Accounting skills don’t always come naturally when you’re running your own business. After all, it takes professional accountants many years to learn the detailed workings of accountancy, not to mention how best practice drives the very best in financial management.
But with a little education, some hands-on practise and the help of some of the latest apps and technology, you can avoid some of the more common accounting mistakes.
Here are five key financial traps that businesses tend to fall into, with our advice on how to overcome these accounting challenges.
1. Not keeping your records organised
To do any kind of accounting, you need to keep records for your business. But many business owners, especially those that are new to running a company, fail to keep those all-important financial records – and that is a disastrous starting point for your accounting.
Unless you record the money coming in, and the costs going out, you have none of the historic financial information (or ‘actuals’) needed to work out your turnover, overheads, cashflow or overall profitability. While it may seem arduous and tiresome to keep all those paper receipts and email invoices in order, it’s actually a fundamental step in the financial process.
So, how do you make this record-keeping process easier?
- Scan and automatically digitise all paperwork – apps like Receipt Bank or AutoEntry allow you to quickly scan in your paper receipts and turn them into digital records. The resulting transactional data can then be ported straight into your accounts software.
- Store your records in the cloud – cloud accounting platforms, such as Xero or QuickBooks, are an ideal way to store your documents and records. And, if you’re VAT-registered, it’s now mandatory for you to keep digital records in this way, so you’re compliant with HMRC’s Making Tax Digital initiative.
- Keep your records up to date – up-to-date information is needed to get the best from your accounting. This means doing your bookkeeping on a timely basis and entering transactions as soon as they occur, to achieve true ‘real-time information’.
2. Not planning for tax costs
‘There are only two certainties in life; death and taxes’ as Benjamin Franklin is often quoted as saying. But, despite the certainty of tax – both on your corporate profits and your earnings as a company director – many businesses don’t plan for these tax costs.
If you want to avoid any nasty surprises when the next tax bill arrives from HMRC, there are some proactive steps you can take:
- Make sure all transactions are recorded – an accountant or tax adviser will need to know about every single penny that’s come into (or out of) your business. So, as we’ve already said, make sure you record everything and keep your bookkeeping timely.
- Plan your tax costs on an annual basis – sit down with your financial director and advisers to work out what taxes you’re liable for, and do some serious tax planning.
- Put cash aside to pay your tax costs – create separate bank accounts for your VAT, corporation tax and any personal tax costs, and pay a regular amount into these accounts each month, so you always have the liquid cash to pay your tax bills.
3. Not building a strong balance sheet
For your business to be profitable, you need a strong balance sheet.
Your balance sheet gives an instant snapshot of the current assets (things you own), liabilities (things you owe other people) and equity (your invested capital and money owed to your shareholders) in the business. If your liabilities outweigh your assets, you won’t have enough working capital to actually operate the business and carry on trading.
To strengthen your balance sheet:
- Keep income high and liabilities low – keep your sales pipeline looking healthy, bring in maximum revenues and ensure you’re paying off your debts in a regular manner.
- Don’t take money out of the business – tempting as it may be to draw cash out, the profits you make need to be left in the business and invested back into your growth.
- Manage your funding effectively – if you’re struggling to maintain working capital, look at finance options, or funding solutions like Capitalise, Funding Circle, MarketInvoice or iwoca, to top up your capital and get back on an even keel.
4. Losing control of cashflow
Positive operating cashflow is vital if you’re going to build a financially stable business.
If you don’t balance your cash inflows accurately against your cash outflows, the business won’t have the necessary cash to pay suppliers, cover payroll costs or operate the company. So, how do you get back in control of cashflow?
- Be timely with your invoicing – use online invoicing and send out invoices to customers as early as possible. The sooner their accounts payable gets your bill, the sooner it can enter the payment pipeline and be paid.
- Ensure you get paid on time – make it easier to pay you, whether that’s taking online payments with GoCardless or PayPal, or card payments using iZettle or Square.
- Chase up late payments – be proactive about chasing customers if invoices are not being paid. The credit control functionality of a cashflow app like Fluidly helps you to automatically chase late payers and boost your overall cashflow position.
- Manage your spending – if you keep cash outflows low, this goes a long way to balancing out your cashflow. So keep a close eye on overheads, expenses and operating costs and aim to reduce them wherever possible.
5. Not monitoring your key numbers
Ultimately, the power of good accounting lies in an ability to understand your key numbers. If you don’t consult your accounts and management information, you don’t gain any insight into the overriding financial health of your business – and that’s vital when making big decisions.
So, whether it’s running a regular profit and loss report, reviewing your cashflow forecasts in Fluidly or assessing your aged debtor report, it’s crucial that you get your hands dirty when it comes to the accounts and management information.
The more financial information you have at your fingertips, the more you’re in control of the future path of your business. So, dive into the numbers and start letting them guide your decision-making, planning and strategic thinking.