Top 6 accounting errors Isle of Man business owners make
Updated: Sep 5
You're an expert in your field - be it optician, therapist, retailer, consultant, restaurant owner, builder or florist. You didn't go into business to 'do your own books' or complete your own tax return we assume?
If you're a business owner in the Isle of Man and spending Sundays doing the books, organising payroll or other mundane task, not only are you missing out on time with your family/doing what you love - BUT you could be making some crucial errors. Equally you could be making more money doing what you're best at. The professional business owner leaves this stuff to a pro. Did you know you can save on average 6 hours a week by using a trusted professional? (Xero)
If you're still bean counting in your business, here's a few reasons not to...
What often seems like a minor accounting error can have significant consequences for your business finances. Here are some examples of common accounting errors.
Overstating cash flow: Adequate cash flow is a crucial aspect of running a successful business. Unfortunately, many businesses overestimate how much cash they have on hand. Overstating your cash flow can make it hard to manage cash flow, pay your employees and vendors, and fund important business purchases.
Missing signs of fraud: You should never put yourself in a position where you don’t know what’s going on with your business finances. Failing to track your finances could cause you to miss the signs of fraud and all the penalties that can come with that.
Incorrectly tracking income: If you don’t accurately track your business’s revenue, you could end up over-reporting or under-reporting your income. This can have tax consequences down the road.
Incorrectly tracking expenses: Another common mistake businesses make is failing to track some of their expenses properly. This will increase your taxable income and cause you to pay more in taxes at the end of the year. You don't know what you can and can't claim for. Never assume.
Forgetting to pay invoices: When vendors send invoices for services, they likely have a due date within 30 to 60 days. If you don’t stay on top of your accounting, it’s easy to overlook these due dates and pay your invoices late. This can lead to late fees and even damage your relationship vendors.
6 accounting mistakes small business owners make:
Here are some common accounting mistakes business owners make, as well as some top tips on how to avoid them.
1. Failing to hire an experienced finance professional
Is it really worth the extra time investment to manage your business’s books on your own? Hiring a professional will minimise the potential for errors in areas like expense tracking, paying vendors on time, balancing bank accounts, running payroll.
Are you confident you’re handling employees’ tax properly? Are you keeping track of all your financial transactions, regardless of size? Just a few mistakes in these areas can cost you more than you’re saving by not hiring a pro so you don't have to worry.
Use an expert and accredited professional with plenty of great genuine reviews so you
get the help you need as a business owner with tax planning, keeping out of trouble and avoiding mistakes. If you already have an accountant, but you're not getting the value and service you need - get another and switch accountant.
2. Mixing personal with business accounts
Small business owners often blur the line between their personal and business finances. It’s understandable, especially when a business is just beginning to find its footing. Adding a few items for both when you're doing the shopping is so easy.
But it goes beyond combining business and personal items on a single receipt. More than a quarter of small business owners don’t have a separate bank account for their business, according to a survey. Using one account can make it tougher to sort out your personal and business transactions, which could cause significant issues when tax time comes and getting in trouble with the tax office. With sloppy financial accounting, you may even miss an expense that you could list as a business deduction.
Blurred lines between business and personal accounts could also be a problem when you apply for finance, loan or credit, as lenders want an accurate snapshot of your business finances when they consider your application.
From the outset, use a separate bank account. If you’ve been using your business and personal bank accounts interchangeably, it's time to break that habit.
3. Not tracking business costs accurately
If you’re not keeping regular accurate records, your accounting and bookkeeping become much less effective. You leave your business vulnerable to losing money and being late on important bills. This sets you up for major hassles at tax time and more problems that can get in the way of a growing business.
It’s not just errors made when entering transaction data into a spreadsheet or failing to note that you paid a bill. Inaccurate financial tracking ultimately costs your business money and undermines your ability to plan ahead effectively.
It’s essential that your accounting system keeps track of every transaction so you can accurately gauge the financial health of your business. Having your accountant do this means you get the best of both worlds with a real human to manage the process and advise you, while the software takes the strain automatically.
4. Inefficiently managing billing
Cash flow is essential to keeping a business operating from one day to the next. Billing or invoicing customers efficiently helps to ensure that revenue comes in promptly.
Businesses that don’t have a grip on their accounting can fall well short of sufficient cash flow. Invoicing gets delayed and customers take longer to pay, leaving your business stretched thin to cover its bills.
To better manage your billing, begin by invoicing your customers before or immediately after you’ve fulfilled your end of the transaction. Ideally automatically with an integrated software such as Xero. Massive time saver and keeps it all neat and tidy in one place.
5. Not properly planning for tax time
DIY software may be suitable on the face of it for preparing a simple tax return, so it can be an attractive solution for small businesses looking to save money on an accountant.
However, no one enjoys piecing together a year’s worth of receipts and documents at the end of the tax year because they were disorganised the other 11 months of the year.
In a survey, while more than 93% of small businesses said they are very or somewhat confident in their ability to file their taxes accurately, nearly a third also said they believe they end up paying too much tax.
Enlisting a qualified professional to help you spot potential savings and things your business could be doing differently well before the tax year is over.
6. Failing to deal with employees properly
Many small businesses rely on employees, freelancers and independent contractors. How they deal with these individuals could result in tax penalties and even legal implications if they do it wrong.
If a small business owner misclassifies an employee, the penalties for that could be substantial.
You must determine if they are employees or contractors based on the jobs they perform, how they are paid, and their relationship with your company. It's essential to enlist the services of a payroll expert, so you know it's taken care of professionally.
In summary Your focus is, understandably, on the success and growth of your business and you have a choice as a professional business owner to get expert help with this stuff.
Purple Accounts is a firm of Chartered Management Accountants in the Isle of Man. We can help you with the right advice to support you, not only to keep you out of trouble, but to do better in business too. Our fixed fee monthly package is tailored to you, so you only pay for what you need.
For friendly advice and support, why not arrange a chat about your accounting needs with us today? You can pick up the phone and call David on 07624 336057 or visit our website.