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Beware the perils and pitfalls of DIY accounting

What seems like a cost-effective solution at first can quickly turn into a financial quagmire, warns Adrian Goodman (pictured), managing director at PPX Consulting.

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IN AN AGE  of digital innovation, cloud-based accounting systems such as Xero and QuickBooks have become indispensable tools for small and medium-sized business owners. Marketed as user-friendly platforms that empower entrepreneurs to manage their own accounts, these systems have – ironically – introduced a set of dangers of which business owners need to be wary.

The attempt to handle accounting without proper expertise can make their accountant’s job more challenging and ultimately cost the business more money.

The appeal of a user-friendly accounting system lies in the idea that even those without a background in accounting can take control of their financial management, potentially saving money on professional accounting services. While this is certainly true – and these systems have literally changed the landscape when it comes to ‘traditional’ accounting services – an understanding of the finer points of accounting concepts is still a key requirement.

Accounting is not just about data entry. It requires an understanding of accounting principles and treatment rules. What seems like a cost-effective solution at first can quickly turn into a financial quagmire. Instead of saving money, business owners may find themselves spending more as accountants are forced to spend extra time rectifying errors and untangling financial mismanagement. 

The very attempt to cut costs on professional accounting services can end up costing the business more in the long run, especially since accountants are often not involved until the end of the year, which leaves a lot of time for problems to build up and fester.

Examples of errors I have seen from clients when they first come to us are:

  • Net pay, instead of gross pay, posted to the salaries account, thereby understating the salary cost;
  • Office consumables posted to the ‘Office Equipment’ account, which is a Fixed Asset account;
  • Corporation tax payments relating to last year posted into this year;
  • Supplier invoice posted to the system and the subsequent payment posted separately, effectively doubling the cost in the accounts;
  • Costs classified incorrectly between Overheads and Cost of Sales, leading to incorrect calculation of profit margins.

So what is the solution? After all, many SME business do not have the budget to employ a full-time Finance Director or engage their accountant for day-to-day support. In my experience, the answer to this is a collaborative approach where the business owner (or the person responsible for managing the accounting system) is educated in fundamental accounting concepts and the accountant is on hand to support with any particularly tricky transactions.

This approach ensures that the benefits of the accounting system – a user-friendly interface and simplified financial workflows – combine with the application of accounting principles and techniques to provide a genuine opportunity for efficiency and reduced cost. 

  • By acknowledging the complexities of accounting, adopting a collaborative approach, and investing in professional expertise, business owners can steer clear of the pitfalls and ensure the financial health and sustainability of their business. If you need any advice on which system is right for your business, or you need guidance on accounting treatment or principles, feel free to reach out to PPX Consulting.

Adrian Goodman is managing director of PPX Consulting and author of  ‘Achieving Profitable Growth: Use the ‘Four Points of Control’ to grow your profit and your business’.

www.ppxconsulting.co.uk   

  01536 856 740

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