1. Use an accounting package and not just a piece of pen and paper, not even just Excel. Many small businesses run their accounts on Excel. Firstly, Excel has inherent flaws in itself that could run your finances to ruin. A small formula error can cause you to show excessive income and thereby an incorrect amount of VAT charged to your business. The business could be paying more VAT than it should. With an accounting package you are sure to record the correct amount unless there is an error in entering information.
2. The next important thing is attention to detail. If you miss something or enter incorrect information, you should have the accounting knowledge to review your own work and ensure that the information recorded is correct. No accounting package will correct errors on its own and worse, if you are working on Excel, mistakes are more than likely to happen through incorrect formulas or even wrong cell co-ordination. Hence you should be 100% sure of what you are doing. Bookkeeping can be tricky even for the most experienced, but the advantage is that experienced bookkeepers are able to review their own work. If you are doubtful, leave it for the bookkeeper or the accountant
3. All invoiced amounts are not to be viewed as income. In a small business, all invoicing is considered as income. This is a fundamental error in the accounting system. In our experience, several businesses believe all money that comes in to the business is income and accordingly any balance in the bank account is profit. It is very obvious that bookkeeping has been made into a simple exercise; however, any fresh entrepreneur could easily fall for this and create a massive hole in his/her business if he/she is not aware that everything that is invoiced is NOT income. There are various problems with this scenario and in our experience we have worked for several clients where bookkeepers clearly failed to recognise the difference between invoiced amount and income. These businesses have financially suffered due to this elementary flaw and most of them were blissfully unaware. Revenue recognition is even more difficult for some other businesses. If you are not sure, take help from an experienced accountant as this is not a matter for DIY accountants or bookkeepers.
4. Record all your existing income but do NOT record any income that is to be received in the future. This is another classic mistake that can easily happen. Income that is to be received in the future is NOT to be accounted as income. Even for tax purposes, it is important to differentiate between the date of the invoice and the posting date of the invoice. This can create disparities in VAT accounting, especially so if you are accounting for VAT on accruals basis. Bookkeepers within the business should be aware of implications of VAT accounting on accruals basis or cash basis. The choice of VAT accounting method is very important for your business cash-flow. If the bookkeeper is unable to identify the optimal VAT accounting method for the business then it could wipe out the cash reserves within the business leaving businesses with nothing to pay suppliers or meet other liabilities.
5. Understand your liabilities and account for liabilities. Another big factor is for the entrepreneur to have a clear understanding of business liabilities. Any VAT or PAYE registered business should be clearly aware of their liabilities on any single day of the business and they are required to leave sufficient reserves to meet these liabilities although many small businesses use VAT on sales as a cash flow buffer, this could be a dangerous idea as HMRC keeps a tight rein on liabilities within businesses. Keeping track of income and expenses on a piece of paper would never enable a business to understand their true liabilities. Most businesses end up overtrading as they are clearly not aware of their liabilities in terms of when they arise and what would be the amount. An accounting package is required if a business needs to know the exact level of liabilities and the bookkeeper needs to have a good understanding of accounting concepts.
6. Always book accruals. Accruals are recorded in the business if a business has incurred an expense but an invoice for the expense has not yet been received. Just as all invoiced amount is not income, expenses/costs are not limited only to bills/receipts that have been booked in the accounting system. There would be regular expenses/costs incurred each month for which an invoice may not have been received but it nevertheless an expense and needs to be recorded in the accounting system and when the invoice is later received, ensure the expense is not booked again through an invoice. An expense can be booked through an accrual or through an invoice but NOT both. The bookkeeper should ensure that expenses are NOT booked twice and that they are definitely booked once. It can be very difficult to run a business, no matter how small it is, without a proper accounting system and a bookkeeper who can ensure all costs are booked accurately within the system.
7. Always keep an eye for lagging debtors and overdue supplier payments. Both are responsible for business failures. Lagging debtors can cause cash flow problems leading to delayed supplier payments which could in turn lead to supplier making a legal claim and the business could end up paying far more than the initial due amount. Another problem with lagging debtors is that seriously overdue debts can quickly turn into bad debts and leaves the business with a permanent loss. If businesses pay VAT on accruals basis, prompt debt collection is a key part of sound bookkeeping. For prompt debt collection to materialise, the books have to be updated regularly on a daily/weekly basis. Again, recording expenses on a piece of pen and paper can hardly make this happen.
Based on the above 7 key areas of concern in bookkeeping, a business would clearly prefer to have an experienced bookkeeper than a bookkeeper without knowledge of how a single factor can affect several other areas within the business with a cascading effect.