The View From… is a series of blogs where we speak to experts in different professions and gather their learnings and lessons from the work they do with small business clients. Kayleigh Williams is an accountant at Duncan & Toplis, a top 30 UK accountancy company.
There are a few common mistakes that small businesses tend to make when it comes to managing their finances.
Some of it comes down to a lack of financial expertise, but often it’s more general ways of working that could be improved – including how you work with your accountant.
Here are some of the common issues and tips to help you overcome them.
Financial accounts are a compliance requirement, so it’s important to stay up-to-date with them before they run away from you. The longer you fall behind the less relevant they will be to your current financial position and the greater the risk of making ill-informed decisions.
By doing regular monthly accounts you’ll ensure you have the most up to date information available and therefore make financially sound decisions that are representative of your position today.
Strengthen your balance sheet
Small businesses often get hung up on their income statement and profit position rather than considering the accounts as a whole and making sure the balance sheet is strengthening year-on-year. They also need to ask the question: if the balance sheet isn’t strengthening – why is that?
Keeping track of your balance sheet position and ensuring you have a good level of revolving cash to service business debts is just as important as making a profit.
Get professional guidance and advice
Your accountant is not just a year-end facilitator. If that’s all they’re being used for then you won’t get your money’s worth. Instead, treat them as a partner in your business who can enhance your strategic decisions with invaluable financial insights.
Manage your cash flow
Your accountant can help you if you have a lack of initial funding, assist with cash flow management and create a clear business plan if you’re lacking one. By helping you with these essentials, your accountant can set you up for the long-term and really help to future-proof your business.
Get ‘clued up’ on the financials
In medium-sized businesses, not everyone is clued up on the financials. This can lead to misunderstandings around expenditure and what is and isn’t allowable as a business expense.
It’s important to get the basics right. But this can be hard to do if you’re just starting out or you’re one of those business owners who look after the finances themselves whilst also managing the rest of the business.
I’ve come across a few simple mistakes that can easily be rectified with the right advice.
For example, business owners often get caught up in the notion that profit means cash. This is very rarely the case. Cash can soon be spent repaying loans you have used to finance your business or purchasing new assets such as new IT equipment, for example. So, the business may be profitable, but your cash will be impacted by these balance sheet items.
Separate your personal expenditure from your business expenditure
Business owners can also fail to separate their personal expenditure from their business expenditure. If you’re running a limited company, personal expenditure will be posted to your Director’s Loan Account. If you don’t keep track of what you have spent versus the capital introduced to the business you may end up owing the company money. This will then incur Section 455 tax payable by the business, in addition to Corporation Tax.
Reconcile your books
People often fail to reconcile their books with the bank account too. This is really important because it proves that an account balance is correct. Doing this monthly can help catch any unusual transactions that could be caused by fraud or accounting errors. If you’re not doing this regularly, you’re putting your businesses at risk.
Corporation Tax payments should be considered
A lot of small businesses only use their accountants to consider their year-end taxes. Corporation Tax payment should be considered on at least a quarterly basis to ensure you don’t fall into unexpected cash flow issues. This is especially important for businesses with tight cash flow. If, at the end of the year, your taxable profit is less than expected then, well done, because if you’ve been putting funds aside to make the payment, you’ve built a cash buffer into your business.
Take note of and embrace Making Tax Digital (MTD)
The introduction of MTD, although daunting for many businesses, is a huge step forward. This is a fundamental change that will come into play from April 1 2019 and will shake up how the UK tax system is administered.
Digital VAT reporting will be the first tax to be moved from paper to digital. VAT-registered businesses will need to have carried out extensive research, reviewed their internal processes and chosen a cloud accounting software that will make them compliant.
More complex businesses will be allowed to defer for six months. For businesses that are genuinely trying their best to comply in this initial rollout, there will be no filing or record-keeping penalties.
Other taxes and businesses were originally planned to go digital from April 2020, however, the Chancellor of the Exchequer, Philip Hammond recently confirmed in his Spring Statement that MTD will not be mandatory yet for any other taxes or businesses. However, the intention is for further rollout over the coming years.
Download our guide on how to work more effectively with your accountant.