Accurate bookkeeping provides you with up to date management information on how your business is performing. From telling you what margin/profit you are making to providing you with warning signs that certain costs are getting out of control, solid bookkeeping is one of the strongest weapons in the armoury of a small business. If you are a small business owner looking after your own books, make sure you avoid these 7 traps.
1. Incorrect Treatment of VAT
Your weekly/monthly bookkeeping will form the backbone of the VAT returns that you submit to the Revenue Commissioners. VAT legislation is constantly changing and trying to keep abreast of all the developments can be time consuming and confusing. You have to ensure that you treating each invoice in line with the latest VAT rules in order to avoid the dreaded Revenue Audit letter arriving on your doorstep.
Many people make simple errors which can result in sizable settlements being made with Revenue . Common mistakes include reclaiming VAT on expenses not related to the business, not entering credit notes correctly and reclaiming foreign VAT on imported goods and services.
2. Not performing a Bank Reconciliation each month
One of the fundamental aspects of bookkeeping is reconciling the books and bank statements every month. However this process is often ignored due to a lack of knowledge or a lack of time.
The initial years of a new business are extremely overwhelming, but failing to keep your books current means you run the risk of missing some major warning signs about the financial health of your business like potential cash flow issues or a significant rise in supplier costs which would affect the profitability of your products.
3. Not entering small receipts
Often times we can pick up small incidentals for the business as we go about our day to day operations. It might be supplies for the canteen or a box of paper for the printer in the office.
These transactions can seem immaterial at the time and often the receipt is mislaid or can be thrown in to a glove compartment or box in a van. These small receipts when added together, however, can make up a significant sum of money when added up over an entire year. Failure to keep these receipts and input them in to your monthly bookkeeping process will mean that when your accountant goes to produce your end of year accounts, and likewise your end of year tax return, your profits will be higher on paper than they are in reality resulting in a higher tax bill. Even €1,000 in mislaid expenses could result in your income tax bill being up to €495 bigger. Add in the fact that your VAT bills will be higher as well and you could be giving significantly more to the tax man than you need to.
4. Forgetting to track expenses
Following on from number 5 above, small business owners can often pay for supplies out of their own pockets during the course of the financial year. It may be that you forgot to bring the business cheque book or the supplier will only accept credit card which the business doesn’t have. All of these monies are owed back from the business to the owner and it is vital to keep track of this especially in the case of Limited Companies where the monies can be reimbursed to the business owner tax free.
5. Failing to keep hard records/appropriate back up
While the concept of the paperless office is one that we all aspire to, keeping proper hard copies of receipts/invoices in an orderly manner is a vital component in the bookkeeping process.
Often times people feel that once the records have been accounted for in an online package they are stored away and the importance of the physical has been diminished.
You and your business have a legal requirement to keep proper books and records for inspection by the Revenue Commissioners for a period of 6 years.
The relative success, or failure, of a Revenue Audit can often hinge on the quality of the bookkeeping system in place and the quality of the hard copies of the receipts that were kept. It is also worth noting that there are stiff penalties in place where Revenue deems that proper books and records have not been kept
6. Giving employees too much access
While it is a good idea to delegate your bookkeeping to an experienced person within the business, it isn’t necessarily a good idea to give them open access to business records without a system of checks and balances in place.
7. Lack of Communication
Having someone handling bookkeeping is only effective if they are filled in and kept up to date on all financial transactions.
It is vitally important that your bookkeeper is made aware of any transactions that would affect the monthly reporting e.g. paying a bonus to staff, paying a supplier out of personal funds, collecting cash from customers and using it to pay for supplies.
Your bookkeeping system is only as strong as the information you feed it so take the time to ensure that you are tracking all activity in your business.
By TaxAssist Accountants
Last updated March 2019