Accounting is to business what climate change is to humanity. Nobody wants to be responsible for it, nobody wants to deal with if it, but if you don’t take it seriously and bring in effective management strategies, it will invariably lead to untold misery.
It’s no secret that money is the lifeblood of business and failure to keep it flowing results in costly mistakes. Said mistakes are often easily avoidable, and with a bit of planning, knowledge and forethought, you can ensure you steer clear of as many potential calamities as possible.
Mistaking Gross for Net Profits
As your business grows and the money starts to roll in, it’s all too easy to look at the figures and see them as your profits. Say you’ve made a £30,000 deal to supply a supermarket with your product. You’ve just made £30,000 right? Not even close.
You’ve now got to make sure you take into account every single cost that it is going to take to fulfill that £30,000 order. Be it supplies, transportation, employee hours, rent etc. It sounds mind-numbingly obvious, but it’s so important to make this distinction.
If you fail to separate net and gross profits and work from the assumption you’ve just made £30,000, you’ll find yourself spending money you don’t have, with catastrophic repercussions. You can’t run a business without money, after all.
The solution here lies with good bookkeeping practice, because if you have a firm grip on your books, you’ll know exactly what profit you made on that £30,000 order. If you don’t it can be incredibly hard to understand exactly how much you’ve actually made or, in fact, lost.
Mismanagement of the Books
Bookkeeping is a powerful and often underappreciated tool in the modern business owner’s arsenal. Used correctly, it offers you a complete overview of your financial situation, allowing you to make informed decisions about the way your money is spent. Used incorrectly, or not at all, you could find yourself in deep trouble.
Let’s go back to our £30,000 supermarket deal. If you have good control of the books, you can evaluate the exact cost of producing those products and discover exactly how much net profit you will receive. If your books aren’t what they should be, you won’t know the right figures and may end up making a choice that is bad for your business.
Obviously, the best way to avoid this is to have comprehensive books to reference from and the best way to have those is to simply maintain good practices. Although books can be done on spreadsheets or paper, the best and most reliable way is to use specialised accounting software or have them built by an accountant. Once you have that setup, all you really need to do is input all your transactions, updating the books with every sale or expense you make.
Now, you have a window into your business’s financial health, allowing to make informed choices from accurate and timely information, instead of simple guesswork.
Failing to Stay Up-to-date with Tax Changes
With the start of the new tax year and the 2016 budget announcement slowly fading in the rear-view mirror, now is an important time ensure you know about any new changes to business tax that may affect you.
Tax laws are constantly being discussed, developed and changed and, as a business owner, it is vital you stay abreast of the situation. Failure to do so will only lead to complications and errors in they way you manage your finances and prepare to submit tax returns.
The simplest way to avoid this problem is to pay close attention to updates out of HMRC and scour the web for content written by accounting professionals that discuss the ins and outs of anything that may have changed and how it affects you.
Letting Yourself Invest Too Much Time in Accounting
Sometimes, the issue with your accounts isn’t that you are paying too little attention to them, but instead far too much. For people who struggle to make sense of their finances, it can become a major issue.
This is all stems from the cliche, yet true statement, that time is money. Whilst you work away at managing your finances, your time is being absorbed. This is time and energy that could be spent elsewhere.
Investing only a small amount of time every day is a good way of maintaining healthy finances, but there is a line that should not be crossed. If you can’t get your finances under control without putting huge amounts of hours into your accounting, then you are stunting your businesses ability to grow by focusing on something that isn’t helping it develop, only maintain it.
The simple answer is, if you can’t do it on your own, don’t. Accountants exist actually for this circumstance, to do the work you can’t or don’t have time for. It may be an added cost, but the damage you do to your business by continuing to struggle by yourself could be far more costly.
Russell Smith, a chartered accountant from Leeds in the UK, is a financial expert with over ten years of experience running his own business.