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 business better over the next 12 months.
So if you’re considering making a fresh start during the new tax year, FreeAgent’s Chief Accountant, Emily Coltman FCA, has suggested 5 bad accounting habits that you should consider kicking to the kerb in order to manage your books more effectively.
1) Not charging your customers enough
When you’re starting out in business or if your business is small, 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 business’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 business as a whole. Consider which areas of your business are the least profitable and may require you to raise your prices. Remember that if you want to grow your business in the future, it’s likely that you’ll need to make a profit on your sales, so make sure your prices reflect this.
2) Not claiming all your expenses
In the hustle and bustle of daily business life, “doing the books” can often slip further and further down the priority list. After all, for most people, it’s not the most enjoyable part of running a business.
However, putting off your bookkeeping can mean receipts for business costs that you’ve paid for personally get mislaid and may never find their way into your business accounts. Not only does that leave you out of pocket because your business won’t then pay you back for those costs, but it also means your business 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 small business expenses are under £10 and many people don’t bother to claim these expenses 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 systems, such as FreeAgent, enable you to take a photo of a receipt with your mobile phone and upload it directly into 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!
3) Not collecting your cash fast enough
Many small business owners are reluctant to chase late payments up 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 money coming in to pay your bills, your business 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 specialist invoicing or 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 small business 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 business 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 round to it. Or you may be using complicated desktop software or spreadsheets that aren’t really fit for your needs and leave 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 business which you can use to make informed decisions about what direction to take next.
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, so you’ll be able to spend less time on data entry and more time on running and growing your business.
Emily Coltman FCA is Chief Accountant to FreeAgent, who provide a multi-award-winning online accounting system specifically designed for small businesses and freelancers.