Here’s a Small Business Tip: Never Break This Golden Accounting Rule
Author: Russell SmithAugust 22, 2016
Many small business owners choose to undertake their accounting themselves.
For the smallest of businesses this can work very well. There are little-to-no expenses to track, only a few client payments to monitor, and you may not even need to worry about income tax.
When businesses start to get bigger though, things start to get more complex. With every new client, every new expense, every new tax obligation, things can get tougher for the DIY accountant.
Still, that doesn’t mean you can’t manage it by yourself anymore.
The Golden Rule of Self-Accounting
Spend time on your accounts. There we are, blog finished…
Dedicating time to your accounting is essential, and we don’t just mean two days of confused faffing at the end of the tax year.
To control and maintain healthy accounts — accounts that can be used to provide an accurate representation of your business’s financial situation and file comprehensive tax return forms — you need to invest time over the course of the year.
To illustrate this small business tip, we have two examples:
Jenny is a gardener, but she’s a bit careless with her finances. She meets her clients, does the gardening, and gets paid. Both cash and card. Sometimes, they don’t have the money for her, but she says she’ll come by next week. Sometimes she does; sometimes she forgets. She doesn’t record her earnings because she’ll remember later, hopefully. When she buys new equipment, she puts the receipts on the side in her office, or on the kitchen countertop, or in her pockets. She doesn’t dedicate any time to her accounts until tax day.
Then we have Jemma. She is also a gardener, except she does dedicate time to her finances. After performing work for her clients, she provides them with an electronic invoice payable to her bank account, she tracks these invoices to ensure they are all paid. These invoices are all saved to her computer. After she is paid, she records her income on a spreadsheet. Sometimes she buys equipment for her gardening business. She always keeps receipts in a filing cabinet and also records expenses under outgoings on her spreadsheet.
Now, Jenny has no control over her finances. She doesn’t know exactly how much she’s earned or spent. She has no way of knowing what her financial situation is other than by estimating. She has also likely missed payments and can’t claim expenses on most of her equipment because she doesn’t know where half the receipts are.
Jenny dedicated no time to her accounts. Now she is worse off and potentially filling out inaccurate, illegal tax returns based on guess work.
Jemma, on the hand, dedicated plenty of time to her accounts. Now she has an accurate insight into how her business is performing, allowing her to show potential investors that could lead to expansion of her business. She also has clear and honest figures that she can use to file her returns, claiming back all expenses and reducing her tax bill. Her invoice system also meant that she never missed a payment and that she can provide evidence of her income in the event of an audit.
Dedicating little pockets of time to her accounting throughout the year meant that Jemma was not only better off financially than Jenny, but had much more control over her business too.
It’s a simple rule, but it’s an incredibly valuable small business tip: dedicate time to your accounts throughout the year.
Not sure what you should be investing your time in? Here’s a nifty infographic we whipped up to help you work out just that.
Take Our Accounting Advice
The reason we at Russell Smith Chartered Accountants offer such small business tips is because we care about small and local businesses.
It would be all too easy to use complicated accountancy jargon and fear-mongering tactics to convince you to use our services, but we understand that some businesses aren’t always looking for accountants. Yet, we still want to help.
Having said that, we must offer you this one last piece of accounting advice: know when to get help.
It doesn’t matter what reason you chose to put off hiring an accountant, at some point in the future, you may have no choice but to do so. There is a reason big businesses have armies of accountants in their employee roster, a reason why they don’t just leave it for the staff to do.
By good finances, we mean stable and controlled. You must be able to access accurate and up-to-date figures and be able to create detailed reports from which you can run your business.
If your finances are getting out of control — if you aren’t sure how much is coming in, how much is going out, what tax you owe, etc — then you’re going to face problems. Costly problems.
Mismanagement of yours accounts can collapse a business.