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Most Common Small Business Accounting Mistakes
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When you've founded your own small business, whatever the profession, the amount of administration tasks, such as bookkeeping and tax returns, can come as a shock.
We can say with some confidence that no-one who runs their own SME has gone into business to spend all day Sunday bogged down with paperwork. Spending time organising payroll, calculating costs and tax planning means you're losing out on doing the leisure activities you love.
In addition to the amount of time you're spending on paperwork, accounting errors are likely to slip through unnoticed, especially if you're not an expert in financial matters, or you're rushing because you have so many other tasks to do.
We've compiled a list of the most common small business accounting mistakes - check if you've fallen victim to any of them and what impact they could have on your company.
Losing track of costs
If your records are inaccurate, or you don't update them regularly, your bookkeeping and accounting can become significantly less effective. When you don't have the full picture of your business's income and expenditure, you could be losing track of costs.
This means you might be losing money, or paying bills late. This also has repercussions when submitting your tax returns, causing hassles that could actually impair your ability to grow your business.
As well as making errors when entering data into spreadsheets, or not keeping an accurate record of which bills have been paid, generally inaccurate financial records costs your company money and make it impossible for effective forward planning.
It's vital for any SME to keep track of every transaction to continually monitor the financial health of the business. When an accountant does this, you can be reassured an expert is managing the whole process and will advise you if there are any issues you need to deal with.
Not planning for taxes
Another common mistake is not planning properly for taxes. Inaccurate tax planning makes it impossible to fill in even a simple tax return. This can lead to problems in running your business, not to mention hassle with HMRC at some point down the line.
You might feel using the services of a professional accountant is something you can't afford. However, on the contrary, it can be a useful solution that will help you save money in the long term.
You won't have to spend days piecing together a year's documents and receipts for your tax returns. If you have been disorganised for the other 11 months, this will be incredibly time consuming - and possibly incorrect after you've finished. This could end up costing your business extra money.
Surveys have revealed almost one-third of SMEs believe they have ended up paying too much tax due to being disorganised and submitting inaccurate data.
Mixing personal and business accounts
Small business owners, particularly sole traders, often make the mistake of mixing personal and business accounts - something you should never do. Blurring the line is understandable, especially if you're new to running a business and trying to find your way forward.
You may add a few business items to the family shop, for example, as it is quicker at the time and a small amount doesn't seem to matter. However, this is a mistake, as it reaches far beyond having personal and business items on one receipt.
Research shows more than one-quarter of small business owners haven't opened a separate company account. Using a personal account for business banking too is a recipe for disaster. It makes it very difficult to separate transactions, causing issues with taxes and possible repercussions from the tax office.
Inaccurate banking and financial accounting means you might even miss out on an expense that can be listed as a business deduction. Blurring the lines financially can also cause issues when you apply for a loan or other line of credit, as you won't be able to submit an accurate record of your company's finances.
Always use a separate business bank account right from the start. If you're already using just one account for personal and business finances, break this habit immediately.
Failing to deal with employees properly
As a small business, you rely on employees, independent contractors and freelancers to keep afloat. However, if you don't deal with their paperwork properly, you could be hit with tax penalties and even legal issues.
For example, if you misclassify an employee, this means the government will miss out on payroll taxes. The penalties imposed for this could be substantial.
You must differentiate between contractors and employees based on the jobs they do, how you pay them and their relationship with your business. Enlisting the services of a payroll professional gives you the reassurance that this is being managed properly.
Employing expert accountants for small businesses can free up your time to focus on the growth and success of your company, without the hassle of doing the paperwork yourself and risking making errors that could impact your progress.