So if you’ve been considering making a fresh start, it may be a good idea to start by cutting out any bad habits that you may have picked up which are causing your business pain. Here, Emily Coltman FCA, Chief Accountant to FreeAgent – who provide a multi award-winning online accounting system for freelancers and small businesses – gives her tips on four common, bad accounting habits to avoid for the tax year ahead:
Not claiming all your expenses
When you’re running a small business it’s important to keep on top of all of the costs that you incur during your day-to-day work, so that you claim any tax relief you are entitled to and, ultimately, pay the correct amount of tax that you owe to HMRC.
Therefore you need to make sure you know exactly what kind of business expenses are claimable or not, including your clothing, entertaining, business use of home, travel, accommodation and food & drink costs. If you aren’t clear on this speak to your accountant for specific advice; you can also get general information from HMRC or from another reputable resource for small business accounting information.
But even if you do know what you can claim, it’s important to make sure that you do actually claim what expenses you can, no matter how small they are. We found that around a third of small business expenses are less than £10 and, while you may think it’s a lot of hassle to log a £1.50 car park ticket in your books, those are the kind of costs that quickly add up! Make sure you include them in your accounts as soon as you can, so you don’t risk forgetting about them and missing out on tax relief.
Not charging your customers enough
When you’re starting out in business, or if your business is small, it’s very easy to set your prices too low. That’s because you may worry that you won’t win new customers if you charge too much, and sometimes you might even decide to charge a price that is so low you don’t actually make any profit.
However, this may not be a great strategy to follow, unless perhaps your low price is attracting huge swathes of new customers and enabling you to scale up your business quickly. For most businesses that have fairly small customer bases, however, charging low prices may make it very difficult to maximise your profit margin or grow your business.
Think carefully about how valuable your service or product is for your customers, as well as what they’d pay to a competitor, and adjust your price accordingly. And take the time to properly review your profit margin, for each project you complete as well as for your business as a whole, to see whether there are any areas that are particularly profitable. You may discover that there’s scope for doing more of that kind of work and fewer unprofitable projects, which could have a big impact on your bottom line.
Missing your tax deadlines
Running a small business can sometimes be quite overwhelming, and it’s easy to lose track of something important when you’re focusing all of your energy elsewhere. For example, you may be dedicating all of your resources into growing your customer base but, by doing this, you forget to file your tax or VAT returns on time. Before you know it, you’re a month late on paying your VAT and HMRC are sending you surcharge forms and threatening to fine you if you’re late again.
Don’t fall into this trap. Treat your tax responsibilities like any other deadline you have to meet in your business, and make sure you’re always up to date and on top of them. Keep a list of exactly when your tax returns and VAT returns are due and make sure you pay your tax on time. And if you can’t pay – ensure you contact HMRC before the deadline. Remember, it’s always best for your business to keep on the right side of the taxman!
Making your bookkeeping too complicated (and time-consuming)
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 easy to make bookkeeping more time-consuming and complicated than it needs to be.
For example, you may keep all of your receipts in a carrier bag and only get round to logging them in your accounts twice a year. Or 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, meaning that you get frustrated when specific bookkeeping tasks go wrong or take too long to complete.
To counter this, block out some time each 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. Once you’re routinely spending time on your books, 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 when it comes to your bookkeeping. You may find that investing in a cloud accounting system, for example, makes it easier to input your financial information, forecast your tax and manage your invoices – meaning you spend less time on data entry and more time on actually running 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. Try it for free at: www.freeagent.com
Image: Bookkeeping via Shutterstock