Managing your own tech company is a handful. In the early days you'll be very cost conscious, not wanting to spend money unnecessarily. You may for example feel it’s easier to administer your own accounting and tax affairs while going with your gut instinct when it comes to making investment decisions.
Your fellow tech entrepreneurs will have been through similar financial scenarios so you can tap them for advice, right? And if they don’t have the answers? Well, there is so much free and useful business content on the web, you just can’t go wrong, can you? Quite the contrary actually. These opinions and decisions are both understandable and common in the tech community.
Unfortunately in our experience DIY accounting is dangerous and plain wrong. Why? Basically mistakes in these crucial financial areas could prove expensive and disastrous. Don’t believe me? Here’s an infographic highlighting the potential pitfalls you could fall into if you do it yourself without sound financial experience. Basically at some stage you're going to need to hire an accountant for your business!
Click the infographic to enlarge.
Preparing your tax return (for you as an individual and your company) can be easily overlooked when you have countless other duties to fulfil while running your business.
Missing the tax return deadline can lead to significant penalties and surcharges. Worse still this can then result in a deterioration of your company’s credit rating which will hurt your ability to raise finance or negotiate an extension of your overdraft facility.
If you submit your tax return on time but it contains errors or anomalies then that will automatically arose the suspicion of HMRC. The result will then be a tax investigation which can cost thousands of pounds and can last for several years. That’s a price and period of uncertainty you want to avoid.
Processing accurate figures into your company accounts will ensure that when this information is processed you can then access accurate management accounts. These then allow you to understand exactly how well you’re doing. You will be able to see how well you’re progressing versus projections and therefore know what needs to be achieved moving forward. Can you afford to make that long awaited investment in new software? Only accurate accounts will provide you with the answer.
Failure to administer effective budgeting and controls however, can wind up in extra costs to your company. It leads to inaccurate tax returns, invoice errors and therefore potentially severe financial losses. If you can’t trust the numbers in your accounts then you’ve got a big problem because you’ll struggle to understand business performance. You won’t know if you’re progressing towards your big picture end goal.
Worse still, you may trust and make decisions on the back of erroneous numbers. The situation is likely to compound until significant accounting errors are revealed further down the line. For example, your business cash position at the bank may be significantly different to the accounts. How then can you have confidence about investing in something if you don’t really know your true financial position?
Linked to the above, poor bookkeeping and record keeping will mean your company won’t stand up to the financial scrutiny of an audit or due diligence investigation, should you look to raise finance or sell. You may have a very healthy and viable organisation, but inaccurate financial statements will project quite the opposite image to the likes of investors, other businesses, a purchaser or even the taxman.
Rules on corporate tax regulations are highly complex, ever changing and in some cases industry specific. Just look at how intricate the new EU VAT rules are to administer. Unless you’re a qualified professional, you’re just not going to be aware of these items or understand their application to your business. That then represents a missed opportunity because you could end paying more tax than you should.
More often than not, when it comes to your company’s finances and other business areas, the DIY mentality will end up costing you more money to hire a professional to sort your situation. Worse still the above errors could reflect negatively on you as a director.
We’ve had to step in and help several tech entrepreneurs who have tried to negotiate doing the accounts themselves or tackle a particularly tricky piece of tax legislation. Occasionally we come across the rare entrepreneur, who successfully manages to juggle their bookkeeping and finance matters fluently. But ultimately, this comes down to where your skill set lies.
The vast majority of tech business owners had to slow certain functions down significantly just to allow us to put the necessary systems and controls in place. That meant a lot of re-organisation, additional time, resource and money spent on the job. The DIY mentality actually ended up being counter intuitive because these were the very things the entrepreneur was trying to avoid in the first place.
The content of this post is up to date and relevant as at 24/08/2015.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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