The Bookkeeping may sometimes seem like a black art. As a business owner or manager in charge of Finance, do you fully understand what Bookkeepers do?
If you are not that clear or have simply trusted that your bookkeeping is being done correctly be careful! There are bad bookkeeping practices which could be costing you significant amounts of money.
It’s one thing to have to pay a bad Bookkeeper. However, it is quite another when bad bookkeeping is also costing your small business money, due to poor financial control.
Often, for you as the small business owner, this is a difficult thing to discover.
You may have a feeling that your bookkeeper is not that good. It is easier to tolerate this when you feel that at least your Bookkeeper is processing the figures. So, you aren’t getting the figures on time and they don’t seem to be able to give you the reports you need, but hopefully, at least you are fulfilling your compliance obligations with Companies House (if you are a limited company) and keeping your books straight.
It is normally the timeliness of the figures I hear a lot of small business owners gripe about. Often, bad bookkeeping, results in you not be able to get your monthly figures quickly enough.
Beware, late figures are indeed a sign of poor financial control.
But, bad bookkeeping then, can also cost you money, over and above the cost of your Bookkeeper.
Here are 5 ways this can happen. So, if you are feeling a little strapped for cash, could this be down to bad bookkeeping? Read on.
1.Invoicing of Customers.
There are several ways this could be costing you cash.
Firstly, all invoices to your customers should be raised. Obvious I know, but this error is more common than you think. If you have no control total to balance your invoices back to, then how do you check? Let’s face it, most of your customers are unlikely to shout, if they have not received an invoice from you.
Secondly you may be invoicing them but invoicing them incorrectly. Your invoice may state the incorrect total amount, because the incorrect price or quantities are being used. One control flag would be if your invoicing is tied to your stock system. Clearly this will apply only where you are selling a physical product This should throw up discrepancies when you do a stock take.
Of course, if you are not doing regular stock takes then this error will continue. Worst still, if no one is making the necessary adjustments being thrown up by your stock take. Again, you as the business owner will not be flagged to this error.
Assuming you are raising your invoices correctly, it may be that the payments received from your customers are not being allocated correctly. They should be allocated against the right customer account and to the right invoices. This will leave your customer accounts in a bit of a mess. It will be you who will need to agree the outstanding balances based on what your customer is telling you. Not a good position to be in! There is much better control when you are verifying amounts owed by your customers, based on what has truly been paid. Again, a situation where you could end up receiving less money than you should.
2.Invoices from Suppliers
Do you have good control around verifying what your suppliers are invoicing you for? For most overheads and services this is normally easier. After all gas and rates are metered and billed on regular amounts. However, if you have suppliers who bill on numerous lines for low values but in high quantity amounts, this is where it gets more difficult.
A good example of this is for delivery and duty costs for those of you who ship a physical product. Your shipping may be in high volumes to many customers. Those operating an online business will recognise this. How do you verify the amount without spending hours and hours checking paperwork? In cases like this, it may be possible to cross check one component on the invoice. E.g. that all lines have a delivery address on it. Otherwise can you see a trend of delivery costs versus sales. E.g. Are delivery costs 10% of sales perhaps.
Secondly, poor bookkeeping may result in not registering all the supplier invoices. By registering all your invoices, you put these on your accounting system. This ensures that all your payments can be allocated to a logged service or product. Where invoices are not logged, it is hard to trace back what payments have been made. even harder to see what payments are for what goods and services. Any supplier discrepancies again will be hard to resolve. It is conceivable to see the situation where you end up paying more than once for the same invoice.
That’s more cash going out of your bank account than should be.
3.Miscalculation of Vat.
If you are a vat registered company, miscalculating your vat is the worst type of cash drain. Your Vat return is paid quarterly and will normally be one of the bigger chunks of cash out flow. It is so important to get these figures right. So here are the key areas where this can be calculated wrong.
Normally the error will be on the supplier invoicing side. Your invoices may be put on your system but not being correctly allocated to a input tax or vat code. If vat is not correctly split out when it is entered on your system, then no vat will be reclaimed. If, due to bad bookkeeping, you are not registering your invoices and simply making payments from your bank account, no vat will be registered. Hence again no reclaim of vat is happening.
It is less likely that you are misreporting the sales side but this again could be causing your overall vat bill to be inflated. For example, where you are recording duplicate invoices or misstating the value of vat on your invoices. Also, if you are a business that sells into Europe in Euros. Are you checking that you are converting your sales figures at the correct exchange rate? If not, this could lead to an overstatement of the sterling value of your sales, and therefore the value of your vat owed. Failure to update the exchange rates monthly may lead to huge discrepancies in sales figures. Watch out when exchange rates are falling.
Finally, when you are registering late supplier invoices relating to a prior month, make sure that this invoice is picked up in the current vat return. The vat period will be determined by the date of the invoice logged on the system. Poor bookkeeping will simply miss this adjustment. An adjustment of a prior period will need to be made to the current vat return. Without this adjustment the vat will not be reclaimed. More cash lost I’m afraid!
4.Misstatement of the Directors Loan Account
You as the director must repay or face paying tax on your director’s loan account. Therefore, if your bookkeeper is just allocating any costs she is unable to verify to the director’s loan account, this will have a direct impact on your personal tax bill…and your pocket!
Often a bone of contention between a bookkeeper and the director, is where there isn’t an invoice to verify a payment. If it looks like a personal expense it can be legitimately put in as personal spending. That means allocating it to the Directors loan account. Your responsibility of course, is to ensure you give in all your receipts for expenses. Furthermore, I would recommend you always check that the Directors loan account (DLA) only holds legitimate personal expenses. Review the DLA quarterly.
Insist on having visibility of the breakdown of the Director loan account monthly.This is another good control to have in place.
5.Poor Decision Making
Now this is a hard one to tie back. Certainly I have found, poor bookkeeping leads to poor and inaccurate reporting. If you are relying upon the figures to feed your investment decisions, then clearly, basing this on erroneous data will cost you £’000s.
The same also works for where you don’t have the figures at all to support your decision-making. Key figures like Gross margin and Gross margin to sales will enable you to judge which areas of your business are under performing. Not having this data could lead to costly delays. You need to have time to rectify the loss-making areas of your business.
So, do you have a nagging feeling you are subject to bad bookkeeping? Perhaps you feel it’s easier to stick with what you have? All well and good. Also make sure that it’s not just the employment costs of your bookkeeper you are paying for. The implications of bad bookkeeping go much wider that the actual role itself.
For more advice to help you with your Financial Management and Control, head across to my Finance Tips Page Here.
If you would like to learn more about how I can eradicate bad bookkeeping in your business. please contact me here.