There’s only so much you can reasonably do in business as a contractor without a clear and correct understanding of your financial situation, and a key part of that is your bookkeeping.
Errors can easily creep into bookkeeping – it’s why reconciling is so important – and it gets easier to accumulate errors if:
- You’ve neglected your records for a while and a deadline is coming up
- You’re having or you have had issues with record storage, physical or digital
- You’ve ever had to update your books while tired at the end of the day
- Regulations, legislation, or guidelines have recently updated and you haven’t had the chance to review them
As you can imagine, when we’re onboarding new clients at ICS Accounting we quite often catch discrepancies, and unpicking the evidence to get at the original problem has made us familiar with a lot of common errors. So here are some things you should definitely watch for.
Separation of Personal and Business Accounts
For sole traders, this is easily the most common issue. We highly recommend creating a business account as well as a personal account – it may not change your liability, but it makes it much easier to monitor your cashflow.
If you’re still waiting for a client to pay that overdue invoice, it can be tempting to pay business expenses with your personal card (always assuming you have the money there). If you have no other option, of course we wouldn’t tell you not to do that! But make sure you document this clearly as soon as possible. Earmarking your money for business and personal use is a huge part of the sole trader financial process, and failing to do so can cost businesses.
It’s not just sole traders who have to deal with this, either. You might order work items via your personal Amazon, and if so, you need to ensure the invoice makes it to your work records or reconciling your balance sheet will have an extra, unnecessary level of confusion.
Lost Receipts
Most of us grow up only really worrying about receipts for very expensive purchases or for gifts. In business, however, lost receipts can become a really big problem. Learning new habits for this can be challenging.
Most modern accountancy software will let you scan your receipts in on your phone and digitise them. We recommend doing this as soon as possible for multiple reasons:
- Your records will be more up-to-date
- It ensures they don’t get lost
- It ensures they’re scanned before the ink on cheap receipts rubs or fades away to unreadability
- Handwritten receipts (still common in some industries) can be harder to read, and still knowing the information on them makes it much easier.
Get into the habit of scanning receipts as soon as possible, and create a safe space they can be stored until they can.
Making Assumptions
Do you know what type of expense that payment was? Is your depreciation calculation correct? What’s the rate for National Insurance Contributions (NICs) on the income you’ve made this month? Are you logging that Christmas bonus against tax using the usual bonus rules or the Christmas rules?
If you’re not sure, check and double check, especially if the reason you’re not sure is that it last came up a couple of years ago. Tax legislation evolves every year, and along the way many subtle distinctions are created. This means that if you’re not fully familiar with the current situation, you could easily end up with incorrect reports or paying your taxes incorrectly. Both of these have real and serious consequences.
So if you’re not sure, double check, and if you are, ask yourself how sure you really are.
Missed Tax Opportunities
Yes, you should always take the time to make sure you understand your tax obligations. At the same time, it’s not uncommon to miss out entirely on tax deductions you’re eligible for simply because you didn’t know they existed.
Failing to recognise your tax obligations can result in significant penalties. Missing out on tax opportunities carries no official penalty but can make the difference between a business that survives and one that thrives.
Rushing The Accounting Process
Accurate bookkeeping, unfortunately, isn’t something that can be done quickly. It requires an up-to-date knowledge of current financial legislation, attention to detail, and a willingness to take time to get it right.
At the same time, accurate bookkeeping is a key pillar of any successful business. How confident are you really that you can hold all your business’ current assets and liabilities in your head without double-checking?
Correct accounting isn’t just vital for your tax obligations. It’s also a cornerstone of good decision making. If you think yours needs support, please get in touch.
