Starting your own small business is an amazing thing to do but it’s also notoriously risky. There’s a lot to think about when you first start out on your own and it can be tempting to put accounting on the back burner, but that would be a huge mistake. Good accounting is crucial to the financial health of your business and mistakes can be devastating, especially in the early days. It’s important to know which mistakes to avoid to ensure that your own business is around for years to come.
Bad Bookkeeping
New business owners are often overwhelmed and tend to neglect bookkeeping. However, it’s essential that you keep the books up to date and record all of your earnings and expenses. Without this data, you won’t have a clear picture of how you’re faring financially, which can lead to a myriad of nasty problems.
It’s important that your business reconciles its Bank accounts frequently. Reconciling is the process of checking that an account balance as listed on your books and accounting software solution is accurate and correct, ensuring that it matches the real balance of your bank account.
Also, understanding the difference between an employee and a contractor, as well as the accounting and tax consequences of this difference.
Meticulous bookkeeping allows you to spot trends, understand your spending and examine which practices generate the largest ROI. You can then leverage this data to improve the financial health of your business, maximise your profits and manage your cash flow. Staying on top of the books allows you to stay one step ahead and put out fires before they start. As your business becomes more established, you’ll be aware of how much your business needs to spend to continue operating. This makes it easy to set budgets for projects that are enough to make success possible, but not excessive or wasteful.
Confusing Cash Flow and Income
The money you take isn’t the money you make.
£100,000 in revenue received sounds okay, but if you had to spend on equipment, insurance, rent, employees, stock, etc to make that money plus pay tax so the net amount you have earned will be smaller.
It’s vital to know not only how much money is coming into your business, but how much is going out. Getting carried away with gross numbers is a common mistake that new business owners make, and it quickly lands them in hot water. It is important to stay grounded in reality and know how much you’re really making so that you don’t overspend.
Using Outdated Methods
Automation and digital uptake are accelerating. Online accounting software is faster and easier than ledgers and Excel spreadsheets.
Software solution is easy to manage and significantly reduces the margin of human error by automating processes and calculations for you. You won’t have to spend hours updating and organising your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. It may be more expensive than the DIY approach initially, but using online software solutions will save you many man hours.
However, bear in mind, that you need to know how to input information right according to your business processes and specifics. You don’t want to do it wrong and then end up with a lot of mistakes to correct when it comes to do Year End Accounts, it will cost you money. So, it’s wise to spend some time to learn how to do it properly. Best thing is to ask an accountant or bookkeeper to set up your business processes correctly from the start. You obviously can find some technical help and demo videos online but it won’t provide you with the best advice coming from the experience and expertise bookkeepers and accountants have.
DIY Accounting
Accounting is complicated. There’s a reason - it takes years to fully qualify. Trying to manage your accounts all by yourself is a surefire way to waste time and stress yourself out. Besides, without extensive financial knowledge it’s unlikely that you’ll be able to save a significant amount of money on your tax return. Furthermore, you could be penalised for making a mistake or being late to file return.
Trying to manage on your own is a drain on your resources so the sooner you seek professional help, the better. Investing in accountancy and advisory services is one of the best decisions you can make regarding the financial health of your business. An accountant will cost you more than managing accounts by yourself, but will SAVE you MONEY and give you an opportunity to focus on your business without stressing out about accounting routine or compliance.
To Summarise
It’s important to avoid the above accounting mistakes in order to set your business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it’s best not to take any risks. Whilst it’s tempting to put accounting off until later, you need to make it a priority right from the very start.
Comments