News by SB Informer

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Accounting Pitfalls in Small Businesses: How to Avoid Them

SB Informer
Wednesday, September 20, 2006; 03:31 AM

At JJ Accountancy we believe that financial awareness and attention to accounts inspires business success, whatever the size of the business.

Here we highlight the main areas where potentially successful businesses can struggle as a result of lack of understanding where accounts are concerned.

1. Accuracy of accounting records. Too many small businesses pay insufficient attention to their accounting records. Accounts need to be accurate, clear and up-to-date. Accounts should be used to monitor business performance and financial position. Successful businesses record and use past, current and future financial information.

However small the business is, a profit and loss account should be produced on a regular basis. The P&L account should be used to compare how the business has performed in comparison to how it was expected to perform in the budget. Any significant differences must be investigated so action can be taken to ensure the budget is met in the future.

2. Payment from clients. There should be an accessible record of how much is due to the business from each client. Even a small business should establish a clear and reliable credit control function to ensure clients know how much they owe and they are encouraged to pay.

The best way to report debtors is on an aged debt report where you can split out debts according to how long ago the invoice was sent out. Producing this report will encourage a small business to focus on debtors and collect the payment for goods/services provided. Simply sending out the invoice is not the final stage in completing a client order. A good accounting function would send clients regular statements of account and, when debts become old, it would chase for payment by telephone, email or letter.

3. Tax calculation and filing. Tax is an area where new businesses can struggle. A simple tip is to remember tax filing deadlines. Penalties for late payment are unnecessary and avoidable. Tax should be calculated correctly as both over and under payments are costly for your business. Records should be kept which assist in the preparation of tax computations. For example, a report of non tax-deductible expenditure will help to calculate taxable profit.

Tax payments and deadlines may not be high on the priority list when a business person is concerned with running the business but it is so important to get on top of tax. If tax is paid late interest and a penalty are charged. Why incur unnecessary charges for under-payment? And why pay the Revenue more than necessary when it is possible to be sure that the correct amount has been paid? In a small business there may be nobody who is confident in performing tax calculations. In this case the assistance of an accountant is money well spent.

4.    VAT compliance. HM Revenue & Customs has strict rules that all businesses need to understand and adhere to. Small businesses may not be registered for VAT at all but they may need to think about registering? The business may be a size where it is compulsory to be VAT registered or alternatively it may make business sense to register voluntarily regardless of business size.

Good management of VAT can help cash flow and poor cash management could cripple a small business. Cash flow should be budgeted and included in here will be when VAT will have to be paid out or received back and the amount of cash involved. Small businesses are often not on top the information needed to complete the VAT return and when the return and any payment are due. Understanding and managing VAT would save time and avoid any non-compliance penalties.

5. Cash flow management. Cash must be available to pay bills as they fall due. A business, particularly a small/start-up business, cannot operate without a reliable cash supply. It is perfectly possible for a profitable business to collapse simply because it does not have sufficient cash.

Cash flow should be monitored at least monthly and possibly weekly or daily, depending on how sensitive business is to fluctuations in cash. It may be sensible to establish critical levels of cash at which special action needs to be taken to invest excess cash or manage cash usage.

6. Understanding and managing employee costs. A small business needs to understand all the costs associated with employing staff. Employees cost employers in salary, benefits, tax and insurance. Payment of each of these needs to be managed - incorrect or untimely payments to staff is a fast-track route to loss of key workers. Incorrect or late payments of taxes results in financial penalties. Income tax and employee NICs on behalf of employees plus employer’s NICs in respect of each employee need to be paid each month and the cash must be available to pay on time.

Payroll reporting should include a detailed summary report, payslips, the bank payment and the payroll journals for the accounts. These should all be reconciled to control accuracy and integrity of your payroll processing.

Payroll is so often an area where it is just too time-consuming/ complicated for a small business to manage and it is more efficient to outsource payroll to an accountant or payroll bureau.

7. Self-remuneration. Although not a pitfall of small businesses, owners should be aware of the options within the business structure to maximise tax-efficient earnings. It is frequently possible for a business owner to increase take-home pay simply by re-structuring how remuneration is received.

For example, if you are a limited company, remuneration may be in dividends or salary. It is likely that the right combination of the two brings the best benefits in terms of income tax, NICs, potential pension contributions and take-home amount.

If you run a small business or start-up and any of the above has made you think about how your business currently manages its financial and tax affairs and you would like a confidential discussion to consider where you could improve your financial recording, reporting and compliance, then please call JJ Accountancy Ltd on 0845 130 6148. We will be happy to advise you on accounting and tax matters and to discuss the services we could provide to help your business.

JJ Accountancy is run by qualified ex “big 4” professionals. We specialise in providing small businesses with a high quality and reliable accounting and tax service. Our aim is to remove the burden of day-to-day accounting and tax requirements so that our clients may be free to run their businesses in the knowledge that their financial and tax affairs are in excellent hands.