From one wo/man bands to larger companies, bookkeeping is a significant part of any business . While it isn’t typically one of the more glamorous jobs, bookkeeping is at the heart of any company’s success, and errors can cost the company significantly.
Below are some of the most common errors that I cover when training SME owners to set up and manage their bookkeeping correctly.
Mistake 1. Combining personal and business finances
A lot of business owners forget to separate their personal finances from the business ones. So when they are inputting their expenses, they come across a meal receipt which they paid for on the company credit card, because they couldn’t find their personal credit card or they didn’t have any money in their bank account.
This can also sometime be the other way around – a business owner could pay for a business expense on his personal credit card and forget to put the expense in for reimbursement.
The problem with mixing up your personal and business finances is
1. You could be missing out on tax relief, from those receipts you are missing and are tax allowable
2. If you put through some personal receipts, this could result in a fine from HMRC.
Mistake 2. Not performing reconciliation
A lot of businesses owners say what is a reconciliation? They have no idea they need to compare their business books with their bank statement and make sure there are no discrepancies.
You should reconcile your business books with your bank statements as often as possible at least once a month to:
1. Keep track of all income and expenses going through your bank and that they match your business books.
2. To avoid and/or detect fraud within your company.
Mistake 3. Being too loose about petty cash
A lot of business owners have informal ‘petty cash’ which can be accessed by most employees to cover small business expenses, such as postage, refreshment, small office stationery, etc. and because it is so small they also forget about getting a receipt.
Implement a simple system for petty cash – log the amount of money initially put into the ‘petty cash’ and ensure workers submit a petty cash slip each time they remove money. The slips should then total the original amount of money put in when the petty cash system was started.
Mistake 4. Not keeping receipts for small purchases
Many business owners don’t see the point in keeping receipts for small expenses, such as parking, business travel, etc. because they will just clutter the office and they assume HMRC doesn’t need to see every little expense.
This is wrong – if you are inspected, then HMRC will want to see receipts for everything you have put through your business as an expenses and if you don’t they can state that it is a non-tax-deductible expense, because you have no paperwork to back it up. If this does happen you could incur penalties and fines.
Mistake 5. No back-ups of computerised accounts
The paperless office does not exist in the real world, where audits and inspections still exist. A paper trail, documentation or verification in the form of backup documents should be available, especially if all files are on the computer system, which could be prone to technical problems.
I recommend that people look into online back-up software or internal back-up systems, depending on the size of the business.
A few businesses are also out and about all the time and have no real fixed office space, and find it difficult to access to there accounts, I recommend an online accounting software package, like QuickBooks Online, as well as apps <sorry I know QuickBooks has an app that can help with accounts on the move as well, but can’t remember what it is called> that best suits there needs as a business.
Mistake 6. Mis-categorisation or over-categorisation
There are fairly standard categories for expenses to use set by HMRC. However, often expenses are entered into the wrong categories or too many categories are created.
Some problems I have come across are: inputting expense into an income account and vice versa. The problem with doing this is that by allocating an expense account to an income account will reduce your overall income and if by allocating this, expense, to the income account you are just under the VAT threshold limit, but by placing it in its correct account you go over, this would lead to a fine from HMRC
By using a general guideline, for standard categorisation, you will not go far wrong with you inputting, just make sure your expenses stay with your expenses and income with your income.
Mistake 7. Not knowing the difference between an profit & loss and cashflow
A lot of business owners think a cash flow is the same as an profit & loss and that both will show them the amount of money in their business. It isn’t.
When undertaking annual accounts or teaching profit & losss, the general question I get asked is I never made that amount of money, ‘look that wasn’t in my bank account’. This is because it’s not a cash flow statement. The profit & loss takes into account transactions that took place within that financial year, but not things like assets, machinery, that will appear on your balance sheet.
The best way to remember the difference is:
- Cashflow – is the cash that flows in and out of the business
- Profit & loss – is the cash that is expected to be received or spent within the business
Mistake 8. Manual vs Computerised Accounting Systems
There are many opportunities to make errors when using a manual accounting system and many of these errors will never occur when using a computerised accounting system.
For example:
- You can be assured that a sale to a customer will be posted to the correct customers account.
- Errors with dates, for example, 30 February will not be accepted in a computerised system.
- VAT will always be worked out correctly in a computerised system.
The benefits of using a computerised accountancy system, such as QuickBooks, compared with a manual accounting system:
- Can save you time
- Can produce reports in seconds
- Its more accurate than a manual system
- Can save you money off your accountants bills