Best Practices in Business Accounting

What accounting processes are you currently following that you shouldn’t be? When you handle accounts for as many SMEs as we do, you often find yourself untangling strange decisions made before you took over the books. Some of them are issues our client knows about; others are timebombs ticking away, waiting for us to identify and defuse them. One of the reasons our field has developed best practices is to avoid falling into any of these traps. Today, we thought we’d shine a line on some of the biggest issues we’ve seen when bookkeeping is handled by a non-specialist.

UK And US Systems Are Different

The biggest of all of these is that good accounting in the UK isn’t always the same as good accounting in the US – but a lot of the advice you’ll find online is written for the US market. It’s easy, especially when you’re in a hurry, not to double check – after all, money works the same way in both countries, right? The problem is that tax legislation is different – sometimes enough to be obvious, sometimes in subtle ways that can lead you far wrong. If you’re going to look for advice online, one telltale is that American documents will often refer to CPAs (Certified Public Accountants). While these also exist in the UK, the more common equivalent is the chartered accountant. However, what we’d actually recommend is to check the business address associated with the article you’re reading; if you can’t find one, best to check elsewhere. (You can see our address at the bottom of this page.)

Set Aside Your Taxes Through the Year

Whether you pay quarterly (and businesses with a profit of £1.5 million are required to) or as a lump sum, your corporation tax (and any other tax obligations you have) should be calculated across the year, with the amount you project you’ll owe set aside. The alternative can bring your business to a crashing halt down the line as you go from highly liquid to having no cashflow. That can directly affect your operations, which has its own knock-on effects.

Internal Controls Are Necessary

It’s important to have internal controls in place as soon as you’re entrusting finances to anyone else within the company. When you first put them in place, you may need to manage your employee’s reaction as they may feel it shows a lack of trust. You can explain that you’re simply putting safeguards in place early, so they’ll be second nature by the time the company expands. But this should be done almost immediately. The longer you leave it, the more their introduction looks like suspicion.

Figure Out What You Can Automate Easily

Automation isn’t just about saving time. Done right, each automation cuts out a potential source of human error. For the same reason, we recommend moving from spreadsheets (we’ve seen far too many businesses stay with these for too long) to purpose-designed accountancy software as soon as possible. These programs are designed to make double-checking as accurate and reliable as possible. But even with these processes in place…

Carry Out Reconciliation Regularly

Even if you’ve only had to deal with it in maths class, we’ve all encountered situations where we realised the number we ended up with was wrong, and had to work backward through a complex series of calculations until we found the mistake. A year’s worth of business accounts is as complex a series of calculations as most of us will ever have to deal with, and an inaccuracy in the wrong place can have massive consequences. Over the course of your year, you’ll be using financial statements to make decisions and lay plans, even deciding whether or not you can afford to take on more staff and calculate bonuses or raises for those you have. If there are mistakes in the data, you need to know as soon as possible. The process of reconciliation is designed to help you catch these errors faster by regularly cross-checking what you should have – what it says in your accounts – with what you do have – your current bank balance. It also acts as another layer of reminders of any late payments you may be owed from suppliers.

Keep All Your Records

Whether electronically or in full paper trail (or both), you’ll want to keep your records on hand. Not only are they an important cross-check (and it’s amazing how often, three or four years after a big purchase, a business owner suddenly needs to know exactly how much it cost while making plans), but these records may be required by HMRC for financial audits. Complete records should be kept for six full years after the end of the company financial year they relate to. After that, it’s still important to retain any records of a purchase you expect will last longer than six years – key machinery and vehicles are a great example of these. Failure to keep these records can result in a fine of £3,000 or disqualification as a company director. Of course, sometimes records can be lost; in the current digital age it’s likely that you can (and should) maintain backups against this risk, but if not, you should inform the relevant organisations as soon as possible, and make a good-faith effort to recreate them. Relevant records can often be requested from suppliers or clients.

Other Queries

If you have any other questions, we regularly blog about business accounting tips. We’d also be very happy to discuss your specific situation – just contact us directly.