You’ve found software and/or even hired an accountant - why? So that you don’t have to deal (as much) with the accounting side of running a business. It’s not the aspect that likely lured you into launching your own business in the first place, and probably doesn’t rank highly on your list of enjoyable tasks.
Yet you know the proper management of finances for your business is essential to its success. Even if you’re working with an accountant or with easy accounting & invoicing software like Debitoor, there are still a few small things you should be aware of when getting started.
1. Putting off adding expenses
You’re likely familiar with it: you run to the office supply store, or grab a quick lunch with a potential customer, or pick something up from a supplier on the way home - and the receipt or invoice gets stuffed into your bag to be dealt with at a later time.
When this happens over and over again and you suddenly have a stack of crumpled receipts lying on your desk, it can seem like an endless task to have to enter them all in your invoicing software. And do you have all of them or have some been lost or accidentally thrown in the bin along the way?
How to prevent it: With mobile apps for accounting software, it takes less than a minute to snap a photo of your receipt on the walk to your car or to the metro, add a few details if you want and that’s it - the expense is registered in your account. No more stacks of receipts or long days catching up on tedious scanning and adding expenses.
2. Not regularly reconciling payments
While your accountant has important tasks when it comes to tax filing and potentially self-assessments, there are still a few things that you can do to make the process faster, more efficient, and help to maintain a better overview of your business finances.
When you receive a payment for an invoice, that payment needs to be matched. In the process of reconciling, you are balancing your accounts - ensuring the debits match the credits. If you don’t work with accounting software that offers automatic bank reconciliation, you likely have to do this manually, which can be a tedious, time-consuming, headache-invoking process.
How to prevent it: Good invoicing and accounting software will give you the option to offer direct integrations with online payment solutions, meaning all online payments are reconciled as soon as they’re received - automatically.
You could also have the option to simply upload your bank statement at the end of each month, and watch all payments match automatically with the corresponding invoice or expense, eliminating the hours typically necessary to manually match payments.
3. Using accrual when you want cash (or vice versa)
The accounting method used by most businesses is either accrual or cash. Cash accounting does not literally refer to paper money, but rather to when a debit and credit are recorded in your accounts.
While cash accounting means the payment is recorded when the money changes hands, accrual accounting records the transaction when the invoice is issued, for example. Using the one not right for your business can have a major impact on your tax, as well as your financial reports.
How to prevent it: Before getting started with an invoicing software, do a bit of reading up on cash accounting vs. accrual accounting and decide which is best for your business starting out. Good accounting software will give you the option to select how to handle registration of your payments moving forward.
4. Not adjusting for different VAT rates
Depending on your business, you might be dealing with sales of products or services with different applicable VAT rates. For example, if you sell children’s clothing, this is eligible for a reduced VAT rate as compared to adult clothing.
When you create an invoice for customers, it’s important to add the correct VAT for each item on your invoice. It can be easy to forget to make these adjustments, especially if you’re dealing with a large order or with several different VAT rates in one invoice.
How to prevent it: Invoicing software that gives you the option to save each of your products or services, including their specific tax rate. This means that when you create an invoice, you can add each item from a drop down list - the tax rate is already saved and applied automatically in each invoice.
5. Using gross vs. net pricing
Your pricing method within your invoicing is another option that should be decided before you issue your first invoice. Gross means that the product or service price is shown including the VAT, net means that the price is shown without VAT.
In both cases, the final result (the total) will be the same. It is a matter of where and when the VAT is added on the invoice. However, it can be confusing if the preferred option is gross when you’re expecting net (or the reverse) - prices for invoice lines will differ.
How to prevent it: The option to adjust whether your invoice uses gross or net pricing right there when you’re creating the invoice and automatically adjusting where VAT is added, is a useful tool for ensuring your invoices have the pricing you want.