Accounting and entrepreneurship go hand in hand, yet even the most successful entrepreneurs make accounting mistakes that leave them out of pocket or damage their company.
We’ve compiled a list of the most common financial mistakes, along with some top tips for entrepreneurs, so that you can do your best to avoid any business blunders.
1. Submitting tax returns late
Many small businesses are at the receiving end of hefty fines and penalties resulting from late submission of tax returns, with around 750,000 people missing the deadline every year. These fines can be costly but are easily avoided by staying on top of your finances and bookkeeping all year round.
2. Not staying on top of the books year-round
This is unsurprisingly one of the most common financial mistakes entrepreneurs make. Year-end tax can be difficult at the best of times, but even more so if you’re left scrambling to find invoices or receipts just before the deadline.
This can lead to costly errors being made or fines for late submission. Stay on top of your books year-round by using a specialist accountant to manage your bookkeeping, or utilise apps such as Xero for basic bookkeeping needs.
3. Choosing the wrong type of company structure
By choosing the wrong business type when setting up and registering your company, you could end up paying more tax than necessary. It’s important to involve an expert accountant to help you set up your business – and avoid such financial mistakes from the beginning.
4. Calculating margins incorrectly
When working out costings and margins for your business, it’s important to consider costs other than just materials. Consider time spent developing the product, the cost of marketing, and even expenses such as utilities. Incorrectly calculating your margins can result in you making less profit than expected, putting your business in a difficult financial position.
5. Forgetting to save for your tax bill
After submitting your tax return, you’ll receive your tax bill – don’t forget to budget for this! Put aside a proportion of your earnings each month so you’re not caught out when you receive your bill. This will make sure you’re not caught short or left owing money to the tax man.
6. Mixing your personal and business finances
Business finances, especially as a small business or sole trader, can easily blur into personal finances (particularly if investing in your own business as an entrepreneur). Commingling business and personal funds can be a recipe for disaster, particularly if your business fails, as it can leave your personal finances in ruins too. Keep your personal finances healthy, and separate, from your business finances to make things easier.
7. Poorly managing cash flow
Although on paper you may be turning a profit, if your cash flow does not reflect this you can easily go into debt when paying suppliers and bills. Managing your cash flow well can help your business to stay financially healthy, and it’s easy to do – for example by only offering short payment terms to customers.
8. Offering long credit terms to customers
As a small business, it can be tempting to offer customers longer credit terms in order to close a sale. However, long credit terms can cause cash flow issues and can be taken advantage of by customers who may be reluctant to actually settle invoices. Save longer credit terms for well-known and established customers later on in your business journey.
9. Having no cash reserve
Unexpected charges and costs can be a make or break situation for young companies, so it’s important to have an emergency cash reserve as an established entrepreneur. Even a small cash reserve can help you to stay in business if an unexpected bill lands on your doorstep.
If you’re borrowing money to help set up your business, or pay for a new project or business expansion, it can be tempting to take as much money as the bank is willing to lend you. This extra debt can cause financial strain in the future, so it’s wise to just borrow as much as you need for your project to avoid more repayments and higher interest fees.
11. Failing to forecast and budget
When you’re building a small business, it can be tough to juggle priorities and decide which tasks are most important. Spending time to make forecasts and budgets on a regular basis is often overlooked, but are a key part of business planning, helping to make sure your business becomes profitable. Without budgets and forecasts, your future income is unclear and may result in you losing money.
12. Spending money (and time) on activities that don’t generate profit
The life of a small business founder is spent tackling a seemingly never-ending to-do list. Many businesses spend time on tasks that don’t actually result in any financial profit for their business, which means the activities that do are left by the wayside. Founders should identify the tasks that help to generate profit, and focus their time primarily on these activities.
13. Not talking to the experts
Your business finances need to be managed correctly and carefully to make sure that you’re operating legally and making the largest amount of profit you can. The tax system in the UK is complicated and can be difficult to navigate on your own. By using a specialist accountant for entrepreneurs to help you manage bookkeeping and accountancy, you can save both time and money.
Here at Alexander & Co, we have a range of experience with accounting for entrepreneurs. We have worked many with small and growing businesses to support them on their entrepreneurial journey. Contact us today to find out how we can help you avoid key financial mistakes that could harm your business.