5 small business accounting mistakes to avoid if you want to succeed
1. Mixing personal and business bank accounts
You pop to the shops for office stationery and end up buying a couple of bits for home whilst you are there.
Directors of small businesses are often guilty of mixing their personal finances and business accounts.
If you have a limited company, it’s actually a legal requirement to have a separate account, but more than 25% of small businesses don’t have a separate business bank account and this can make it really difficult to track exactly how much money is coming in and out of the business and could result in taxable expenses being omitted or incorrectly categorized.
It can also cause issues when applying for a business loan, as lenders will need a detailed and accurate view of the business accounts. If you are someone who blurs the boundaries between personal and business money, break the habit! Get a separate business bank account and you will save hours’ worth of headaches down the line.
2. Not understanding VAT
The UK’s tax system is complicated, and it can be really daunting and time consuming for new businesses to deal with, when your real focus should be business growth.
It is so important to understand when to register for VAT. A lot of directors make the mistake of registering too late and risk being fined or registering earlier than necessary, creating a headache with additional filing requirements.
It is only mandatory to register for VAT if your taxable turnover goes over £85,000 (the threshold) in a 12-month rolling period. If you are not VAT registered, you cannot charge VAT.
Then there is which VAT Scheme you should be on, flat rate or standard? Each scheme has different requirements and VAT rates which are applied, and so it is important you don’t get these confused.
Because of how detailed the VAT system is, a lot of people choose to get external support, saving hours of studying and avoiding the risk of being fined for incorrect reporting.
3. Not keeping your accounting software up to date
If your bookkeeping and accounts are not up to date you don’t know how much money is in the business, you risk missing bills, not knowing how much cash you have for stock, wages etc. and the task of reconciling everything when the next HMRC submission comes around becomes a mammoth task.
Failing to keep your accounting software up to date interferes with your future planning and could end up costing you money.
Spreadsheets are archaic and there are a huge range of integrated software systems out there that will link to your bank account and do most of the work for you.
Accounting Software’s such as Xero or FreeAgent can help to keep on top of your business’s finances by tracking invoices and monitoring bank deposits and withdrawals along with providing other useful reporting functions which can aid your decision making.
Can you afford not to know your business health?
4. Processing Payroll Correctly
Your business is doing well, and you have expanded and taken on staff.
You must be aware of your employer obligations such as holiday entitlement, workplace pension, pay rates etc. Paying your employees correctly is important not only to reward them for their hard work but to remain compliant with HMRC and avoid facing fines.
HMRC require real time information to be reported, meaning you must update HMRC with your payroll information on or before the date you pay your staff or risk facing penalties.
Payroll admin can take up a huge amount of time for a growing business because of the level of detail and the HMRC compliances. As payroll needs doing at least once a month, many businesses chose to outsource so they can channel their time and energy back into the business.
5. Doing everything yourself
Accounting is a complex process and accountants’ study for years to master their craft.
Directors often worry about the cost of hiring an accountant, but are you certain you are claiming all the expenses you are entitled to? Are you sure you are handling employees' pay correctly? Are you keeping your accounts up to date?
Accountancy services can range from one off support with end of year accounts filings, to full packages where all your HMRC submissions are managed by an accountant. Remember accountancy fees are an allowable business expense which provide tax relief.
Your time should be spent benefiting the business and as accounting mistakes can result in fines, not hiring a professional could actually cost you money!
For more information about small business accounting and support, speak to a member of our CloudAccountant.co.uk team. Call: 0808 281 0303.