Three Common Accounting Mistakes to Avoid as a Startup Founder with Pradhyuman Borana, Founder of Wings Online Filings

Having the necessary information and tools to avoid costly accounting mistakes is a must for every startup founder. From being aware of what business expenses you can claim to choosing the most tax-efficient ways to pay yourself and manage your cash flow, the financial decisions you make will affect the health of your business. Pradhyuman Borana, Founder of Wings Online Filings, joins us on the blog to share a few useful practices you can adopt early on in your startup journey to develop the right financial management habits from the start. 

Tell us more about your business and what inspired you to launch it.

We are an accounting service provider based in the UK, dedicated to offering premium yet affordable accounting solutions tailored specifically to startups & small businesses. Our primary aim is to empower startups across the UK by delivering cost-effective accounting support.

The inspiration behind launching this venture arose from witnessing the challenges faced by startups. Throughout my professional journey, I've encountered a big issue faced by founders: the significant financial strain imposed by accounting expenses in the early phases of business growth, particularly when revenue is limited. Furthermore, when investing in low-cost accounting support, many startups often deal with a lack of personalized attention and guidance. Motivated by these observations, I embarked on establishing Wings. At our firm, we specialize in providing premium and affordable accounting and tax services, ensuring that quality and ethical standards remain uncompromised, regardless of the price point. Our mission is not just to offer financial solutions but also to foster enduring partnerships built on trust and mutual success.

In your experience, what are the most common accounting mistakes that founders make when managing their accounts?

1. Using personal bank accounts for business transactions: one of the most fundamental mistakes a founder can make is mixing personal and business finances. When a founder uses their personal bank account for business transactions, it blurs the line between personal and business finances. This can lead to potential legal issues and difficulties in accurately tracking business expenses and separating personal and business finances for tax purposes. For example, mixing finances can result in missed tax deductions or claiming personal expenses as business expenses, which can lead to tax penalties and audits by HM Revenue & Customs (HMRC).

2. Registering for VAT without understanding rules and requirements: Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of production and distribution. In the UK, businesses with taxable turnover above the VAT threshold must register for VAT with HMRC and charge VAT on their taxable supplies. However, registering for VAT without a clear understanding of the rules and requirements can lead to compliance issues and financial challenges for small businesses. 

VAT-registered businesses must collect VAT on sales (output tax) and pay VAT on purchases (input tax). If a business fails to account for VAT properly or miscalculates VAT liabilities, it can lead to cash flow problems, especially if VAT payments exceed VAT refunds. Incorrectly charging or reclaiming VAT can result in compliance issues and penalties from HMRC. Errors in VAT returns or failure to submit VAT returns on time can lead to fines and interest charges. Our team provides guidance on VAT compliance to ensure accurate VAT registration, proper VAT accounting and timely VAT returns. 

3. Overlooking proper payment methods and tax implications: how founders pay themselves from the business can have significant tax implications and financial consequences. Choosing the wrong payment method or structure can result in higher tax burdens, compliance issues, and inefficiencies in cash flow management. Inefficient payment methods or excessive withdrawals from the business can strain cash flow and hinder the company's ability to reinvest profits or cover operational expenses. Depending on the payment method chosen, founders may face higher tax liabilities on their earnings from the business. Also, incorrectly classifying payments to oneself can lead to non-compliance with tax regulations, such as PAYE (Pay As You Earn) requirements for employee salaries or dividend tax rules for company shareholders. 

When providing financial guidance to our clients, we focus on determining the most tax-efficient payment structure based on their circumstances, business structure, and financial goals. Our main goal is to equip founders with the information they need to navigate complex tax rules, minimize tax liabilities, and ensure compliance with HMRC requirements.

By addressing these common accounting mistakes and implementing sound financial practices, small business founders can enhance financial management, mitigate risks, and promote long-term business success.

What practices can founders adopt to ensure they are setting themselves up for financial success from an accounting perspective?

Here are a few practices that founders should follow:

1. Maintaining accurate financial records: they should ensure that they maintain accurate and up-to-date financial records. This includes proper bookkeeping, timely recording of transactions, and reconciling accounts regularly. By having a clear picture of their financial situation, founders can make informed decisions and identify areas for improvement.

2. Expense management: expense management is a critical aspect for founders to maintain financial stability and optimize tax efficiency. By adhering to the guidelines set forth by HMRC regarding allowable expenses, founders can effectively manage their tax liabilities. HMRC allows for a range of expenses that can be deducted from taxable income, thereby reducing the overall tax burden for businesses. Proper management of these expenses not only ensures compliance with tax regulations but also enables founders to strategically plan their tax obligations. Consulting with an experienced accountant can be invaluable in this regard. 

3. Seeking professional advice and guidance: founders should seek advice and guidance from financial professionals, such as accountants and financial advisors. These professionals can provide valuable insights, help founders understand their financial statements, and offer strategic advice to optimize financial performance. Working with experienced professionals can also ensure compliance with relevant accounting standards and tax regulations, minimizing the risk of costly mistakes.

Staying on top of the ins’ and out’s of your business account is crucial to effectively manage cash flow. What software and cash flow management apps can you recommend to help us monitor our financial transactions?

Xero: Xero is a popular cloud-based accounting software that provides tools for invoicing, expense tracking, bank reconciliation, and financial reporting. It integrates with many banks and financial institutions, making it easy to import transactions and keep your accounts up to date.

QuickBooks Online: QuickBooks Online is another widely used accounting software that offers features for invoicing, expense tracking, payroll, and more. It also integrates with banks and financial institutions for automatic transaction imports.

FreeAgent: FreeAgent is designed specifically for freelancers, contractors, and small businesses. It offers features for invoicing, expense tracking, project management, and tax management. It's known for its user-friendly interface and comprehensive reporting tools.

Sage Business Cloud Accounting: Sage offers cloud-based accounting software tailored for small businesses. It provides features for invoicing, expense tracking, bank reconciliation, and reporting. It also integrates with various payment gateways and financial institutions.

Cashflow Manager: Cashflow Manager is a simple accounting software solution suitable for small businesses. It offers features for invoicing, expense tracking, and basic reporting. It's particularly useful for businesses that prefer a straightforward approach to financial management.

Excel for cash flow management: Using your own Excel spreadsheet can be a flexible, customizable and cost-effective solution option for managing cash flow, especially for new businesses. With Excel, you have full control over the structure and formatting of your financial data, allowing you to tailor it precisely to your business requirements.

Where can our readers learn more about your services and connect with you?

They can learn more about our services and reach out to us at www.wingsonlinefilings.co.uk. They can also contact us at [email protected] or on WhatsApp (+44 20 8089 1876). We offer complimentary consultations that can be booked via our website. Hub members are welcome to connect with me directly inside the membership and book a complimentary consultation/ financial guidance session. We are also on Instagram - @wingsonlinefilings. 

Pradhyuman Borana is a Chartered Accountant and Founder of Wings Online Filings - an accounting service firm committed to helping businesses and individuals achieve their financial goals. On 27th May at 3pm GMT, Pradhyuman is hosting a talk inside the Co-created Hub membership where he will be providing expense and tax management guidance to UK-based startups. Our business and holistic wellness talks are open to non-members to attend and connect with the speakers - click here to apply for our complimentary access pass and join the talk.