costs are claimable business ones, and which credits to your account denote taxable income. As well as being a nightmare to wade through, you’re also at risk of raising eyebrows at HMRC.
5. Using a decent accounting system
There are some businesses for which entering records into a manual cash book will suffice. For most, however, proper accounting software is crucial for tracking invoices and payments, managing relationships with debtors and creditors, and for staying on top VAT. Make sure that you choose software that does everything you need, fully understand how to use it and are using it to its full – halfheartedly dipping in and out will great more confusion than not using it at all.