Top 11 Bookkeeping Errors

blob-decoration<

CEO of Addition Finance, John Miller has worked in top-tier finance roles for over 14 years with companies such as Thomas Cook, TfL and EY, but also has experience working with much smaller companies and has proven success with a start-up tech firm. John’s focus is on trying to improve communication around finance and help small businesses increase financial confidence. 

While John now runs Addition Finance, which provides accounting services, John agreed to speak to our members and share with them his wisdom of 14+ years in finance and accounting, and flagged how you can fix the frequent mistakes that he sees businesses make that cost them money.  Watch his webinar here.

  1. Outsourcing 

“You can’t do everything. Time is the only thing that is the same in every business; there’s 24 hours in every day, so outsource what you don’t enjoy, and what you’re not good at.” 

The first piece of advice that was given was to outsource everything that you don’t enjoy, or aren’t your best at. Time is a resource that is limited and expires, so in order to maximise what you have, seek help where you need it so that you have the time to do what you can do, even better than before. 

  1. Ditching Physical Receipts 

“There’s applications for absolutely everything now; for recording your team’s time, sending out invoices; whatever it might be, there will be an application that can make it faster smoother and quicker.” 

John mentions next that a large concern when he sees clients is when new customers bring him boxes of receipts, looking to do their tax returns or annual accounts; using paper is a thing of the past now and is no way to conduct business. He stresses how important it is to use technology to your advantage when handling your accounts so that your records are kept safely and neatly for reference later when the information needs to be accessed. 

  1. Invoices

“Match every single payment with every single invoice that you might have.” 

The third error that businesses make when handling their books according to John is failing to keep invoices or bills reconciled to bank payments. Make sure that all of your invoices are noted once you have been paid so that you do not mistakenly double-charge a client or make a bigger mistake with a bill. 

  1. Using The Correct Tools

“A lot of the customers that we take on were using Excel to do their accounts, they weren’t thinking about the benefits that a piece of accounting software can have.” 

While a lot of businesses use Excel to keep track of their finances, John suggests searching for a software that suits you to be able to keep even better track of what comes in and out of your business funds. The software that John uses as an example is Xero, a cloud-based accounting software that can keep track of much more than what your clients are paying you, but allows you to pay your employees and can submit your VAT returns. John also stresses that while you have the software, it might not be enough to be effective and suggests that if you are ever unsure, refer to point one and outsource someone who can better understand what it is they are doing. 

  1. Understanding VAT 

“Always consult an expert or at least go on the government website. If you’re not going to speak to a professional, rather than just googling the information you need, actually go to the government website and see the true reflection of what the government actually want you to do.”

Back again to outsourcing: You want to make sure that you are getting the work correct – especially when it comes to VAT and taxes. When you don’t understand what is being asked of you, you cannot possibly expect to get it right, possibly losing money in the process. In the event that you can’t outsource, do the research! 

  1. Calculating Payroll Taxes

“When you’re a small business, you don’t usually have HR function, and definitely not a payroll department. So how do you make sure that your pay is correct to your employees and to yourself?” 

In the webinar John explains how to account for employees’, pensions and National Insurance tax, as well as providing software examples that will help make this task easier. 

  1. The Right Way To Pay Yourself

“If you’re paying your employees, you might as well pay yourself in the same way. But it’s not the most tax efficient way to pay yourself.”

Another game-changing piece of advice is that instead of putting yourself on the payroll along with your employees, you should take a mixture of salary and dividends: taking roughly £9,000 of salary, just under the cap of employer or employee taxes, and take the rest of your pay as dividends – this is because up to the first threshold, it’s only a 7.5% tax, rather than 20% income tax. 

  1. Applying For Grants 

“Ultimately, we see a lot of customers come to us, and they haven’t really taken advantage of what’s out there to help new businesses. There’s so many grants out there.” 

As a business, you want to make sure that you are applying for as many grants as possible to ensure your business is supported through unexpected events or any big changes that might take place. He mentions that there are many people you could outsource the task of looking and applying for grants on your behalf to, but if you do it yourself, make sure that you are searching thoroughly for options and combing through your applications carefully. 

  1. Financials As Management Accounts

“Don’t think of financials as financial accounts. Think of your financials as management accounts and dashboards that will show you what’s going to happen within your business rather than what has happened.” 

When you treat your financials as management accounts rather than a boring spreadsheet for your taxes, you can start to notice trends and patterns in your business that will help you make smarter, more informed business decisions such as when to hold certain sessions or what times your services make the most money.

  1. Miscategorising or Over-categorising

“Once people wrap their heads around management accounting being useful, they tend to miscategorise, or they over-categorize.” 

When you offer multiple services in your businesses it is easy to fall into the trap of setting up a different management account for each service to see what works with the service and what doesn’t – this is over-categorisation and is much less efficient than you might think. John suggests that once you have understood how management accounts work, try to work in brackets so that you can see which services work better where and at what times. 

Miscategorising is when you incorrectly place expenses in the wrong accounts. An example of this is when you mark an invoice as not having VAT, when it in fact does, or marking down your salary as a general expense rather than an employee expense. When you do this you miss out on potential tax returns and relief when it comes to taxes on business expense. 

  1. Making Sure You’re Allocating Costs to the Correct Financial Year

“You need to make sure that you’re matching the revenue of the items with the cost of the item – and also the overhead. Any labour costs or office costs including heating, electricity, or insurance, allocate them all to the correct year. That way you can create a proper picture of your business.” 

John says that the last common mistake he sees in his practice is businesses accidentally allocating costs to the wrong financial year – usually due to a late invoice or payments in arrears. This causes problems for businesses because then you are paying tax on the income but not getting any relief on the costs. You want to make sure that your tax bill is correct. 

Click this link to listen to John explain the critical aspects of good bookkeeping.

Article written by Maisie Violet Wicks, BA Hons. Please contact newsdesk@privatepracticehub.co.uk for any corrections, comments or suggestions.