At the early stages of your business, you will find that your company requires you to wear many hats:
The manager; The marketer; The IT specialist; The accountant.
Deals need to be sealed, emails need to be answered and employees need to be paid. With all the vital aspects of your business resting on your single set of shoulders, chances are important things will start slipping through the cracks.
The next thing you know, it’s tax season and your books are in disarray.
Common Financial Mistakes of Small Business Owners
Financial management is one of the most challenging hurdles to overcome on the road to business success. Statistics show that 20% of small businesses fail in their first year, and only half of those who started will survive until their fifth year.
Running out of cash is the second most cited reason why businesses fail in their early stages of development. Whether it’s managing cash flow or securing capital, there are several common financial pitfalls you need to avoid if you are to stay on top of your finances. These include:
- Late payments
It could be your putting off paying bills until the last minute or a delay in your client settling invoices. Either way, late payments can cripple your business’s cash flow.
- No emergency funds
At some point in your company’s lifetime, you will have to pivot. When that happens, having an emergency fund will allow you to rise above any unexpected hurdles thrown your way. As a rule, you should save enough to cover three to six months of expenses.
- Not separating business funds with personal funds
Small business owners often neglect to separate their personal funds from business expenses. Without business bank accounts and business credit cards, you will not be able to properly file your taxes, balance your accounts, measure profits, and even set financial goals. Numbers will be jumbled with your personal funds, which could then affect not just your business but impact on your life outside the workplace.
- Committing numerous accounting errors
Some accounting mistakes can be easily rectified; others can significantly impact your bottom-line, especially when repeated. These mistakes include:
- Misclassifying an expense as either a liability or an asset
- Failing to record every transaction (even the small ones)
- Throwing away receipts
- Not reconciling your books with your bank accounts
As a small business owner, you need to realise that your primary job is to make sure that every cog in your company’s machine is working as it should. Sometimes, the number of hours you spend correcting your books and looking for mistakes may impact on your limited time. Spending hours scouring your books for accounting errors may impinge on your ability to run and grow your business.
As your business grows it will become inevitable that you will look to outsource your accounting function to reliable accounting professionals, so you can save yourself from committing financial mistakes and focus on more cash-generating activities.
How can an Accountant Keep your Business on the Right Track?
Historically, accountants have been confined to the role of keeping track of a business’s expenses. They come in every tax season and make sure that you file on time.
Today, the role of the accountant has developed and changed radically.
Modern accountancy firms now possess skills that can help propel your business forward. While they will still focus on your financial commitments and admin, they are also in the position to analyse your financial activity and provide strategic advice. The role of the accountant has widened from one of simple tax compliance to a more strategic financial function.
With an accountant on your side, you can:
1. Make sure you have enough cash flow
Small business owners, especially at the first years, often forgo paying themselves. Instead of receiving a decent wage, they would re-invest their earnings to grow the business. However, paying yourself is vital to your well-being and will encourage you to keep moving forward.
A skilled accountant can make sure your cash flow stays in the positive by:
- Staying on top of bookkeeping tasks, so you know where your business stands in terms of cash flow and savings
- Reducing business expenses by looking at your accounts payable, accounts receivable, operations, and market costs
- Pointing out key timing and processes that can positively affect your bottom-line
- Helping you raise finances that presents little to no risk for the business, be it taking out loans, crowdfunding, or looking for an angel investment
- Keeping tax return bills at a minimum, as well as provide advice on the best tax planning solutions
2. Remind you of important dates on your financial calendar
It’s hard enough that you have to juggle multiple tasks within the day, let alone keep track of any quarterly and annual tax deadlines you may have.
A study from Staples in December 2017 shows that more than half of small business owners find tax preparations complicated, with two in five believing that tax preparations cause last-minute complications. Despite this, however, almost half of small business owners continue to handle taxes themselves.
Accountants will take these complications off your plate. They will make sure that your tax and administrative obligations are fulfilled on time, saving you from paying late fees and penalties.
3. Keep track of financial records efficiently
Having your books in order means you need to keep track of all financial transactions down to the last pence. That is not an easy thing to do, as it requires a lot of time and diligence to accomplish (not to mention how mind-numbing it could be).
Accountants can make sure all your bank statements, balance sheets, profit and loss statements, and every receipt are kept on record.
With cloud accounting software, your accountant can use your financial data and extrapolate ways for you to grow your business. Software like Xero Cloud Accounting is not only secure but can be integrated easily with other tools, giving you real-time insights into your current financial position and projections.
4. Provide support with legislative changes
Accountants can also help prepare your business and create an action plan in the event of any legislative change.
Take, for instance, Making Tax Digital (MTD). Digitising the entire UK tax system will begin in April and continue to roll out to all businesses until 2020. While MTD decreases inaccuracies and fast-tracks the process, it does pose a problem for the 65% of SMEs who are not ready for it.
Working with an accountant who understands the digital space, as well as the provisions of the law, will help ease your transition to MTD. They can also put a system in place to make sure your business can file quarterly reports using HMRC-approved cloud accounting software.
5. Leverage financial information for business growth
A good accountant on your team will also take on the role of business advisor, offering guidance on short and long-term business decisions to create a roadmap to success. They can:
- Present growth options by setting up goals based on accurate financial forecasting
- Establish KPIs and compare them with industry standards
- Create financial reports to make sure KPIs are met without compromising cash flow
- Assign clear budgets to each project
Find the Right Fit
Hiring an accountant requires that you first take stock of what your business currently needs. A small business, for example, would not work well with an accounting firm that specialises in multinational companies.
Start by listing down your expectations of an accountant — their qualifications, what you need them to do, and the results that you want to see. Also, consider how much help you need. Do you need them work on all your business’ financial activities or do you want your in-house bookkeeper to work with them?
With your qualifications clear, you can then start looking for the right accountant that fits the bill. Keep in mind that your accountant would ideally work with you in the long term, so be stringent with hiring and only pick the one that you trust.
About the Author: Andy Hyland has been a qualified accountant for fifteen years and is the owner and director of AK Tax, an accountancy and tax advisory firm based in Medway, Kent. He is a certified Xero Accountant and has written extensively on finance related subjects and cloud accounting. You can connect with Andy on Twitter, Facebook and LinkedIn.