In your bad books: mistakes small businesses can make with bookkeeping

Without good bookkeeping a small business can totter and fall – simply because it doesn’t really know how it is doing.

And while small business owners are great at keeping many plates spinning, doing the books can take a back seat. This can lead to problems when it comes to completing tax returns and paying bills. What the most common problems caused by bad bookkeeping – and what impact can they have on a small business?

Jack of all trades?

Coral Hamze FMAAT, is a former bookkeeper who now has her own accountancy business, Simply Accountancy.

“My view is that when people start out in business they do so because they want to deliver a service, not because they want to be a bookkeeper. But then when they do their own books, they get stressed: and the bookkeeping goes to the back of the line in front of all other aspects of their business.”

Hamze adds: “I do think that you have to accept that no-one is good at everything – they can’t be. I am a small business owner, but I would never think about doing my own marketing or website creation – I leave that to the experts. It’s the same with bookkeeping: unless you are competent at it and have the time to reconcile your books, keep records and ensure you know the real financial position of your company, then it makes sense to use a professional bookkeeper.”

Invoicing properly is an important part of bookkeeping

The bottom line

It’s not only time and your sanity that can be impacted by bookkeeping. It could affect the health and future of your business. The easy bit about running a small business – if there is anything easy about it – is taking in the money. But accounting for the money going out – paying suppliers, wages and other expenses – can be more of a challenge. Unless the two are reconciled, then a small business doesn’t have a proper picture of how they are doing.

“If you don’t have your books made up properly, then you don’t really know how your business is actually doing,” adds Hamze.

“You might know how much money you have coming in, but unless you balance that with what’s going out then you’re not getting the full picture. Most people who go into business are good at the sales side of it but when it comes down to remembering expenses or costs, then they are less so. If you don’t really know how your business is doing, then when it comes to doing your tax return you’re going to get a shock.”

Invoicing properly is an important part of bookkeeping for small businesses. That means sending invoices off promptly with the correct rate of payment and the terms of business – how long the customer has to pay it. It can be easy to forget to invoice unless it is done swiftly and not chasing unpaid invoices could have a negative effect on the books. Small businesses with good bookkeeping habits watch their cash flow carefully – if they haven’t got the money coming in from the invoices then they can’t pay suppliers – or possibly the tax man.

Common mistakes

Small businesses which do want to run their own bookkeeping would be well advised to put aside a time every day to record their payments in and out. Little and often is sensible – so any potential problems can be caught early.  And once a month the small business should reconcile its accounts with its bank account to see if they tally. If a business can’t put aside the time for this, then it is time to take on a professional bookkeeper.

A cardinal sin for small businesses is when they mix personal and business spending.  It can be tricky but small businesses need to keep transactions totally separate otherwise they could end up paying the wrong amount of tax. It’s also important to make sure that every single transaction, however small, is recorded and that the receipts are filed properly – so if the small business is questioned by the tax authorities, everything can be accounted for. Bad invoicing can also cause problems for small businesses: it is essential they are numbered sequentially and that there is a system in place to show when payments are overdue.

Cash is not king for small businesses:  taking and making payments through the business’ bank account means there will be a record while cash can easily be forgotten. In the same vein, petty cash is part of the business and needs to be recorded or the business’ accounts will not tally. While all this can seem daunting, good bookkeeping is worth it while bad books could end up causing serious problems in the future.

Charlotte Beugge spent more than 20 years as the deputy personal finance editor on The Daily Telegraph and then The Daily Mail. A freelancer since 2010, her work has appeared in national newspapers, magazines and websites.