Bad accounting habits limited company contractors should give up

The end of the tax year is fast approaching, which means you may be thinking about making a few resolutions to help you run your contracting operation better over the next 12 months.

As the new tax year approaches, FreeAgent’s Chief Accountant, Emily Coltman FCA, highlights five accounting habits that often cause problems for limited company contractors.

1) Not charging your customers enough

When you’re starting out in business as a limited company contractor, it can be very easy to set your prices too low because you may worry that you won’t win customers if you charge too much.

Some new businesses charge such low prices that they don’t make any profit. Needless to say, that’s not a sustainable strategy!

It’s important to make sure that you charge what your service or product is worth – and that the price you charge doesn’t impede your company’s profitability and growth.

Think of the time and energy you’re saving your customers, as well as what they’d pay to a competitor. Review your profit margin for each project you work on and for your company as a whole.

Identify the least profitable areas of your business that may require you to raise prices.

Remember that if you want to grow your company in the future, you’ll likely need to make a profit on your sales, so make sure your prices reflect this.

2) Not claiming all allowable expenses

In the hustle and bustle of daily contracting life, “doing the books” can often slip down the priority list. After all, for most people, it’s not the most enjoyable part of running a company.

However, putting off your bookkeeping can mean receipts for expenses that you’ve paid for personally get mislaid and may never find their way into your accounts.

Not only does that leave you out of pocket because your company won’t then pay you back for those costs, but it also means your company will pay too much tax because you won’t be able to claim relief on those expenses.

Make sure you log your expenses regularly into your accounts so you don’t risk forgetting about a receipt.

And don’t think that an out-of-pocket expense is too small to bother claiming for either.

We have found that a third of limited company expenses are under £10, yet many people don’t bother to claim them because they don’t think it’s worth the hassle. Those costs quickly add up!

Finally, look for tools that can help you manage your expenses on the go.

Some online accounting software, such as FreeAgent, lets you take a photo of a receipt on your mobile phone and upload it directly to your accounts.

This could really help you keep on top of things if you tend to just stuff your receipts into a shoebox and forget about them!

Read our full guide to limited company expenses.

3) Not collecting your cash fast enough

Many contractors are reluctant to chase late payments promptly, perhaps because they’re worried about offending their clients.

However, it’s important to remember that you need to get the cash if you’ve done the work! Without enough income to pay your bills, your company is unlikely to survive for long.

Try setting clear payment terms and make sure your customers know when they have to pay you – and then stick to those terms!

Of course, you can give your customers more time to pay if they’re in genuine difficulty, but if you have clients who repeatedly fail to pay you on time, you may need to raise this issue with them.

If you’re worried about managing or chasing your invoices, you could also invest in online accounting software that will send out automatic reminder emails to customers when they don’t meet your payment deadlines.

You may find this is easier and quicker than chasing them manually.

4) Not meeting your tax deadlines

The life of a limited company owner is incredibly busy, and at times, it can be easy to lose track of what you need to be doing.

But when it comes to your tax responsibilities, this is a dangerous predicament to find yourself in.

If you miss the deadline for filing your VAT return, for example, you may receive a penalty from HMRC and could even be charged more if you’re late again in the future.

Don’t fall into the trap of neglecting your tax deadlines!

Failing to file and pay on time can cost you interest, surcharges and penalties. It also means that you could be more likely to be selected for an inspection by an HMRC officer.

Make sure you know exactly when all your deadlines are, and that you file all your tax and VAT returns and pay your tax on time. If you can’t pay, be sure to contact HMRC in advance of the deadline.

They may give you more time to pay or allow you to pay your tax in instalments, but you won’t know unless you ask!

5) Making your bookkeeping too complicated

It’s important to stay on top of your books so you know exactly how much money you’re making, how much tax you owe and which customers you need to chase for payment.

But it’s also easy to make bookkeeping more time-consuming and complicated than it needs to be.

For example, you might only input your bank transactions every few months, which means it’s an all-weekend job when you finally get around to it.

Or you may be using complicated desktop software or spreadsheets that aren’t really suited to your needs, leaving you frustrated when specific tasks go wrong or take too long to complete.

As the new tax year approaches, start working smarter when it comes to your books.

Block out one hour a week in your diary and use it to stay on top of your invoices, chase up those clients who haven’t paid you, manage your bills and reconcile all the unclassified bank transactions in your accounts.

You’ll then be able to see accurate, timely information about your limited company, which you can use to make informed decisions about your next steps.

Also, don’t be afraid to look for additional help with your bookkeeping.

You may find that investing in a cloud accounting system makes it easier to input your financial information, forecast your tax and manage your invoices.

You’ll be able to spend less time on data entry and more time on running and growing your contracting business.

Further Information

Emily Coltman FCA is Chief Accountant to FreeAgent, who provide a multi-award-winning online accounting system specifically designed for contractors and freelancers. Get a free trial + 10% off for life here.