The 4 most common mistakes.
Keeping good records is vital for the financial health of a business. Many new business owners see this as a chore rather than the core of their business.
You may be doing the bookkeeping to the best of your knowledge and ability but unfortunately you will make errors and omit transactions. We need to consider the affect that keeping your own books has on your business and your life. We will start by looking at the common mistakes.
Inadequate bookkeeping system
We are assuming that, if you are keeping your own records, you have some sort of bookkeeping system in place. Whatever system you are using, manual cash-book, excel spread-sheet or computer accounting software, you should be able to retrieve the data and information that is needed to comply with your obligations to government agencies.
You should keep all data safe and secure with back-ups of all computer systems. Accounting software, such as Xero securely, stores your data in the cloud automatically and being digital ensures that you continue to be tax compliant.
Not recording all of your bank transactions
Recording money in and out of your business may not be your idea of fun – but, no matter what system of bookkeeping you use, you have to do it. It is important to ensure that all transactions have been entered. A big mistake that can be made if you keep your own records is that you do not carry out a detailed check of all items going through your bank account.
Cloud accounting software such as Xero provides, amongst many other things, automated bank feeds. These will ensure that all transactions are imported for you to process
Leaving it until the last minute
A big problem with doing your own bookkeeping is that you don't really have the time and so it has to be done in the evenings or at weekends or whenever you can fit it in. Leaving your bookkeeping to the year-end or just before you file your tax return or, if you are VAT registered, to the end of the quarter may seem like a good option. But “binge” accounting can be detrimental to your business for the following reasons.
- It can seriously hurt your cash flow. A delay in issuing sales invoices will result in delays in the collection of money and even bad debts.
- Filing late VAT and tax returns will give rise to penalties and interest.
- The longer the gap between “binge” bookkeeping sessions the more likely you are to lose receipts and not claim all of the allowable expenses.
- It may be difficult to remember what some of the expenditure was for.
- Incomplete records with errors will cost the business more in terms of higher accountant’s fees at the year-end to find the errors and omissions and fix them.
- Missing expenses will increase the profits on which tax is paid.
There is no excuse for not keeping your businesses records right up to date with cloud based software like Xero. You can even take a picture of your expense receipts on your smart phone and upload them to your records. Cloud accounting software gives you all the current data on which to base your business decisions.
Mixing business and personal finances
This is something that we see all the time. Sole traders often feel that their personal lives and their work merge into one and having one bank account might seem like the easiest, most convenient and cheapest way of operating.
On the contrary, not only does it cause extra work when it comes to writing up the books and reconciling your bank accounts, it also introduces an element of doubt in the mind of HMRC inspectors as to the validity of business expenses. They will also tend to treat all bank receipts, including personal items, as business income.
By all means shop around for the best options when looking to open a business bank account but make sure you do have a separate business account.
Owners of limited companies must be particularly careful. Any drawings from a company bank account must either be for salary or dividends.