Bookkeeping – what are the most common mistakes SMEs make?

When growing a small company or forming a start-up, the financials can get left behind.

What are the pitfalls to avoid, and what are the best ways to improve? Here are the most common mistakes, and the golden rules to overcome them…

Not focusing enough on cash flow

“This tends to be the biggest problem because it can have catastrophic consequences,” says Brian Munjanja, Managing Partner at Broadwing Accountancy Services. “Make sure you understand that time frame of getting the money in when you have to pay bills and attend to staff costs; and get to grips with larger or more established companies who won’t be your customer unless they are given extended terms.”

There’s a paradox here, says Munjanja, that SMEs need to get on top of: “you want the work because it’s good business, but if they don’t pay for 60 days and you’re a small business, you have to understand the huge impact this can have.”

Not keeping up with tax

“Take tax seriously,” says Andy Fish, Director at Community Heroes, a business development agency. “Pay what you need to pay and pay it on time. I registered for VAT from the start, rather than wait until I hit the threshold, as my customers expect me to be VAT registered. I don’t have too many purchases/inputs that I can reclaim so don’t get much benefit from that, but it keeps customers happy.” If you are registered, understanding the complexities of VAT is vital. “People do make VAT errors,” Brian Munjanja says. “It may seem simple, but it’s actually the most complex tax in the UK.”

Not being organised

Because bookkeeping is timekeeping, it can be easy to lose receipts, not keep proper track of expenses and generally find yourself being disorganised. And if you find yourself looking at things months later in order to meet HMRC deadlines, it can be hard to remember what’s what. Good bookkeeping is essentially about good housekeeping.

“Not making a note of those small expenses or hanging onto the receipts can soon add up over the year. When you think this is money effectively lost by your business, it is no joke,” says Melanie Richardson of Swindells Accounting. “Make sure to have a proper filing system set up for all your accounts and regularly update your records every month. This will keep your books in good order and avoid a whole load of work when your tax return looms.”

Going it alone with bookkeeping

When you’re running a small business, you don’t want to be spending valuable time poring over your bookkeeping when you should be growing the company. A dedicated bookkeeper – either internal if your company is large enough to warrant one, or outsourced if you’re smaller – is a worthwhile investment because your time is money.

“A good accountant can be instrumental in helping a business grow, and also bring to the customers’ attention any concerns around how future changes to tax, or related legislation, may impact the way the business finances are managed,” says Mark Bennett, Regional Director at Ultimate Finance Group.

Not understanding your finances

If taking your eye off cash flow is the most serious problem for SMEs, simply not understanding your finances is the most common. “Whether it’s forecasting, the difference between profit and actual cash, or knowing whether it’s best to use cash-based accounting or accrual – having a sound understanding of your finances is vital,” says Brian Munjanja. “It may seem obvious to many of us, but that’s because we have to remind ourselves we’re in the finance industry.”

Munjanja’s experience is stark: “I’ve seen so many businesses say, ‘where’s the money gone – I made so much profit!’ ” There’s an educational role for bookkeepers here, but SMEs need to know that there are things they need help with.

A good accountant can be instrumental in helping a business grow

Not keeping business and personal finances separate

It can be surprising to discover how many SMEs, especially start-ups, still make this basic mistake. “Open a business bank account ASAP,” says Chris Sweetman, Director, Sweetmans and Partners. “Some high street banks offer free banking for 12 months, and it makes it much easier to track your income and separate out your expenses. You could also have a business savings account, as well as a current account, into which you can make regular payments ahead of your annual tax bill.”

Not reconciling

When SMEs try to go it alone, it’s essential to do reconciliations every month. If you can’t commit to this, get a bookkeeper. It has knock-on benefits to the business because it avoids problems associated with fraud and it gives you a healthy finance check along the way, alerting you to problems. Getting into good habits also encourages you to back up all your data – another simple precaution that many SMEs forget to do.

Not realising when you need advice

“You can find so much online now,” says Brian Munjanja, “and whilst that’s great, there’s a point at which things cease to become sufficiently adequate – or sufficiently tailored to your needs – and often, SMEs don’t quite pick up on this. Don’t lean too far in either direction,” he advises. “You can learn a lot online or from generic advice, but for actual business risk, talk to your bookkeeper or accountant.”

Not spotting legislative changes

Finally, tax rules change every year. Just in 2018, changes have been made to personal tax allowances, pensions, dividends and national insurance. You need to know about the tapered minimum wage rates, and you need to know about a whole raft of employer responsibilities. When you need to, consult a professional – don’t let your passion for the business be overshadowed by regulatory commitments.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.