Why keep accounting records?
In my “Home Base Business” blog I wrote an article about keeping good accounting records.
Most small businesses look upon the need to keep good accounting records as a cost, whether that be in terms of their time or the cost of an accountant or book-keeper. However, I would encourage them to regard their accounting records as an asset. You may ask why that is! Well, at the beginning of my career when training in a London firm of chartered accountants (long disappeared through mergers) I, along with my colleagues, would be handed a parcel or bag containing a year’s worth of receipts and invoices, and would be expected to put together a set of accounts for filing with Companies House and as a prelude to the preparation of a tax return. The technical jargon for this was an “incomplete records” job and, indeed, that is what they were. The process generated many questions which need to be answered which consumed the business owner’s time and, more importantly, cost them money. This process was indeed a cost to the business, and apart from the legal aspects of producing accounts, there was very little benefit to the business owner. They received their accounts far too late to be of real benefit to them. But, these businesses were missing some tricks:
- by not keeping records during the year the costs to them in time and money were much higher than would have been the case had they done so;
- by not keeping records they did not have a resource which told them how the business was performing; and
- by not keeping records they were deprived of the information they needed to make crucial decisions for the business, such as how much they could spend getting new customers.
The period of time that I am talking about was before the advent of the computer and the records were hand written, so there may have been an excuse to those who did not have the skills to get to grips with double entry book-keeping. In today’s world, however, there is no excuse. There are plenty of affordable software packages out there which greatly ease the burden of keeping good records and the more modern of these, such as Xero, provide a cloud based solution with a dashboard depicting key aspects of the business’s performance.
HM Revenue and Customs took £565m from small business in compliance activities.
In 2013 HM Revenue and Customs took £565m from small businesses which they targeted, collecting taxes that they say were owed on income not declared or on expenses incorrectly claimed. That figure was up 31% from the amount collected in 2012. On top of that, George Osbourne, the Chancellor of the Exchequer, is targeting a further £7b revenue from compliance activities in an attempt to balance his budget. Much of the effort on this will be against small businesses. Why? because HM Revenue and Customs know that many small businesses keep inadequate accounting records and so they know that they will be easy prey to them: even if they were not trying to cheat on the tax man they would not have the records to prove their case and so will lose.
Know where you are!
In a previous article “Why do businesses fail?” I pointed out that one of the major reasons that businesses fail is the fact that, due to inadequate accounting records, the owners do not know the financial state of the business.
So, whether you employ a book-keeper or do the job yourself, you can see from the arguments above that keeping good accounting records is an asset and not a cost. So, why not invest in that asset now.