Managing a small business in the UK is challenging, especially regarding finances. London is competitive, and compliance is mandatory; even a slight mistake in accountancy can be costly. However, knowing the most frequent errors and making efforts to prevent them will save time, money, and energy.
Let’s explore some of the most significant mistakes in accounting that small businesses in London should avoid.
- Neglecting to Separate Personal and Business Finances
The worst thing one can do is allow for the commingling of business and personal money, expenses, and taxes.
Why It’s a Problem
Knowing a business’s financial position can be difficult when a company’s affairs and its proprietor’s private matters are blurred. This can also provoke concerns during HMRC audits.
What’s the Solution
- It is wise to open a separate business bank account.
- It is essential to use accounting software to categorise expenses correctly.
- It is vital to keep and preserve all receipts or vouchers for any spending made in the business.
- Delayed Record Keeping
Update your records promptly to ensure accurate financial data, and you may miss opportunities.
Why It’s a Problem
Timely issues make work easier since lapses are immediately detected, trends are identified, and compliance is ensured. However, they can also lead to missing certain tax deadlines and consequently paying many penalties.
Solution
- It is recommended to take your books at least once a week.
- Record repetitive transactions with accounting software.
- Set reminders for important financial deadlines.
- Failing to Understand Tax Obligations
Taxes are complicated, and small businesses usually need to estimate or pay attention to their tax responsibilities.
Common Mistakes
- Employers fail to differentiate between an employee and an independent contractor or when they fail to distinguish between the two.
- Ignoring VAT registration thresholds from the calculation.
- Most people need to claim the deductions they are entitled to.
Solution
- Seek professional guidance from an experienced accountant in matters to do with taxation.
- It is also important to always refer back to HMRC guidelines.
- Keep digital records to streamline the filing process.
- Overlooking Cash Flow Management
Cash flows are critical because even profitable businesses can fail because of poor cash flow management.
Signs You’re Struggling
- Delay in the payment of suppliers.
- Paying with credit for most purchases that may be easily paid in cash.
- Lack of uniformity in the bills issued.
Solution
- The key performance indicators should include preparing monthly cash flow forecasts.
- Set up payment terms that are very rigid for customers.
- Overdue invoices should be checked regularly, and collection done accordingly.
- Not Using Accounting Software
Manual methods or legacy systems could be more efficient, often leading to mistakes.
Why It Matters
Contemporary accounting tools enhance operations’ efficiency, eliminate human influences, and offer immediate results.
Recommended Steps
- Develop software that is easy for small businesses and oriented towards this market.
- Use cloud-based platforms to access data and for data backup.
- Make your team familiar with how to use the software.
- Ignoring Financial Reports
Missing the financial reports review is like driving a car without a map.
Consequences
With the reports, it is possible to determine profit trends, decrease expenses, or forecast future development. However, getting loans or even attracting investors to fund the business becomes very difficult.
Solution
- Prepare monthly accounts, such as income statements.
- Organisations should compare the planned budget to the actual performance to make changes.
- Engage an accountant to have them explain some complex data.
- Mismanaging Payroll
Some consequences of payroll mistakes include unhappy employees and legal repercussions.
Common Errors
- Incorrect tax deductions.
- Late salary payments.
- Misclassification of workers.
Solution
- Payroll software should be used to avoid and minimise mistakes when preparing the payroll.
- Get to know more about the employment taxes in the United Kingdom.
- Do a payroll check at least once per quarter by either an internal or an external auditor.
- Not Preparing for Audits
Most small business entities need to maintain proper records to meet auditing standards.
What Goes Wrong
- Missing receipts.
- Poorly organised data.
- Audit compliance is an area that many people need to understand more.
Solution
- Keep records for up to six years and ensure they are well arranged.
- They should also carry out internal audits to look for possible signs of risks.
- Contact professionals in advance before the audit.
Wrapping It Up
Accounting mistakes can be a huge setback to the development of small businesses, but they can be prevented. Staying organised, using tools, and consulting a professional will help you manage finances better.
At Waldenway, we provide customised accounting solutions for small businesses in London that meet your business requirements, keep you on track with necessary compliance, improve your cash flow, and provide you with the financial perspective you need.
FAQs
- Which accounting software is the most suitable for small businesses in London?
Choose Xero, QuickBooks, or Sage since they are easy to use and have compliance with the laws in their respective countries.
- What can I do to track the cash flow well?
Accounting software with cash flow tracking capabilities and creating monthly forecasts.
- What do I do if I need to correct my tax return?
Contact HMRC immediately to effect changes to the return and reduce penalties.
