The top 5 mistakes small business owners make when it comes to accounting and how to avoid them

As a small business owner, you may feel that if you're busy, money is coming in, and if you're meeting all your financial requirements, that's sufficient for managing your accounts. And, while you may be able to get by doing the bare minimum in the early days, continuing to do this in the longer term can impact your business's ability to grow and succeed. So, what should you do to ensure your accounts are organised, well managed and even contribute to your business success, and what mistakes should you avoid?

1. Not hiring an experienced finance professional 

The first mistake many small business owners make is thinking they can handle their business's financial side by themselves. One of the best decisions many business leaders make is hiring an accountant or bookkeeper to assist with a time-consuming task. Not only will an experienced financial professional be able to keep on top of your books regularly, but they'll also take the pressure off at critical times, such as tax deadlines. Depending on your needs and the person you hire, they may also be able to advise on ways to make your business more financially efficient, highlight any changes to tax legislation that may impact you and even help you better understand your finances so you can plan more strategically. Most importantly, however, leaving your finances in the hands of an experienced professional will free up your time to run the business without any distractions.

2. Not tracking business costs accurately 

While businesses tend to be good at tracking more significant costs, some can overlook those smaller expenses even though they soon add up. For example, a few pounds on a train ticket for business travel a couple of times a week will add up to a significant sum over a year, so don't ignore it. Monitoring all expenses and keeping receipts or other records is essential to good bookkeeping and means you'll pay the right amount of tax, so make sure you don't let anything slip through the net.

3. Mixing personal finances with business accounts 

Keeping all your finances together may seem like a sensible, time-saving way to do things when starting out in business, but there are many reasons why this isn't a wise choice, even in the short term. Some banks won't let you accept business payments to a personal account, especially if you're set up as a limited company. Even if they do, however, it's rarely the best option. Keeping business and personal finances separate makes bookkeeping much more straightforward, as you don't need to work out what is related to work and what isn't. This also makes tax returns much more straightforward. Some banks also won't lend you money for your business unless you have a separate business account, so if you think you will need loans or credit, separate accounts are essential. You'll also have a better chance of securing credit if you're building up a credit score for your business by operating a business account. Finally, if you use accounting software to help manage your finances, you could connect it to your business bank account so transactions sync automatically, saving you time and ensuring your figures are accurate.

4. Not taking the time to plan 

With all the pressure of setting up and running a small business, planning your finances may not take priority. If you have enough money coming in and you're paying your expenses, you may feel that's good enough. However, taking time to plan is well worth it. Not only will more thorough financial planning help you be more aware of what is needed in terms of short-term budgets, but it'll also spell out what you aim to achieve in the longer term and help you identify if you're not hitting your targets. By planning, you'll also gain a deeper understanding of your business, perhaps identifying trends or opportunities, measuring progress and providing clarity.

5. Not preparing for tax

Financial planning should also take into account your expected tax obligations. It can be difficult to know how much you're likely to pay in tax, especially in those early years of business ownership, but it's essential that you plan for it; otherwise, you may be hit with a sizeable and unexpected bill. The tax you'll pay will depend on how much you earn and how you structure your business, but Income Tax, National Insurance, VAT and Corporation Tax would be the main ones to look at. If in doubt, your accountant can advise on what's due when and how much to factor in for your bills, or HMRC has detailed guidance online.