Just ask Tesco, which famously overstated its profit forecasts by 263m. The furore cost peoples jobs; sparked a lengthy debate over the supermarkets supplier contracts; damaged customer trust; severely impacted its share price and invited an ongoing investigation from the Serious Fraud Office.
The lessons for small to medium-sized business owners are ones of the ever-present need for consistency and clarity.
If you have set up a new business, ensuring you have the right processes in place at the start, will save you a lot of time and money in the long run. Allow them to become convoluted or “muddy” and you are inviting nothing but trouble.
Even small-scale accounting mistakes mean you may not be able to accurately plot your cash resources or your overdraft facilities, understand how much a client owes you, whether youve paid a supplier or whether youve even paid them twice! Its enough to send a shiver down the spine of every business owner, big or small.
Here are some of the most common errors and suggestions on how they can be avoided.
(1) Reconcile properly
The proper reconciliation of monthly accounts is such a basic good practice but remains a common mistake.
Poorly reconciled accounts are like an open door for financial headaches and can seriously destabilise your internal processes. These can include: duplicated transactions, unpaid bills, un-cleared transactions, payroll liabilities, voided cheques, bills paid to wrong accounts and even bank errors.
If there are errors and you dont pick up on them quickly, they can easily become tangled in other accounts, become part of bigger payments and cause no end of problems.
Human error is still the most common data error, which is not always quickly identified if you dont reconcile your accounts frequently. It sounds like such simple advice but check your cash received against your invoiced amounts at least once a month and ensure every transaction is accounted for. Its a really good habit to get into and the time spent is more than worth it.
(2) Ditch the spreadsheets
Many small businesses and sole-traders still rely on spreadsheets to track their accounts, manually inputting everything, rather than using reliable accounting software.
Spreadsheets should never be used as a cheap company financial officer, no matter how small you may think your accounts need to be. Its too easy to enter data incorrectly meaning systematic errors are not always picked up straight away, which can lead to your business losing money.
Its worth investing to use proper payments software and anything else is just a false economy and a nightmare waiting to catch up with you.
(3) Double, triple, quadruple-check your purchase invoices
Purchase invoices are like the little green gremlins of accounting. Sometimes they are docile and easy-to-understand little things, sometimes they are anything but friendly and turn your business upside down.
Incorrect purchase invoicing can cause untold nightmares further down the line so make sure you implement a rigorous process of checking every single invoice before it goes anywhere near the books.
Were the goods received Were the services delivered and did they meet established KPIs Is the information actually correct Is the VAT correct, does it add up properly Establish a strong process and make sure you stick to it
(4) Value stock properly and act quickly
If you trade in goods and have an inventory of stock in a warehouse, make sure that stock is correctly and continually valued and re-valued.
Stock that is not counted properly, miss-recorded or miss-valued can course serious headaches later on. You need to make sure that you are properly accounting for the stock you have at the end of each quarter and not letting anything sit over.
Getting a true value of stock is critical, not just noting what you paid. If you have stock sitting around that doesnt sell and is costing you in storage costs, then that stock is worthless to your company so write it down quickly.
(5) Be consistent
Consistency is critical to establishing a smooth process that everyone in your company adopts easily and without fuss. Without consistent entries year-on-year it is almost impossible to draw meaningful data from your accounts.
Also, by making the accounts the cornerstone of your data gathering, you pour much more attention on them. If you consider them an annoying chore, like you might a tax return, you will learn very little from them.
Ultimately, creating a smooth, seamless accounting process is not just a necessary chore, it can be an extremely useful focal point for your companys growth projections and demand forecasting.
And, if you’re lucky enough to grow your business into a multinational grocery supergiant, youll avoid any investigation from the Serious Fraud Office.
Craig Harman is a tax specialist at Perrys Chartered Accountants.