Every Small Business Makes These 5 Accounting Mistakes
Accounting is infamously difficult to understand for non-accountants but as a small business owner, good accounting practices are vital to the financial health of your business.
Here at Accountancy Assist, we take the accounting side seriously from the start as it is the best way to set your business up for success and it will enable you to operate much more efficiently in the future. Whilst bad accounting can lead to financial and legal difficulties that may seriously threaten the success and even survival of your business in the long run.
Here we have identified the most common accounting mistakes made by small business owners so that you can avoid them. Mistakes compound over time, so it is important to pay close attention to the accounting side of your business right from the very beginning.
A common accounting mistake that small business owners make is waiting too long to prepare their financial information. When the deadline is months away, it’s extremely tempting to put accounting off until a later date when the deadlines approach, but this can have many disadvantages. The longer accounting mistakes go unnoticed, the more damage they are likely to do to your business.
In order to make sure that your financial information is as accurate as possible, the books must be updated on at least a monthly basis. This makes tax season when the deadline approaches less worrisome and manageable as well as preventing you from making mistakes that will require a lot of time and money to fix.
2. Misunderstanding Metrics
New business owners often confuse accounting terms such as revenue, net profit and cash flow. A common financial mistake that small businesses make is focusing solely on revenue without subtracting expenses to calculate their net profit. This can lead to serious overspending.
Also, many new business owners get carried away and forget that there may be a significant difference between their net profit and their NOPAT (net profit after tax). As well as encouraging overspending, this can lead to significant financial problems when it’s time to file a tax return and pay the outstanding tax.
3. Mixing Personal and Business Banking
Sole traders are legally permitted to use their personal bank accounts for their business, but this is not the wisest course of action. It’s best to separate your business and personal bank accounts as soon as possible in order to avoid financial blunders.
For one thing, going back over your bank account and trying to remember which transactions were personal and which were business-related is a certain way to give yourself a headache. It’s also a huge waste of valuable time that could be better spent growing your enterprise.
Additionally, you may face an array of legal problems should your business be audited or selected for an inquiry from the HMRC.
Simple mathematical mistakes are all too easy to make, but an innocent error can compound over time and damage the financial health of your business. It’s important to concentrate fully and double-check every entry. Our digital cloud accounting software can automate many calculations for you to ensure accuracy and enable you to access from any location remotely.
5. Trying to Do It All Yourself
Trying to handle your accounts by yourself is a costly and time-consuming mistake. Many small businesses attempt DIY accounting when they first start out to keep costs low, but this can actually slow down their growth and threaten their financial health.
Hiring a qualified chartered accountant helps business owners avoid expensive accounting mistakes and saves them a huge amount of time, allowing them to focus on growing their business. Our staff are all qualified accountants from well-known UK bodies such as the ACCA (Association of Chartered Certified Accountants), AAT (Association of Accounting Technicians and ATT (Association of Taxation Technicians). Furthermore, accountants can save businesses a significant sum of money on their tax returns, thanks to their up-to-date knowledge and financial expertise. Although hiring an accountant does present an extra cost, but it can save you money and grow your revenue as well as stay compliant with government regulations.
A good quality accountant will bring market knowledge to the table and can help business owners to present a strong case to potential investors, further accelerating the growth of the organisation.
Accounting is part and parcel of running a business and it’s very important to do it correctly. By taking accounting seriously from the very beginning and hiring professional help, you can protect your business against the above accounting mistakes and focus on growth instead of putting out fires.
Ahmed Bayat ACCA-2021