Are you making these accounting mistakes?

Amy Hamilton Chadwick
Are you making these accounting mistakes?

End of financial year is on the horizon, and it’s time to start thinking about your company accounts. Are you making one of the three most common small business accounting mistakes?

 

1. Making assumptions about tax

Considering the complexity of our tax system, it’s not surprising that small business owners get it wrong. That is surprising is that they often make spending decisions based on their own vague notions of how much tax they need to pay.

“Tax is very, very complex, and Inland Revenue is on the ball these days,” says Baubre Murray, director of Dowse Murray Chartered Accountants and a Fellow of the New Zealand Institute of Chartered Accountants. Murray says she often has to sit clients down and try to explain why their assumptions are wrong – and that’s not a conversation anybody is likely to relish.

SEE ALSO: Starting a business on a shoestring budget

Some of the most common mistaken tax assumptions include:

  • There’s no cash left in the business at the end of the year, so I don’t have any tax to pay. “You could have spent money on plant or machinery, or on loan repayments, so even if there’s no cash, you may still have tax to pay,” says Murray.

  • I only have to pay tax on my drawings – I only took out $50,000 this year, so that’s all I’ll be taxed on. In fact, if there’s an additional $50,000 in profit still sitting in the business, you’ll also need to pay tax on that sum. “People often underestimate that, and it takes quite a lot of explaining.”

  • The likelihood of me being audited is extremely small. “Inland Revenue [IR] is putting all its resources into auditing, and for people who haven’t dealt with IR for 15 or 20 years, they need to know that the situation has changed,” says Murray. “It’s not a matter of if they’ll get audited; it’s a matter of when.”

It’s important to budget accurately for tax payments to avoid nasty surprises, and that means contacting your accountant regularly, not just at tax time.

 

2. Not looking too closely at the numbers

Most small business owners are experts in their own field, but unfortunately that’s not enough to create a thriving enterprise. Small business owners can be in danger of becoming so caught up in doing their job well that they fail to really analyse their figures, says Murray. This can lead to major problems, including:

  • Failing to accurately estimate how much cash will be needed in the first few months of starting up. “People think, ‘I can survive on $20,000’, and they employ someone, and when their money doesn’t come in on time they don’t pay their PAYE,” Murray says.

  • Sometimes, small business owners are actually paying for the privilege of being self-employed. A beauty therapist who asked Murray to value her business was not pleased to be told that it essentially had no value and that she could earn $15,000 more annually if she did the same job for someone else. Because she hadn’t looked realistically at the numbers, she thought she was building a business when she was only buying herself a job.

  • Failing to chase debtors effectively – have a system in place, and if a client looks as though they might have trouble paying, arrange payment terms with 50% up front.

Sit down with your accountant and make sure you understand every aspect of the finances of your business, so you can make accurate forecasts for revenue and expenses – with enough left over to pay your taxes.

 

3. Trying to do it all yourself

Trying to do your own taxes is like trying to dig your own swimming pool. Theoretically, you could save yourself a lot of money. But it’s more likely that you’ll waste a lot of time and energy, and still need to call in the professionals – and it’ll cost more to sort out your mess than it would have to start from scratch.

One of the first mistakes business owners make is to mix up their accounts between their personal expenditure, their company expenses, and sometimes a trust, too.

“With new clients we see a lot of robbing Peter to pay Paul,” says Murray. “You can’t track what’s going on and there are lots of obscure things happening in their bank statements.”

She often sees small business owners trying to run all their expenses through their company, without any real justification.

“A lot of people will say they need to look good for their jobs, and then claim all sorts of things like their gym membership, haircuts and clothes,” Murray says. “Then IR audits them and tells them they’ve underpaid their tax, and there are penalties and interest to pay, and we have to arrange a payment scheme. At that stage it’s really hard for an accountant to unravel it.”

Doing your own accounts may be time-consuming and stressful – and you may be costing yourself money by missing opportunities to save on your tax. A skilled accountant can be an extremely cost-effective investment. Employing a professional, says Murray, “is worth it to save you a little money and a lot of grief. And, having someone independent look at your business can help you get more value out of it.”

SEE ALSO: Starting a business on a shoestring budget

 

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