Why bad accounts got me in trouble


In the excitement of starting a new company, I forgot to sort out proper accounting systems. Which landed me in trouble with HMRC. Here I explain how it happened and how it can be avoided.

The challenge

For many years now I have said that if I was ever to start another business, the very first thing that I would do is buy a good accounting package, and hire a reliable and knowledgeable bookkeeper. I say this as this was just about the last thing I did when I set up Interdirect. Now I'm sure that some of you might think that this is an obvious thing to sort out and must be thinking me stupid for not having done so - however, you'd be surprised at how often others have regaled me with the same tale of woe. The reason for delaying such an obvious and vital process is that when setting up new businesses it is usually very easy for entrepreneurs to get caught up in the excitement of their new venture, and as a consequence, they tend to ignore the comparatively boring task of setting up a robust accounting process.

Of course, the effects of this omission can be widespread and could seriously threaten the survival of a business. They range from not getting invoices out on time and not getting paid in a timely fashion right through to not paying HMRC the taxes. The first will starve your business of all important cash flow - but the second could ultimately land you in jail!

In my case, my first year's worth of accounts got in such a mess (my accounts system was a cardboard box in corner of my office) that I fell behind paying my taxes as I didn't have the right paperwork in place to properly calculate them. The end result for me was an inspection, a fine and a demand for immediate payment of backdated taxes. With some quick thinking and a sympathetic bank manager (don't rely on finding many of those at the moment) I managed to quickly sort the situation out; but it could easily have caused my (otherwise successful) business to fail and it provided me with the short sharp shock I required to redress the situation.

The solution

As mentioned above, the solution to this problem is to place the act of getting an efficient and accurate accounting system near the top of your priorities list. This investment need not be too expensive. Accounts software packages vary greatly, but the most commonly used are probably Sage and QuickBooks and prices of these start from only a few hundreds of pounds.

If your company is a private limited company (Limited) then as a director of the business you are also obligated to publish annual accounts and returns and so on - so it is also essential to appoint a qualified accountant.  Accountants are an expensive resource, so they should be used sparingly. However, they will also advise you on what processes should be implemented within a business - so they are worth every penny. It is also worth mentioning that accountants often have a preferred accounts program too, so it is important to make sure you speak to them and establish this in advance of them working for you.

Another good thing to do is to appoint a part-time bookkeeper. These tend to be a lot cheaper than accountants, which helps to reduce your costs and frees up your time to concentrate on doing what you are best at - running your business.

Key lesson

Don't wait for the bailiffs to be knocking on your door before you sort this out!

Top tip

Be enthralled by the excitement of creating your own business but don't forget to keep your eye on the essentials.

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