You probably didn't start your business because you love doing bookkeeping and admin, but unfortunately when you start a business it's something you need to think about. Here are four common mistakes I see all the time, and how to avoid them.
1. Not having a separate bank account
If you've ever had an initial call with me on the phone, I will have definitely asked you this question. Do you have a separate bank account for your business? If you're running a limited company, it's a legal requirement to have a separate business bank account, but (at the time of writing, anyway) it's not for sole traders. That said, even if you are a sole trader, I would absolutely recommend you have a separate bank account. If you don't have a separate bank account, you'll find yourself overwhelmed with transactions, you'll spend a lot of time wondering whose money is whose and whether that £5 spend at the supermarket was for biscuits for a client meeting, or dinner on your way home that Tuesday night.
Frankly, it makes it an enormous task just to work out which expenses relate to the business if you run everything through your personal account, so setting up a separate bank account will save you a lot of time and stress.
2. Not reconciling your bank account
One of the things bookkeepers do is to reconcile your bank balance against your accounting records to be absolutely sure every bank transaction has been recorded. Not performing a bank reconciliation can result in missing transactions, leaving your business accounts potentially incorrect.
Bank reconciliation should be performed monthly.
3. Keeping poor records
Working with startups, we've seen it all, and if you have a bag of receipts, you're not alone, but if does leave you open to mistakes. If you're not keeping good financial records there's a risk you're not properly recording your sales, or you're not recording all of your sales. And, if your profit figure is incorrect, you could be paying too much or too little tax to HMRC leaving you in a sticky situation if you have an audit from HMRC.
We'd recommend setting up and using a cloud based accounting system for your business to properly keep track of your income and expenditure and to be sure you're keeping robust records.
4. Recording drawings as a business expense
If you're a sole trader, you and your business are the same legal entity. That means if you take money out of the business, this isn't an expense of the business, it's just you taking some of your own money out of the business. The reason it matters is that expenses affect your business profits (and therefore tax bill) but drawings are paid after the business pays tax and do not affect the tax bill.
Still have questions about your business expenses? We'd love to help, please get in touch through our contact form.