Common Accounting Pitfalls for Small Businesses
Doing the accounts is something that few small business owners relish, and that can involve hidden hazards for the unwary.
There is an apocryphal tale of a successful London lawyer whose wife criticised him for calling a plumber to deal with a leaking tap instead of looking at it himself. He answered that he would only do so when he saw a plumber defending a legal case at the Old Bailey. As is so often the case with good lawyers, there is no faulting the man’s logic, and the same reasoning is what has led to so much outsourcing in today’s businesses. If you are an expert in law, or accountancy, or IT, then get on with it. If not, pass it to somebody who knows what they are doing.
For small businesses, this strikes a particular chord when it comes to accounts. In the SME heartland of the Fens, accountants in Peterborough look after the finances of a vast number of small enterprises. But while appointing an outside expert might be a logical choice, it is not mandatory, and there are some companies who choose to keep the accounts in-house. If you are among them, here are some of the most common elephant traps you need watch out for.
Letting things slip
Book keeping isn’t the most exciting part of running a business, and many owners simply don’t take it seriously enough. Everything needs to be recorded, and as soon as you start to “not bother” with small transactions, you are on a slippery slope. Everything means everything, even the pay and display parking charge and the round of coffees you bought during a client meeting.
Mistaking profit for cash flow
The biggest risk to a small business is running out of cash, and it is truly heart-breaking to see a great new business with happy customers and a full order book have to close its doors because it doesn’t have cash to pay salaries and bills. The mistake businesses make is to count every new order or contract as money in the bank. For example, landing a big contract that will be worth £20,000 is great news, but you need to be careful how you treat it from an accounting perspective or it can give a false impression of the business’s financial security.
Not budgeting properly
Diving headlong into a project without a clear picture of what it will cost is a fantastic way of losing money. Even worse, though, if you don’t have an effective budget against which to measure costs, you can be haemorrhaging cash for weeks without even realising the fact, merrily throwing good money after bad.
Not reconciling the books
Reconciliation is the process of checking your accounts against your bank statements and it needs to be done every month. That way, you’ll immediately be alerted if money is leaking through some cost that you are failing to account for.
Trying to do it all
Finally, we return to the beginning. Accounting is something that should not be taken lightly. Most businesses choose to use an external accountant for a reason – it gives them the comfort of knowing that the books are in safe hands, and leaves them to get on with running the business. After all, none of us have seen a plumber on the bench in the Old Bailey to date.