Practical issues on bookkeeping and taxation
For many businessmen bookkeeping, and business administration in general, is often seen as one of the necessary evil things that must be faced. Many consider that all time one spends in the administration of the business, is away from the time to make money. It is not, however, so straight forward.
At its best, proper administration and bookkeeping may save you both money and time later, especially if there were to be, for example, a tax inspection.
Also, well thought trough and structured administration and bookkeeping provides the tools to manage your business and predict and follow your business environment. If well thought through and structured, your administration does not necessarily even bear too heavy extra costs.
The boring task of bookkeeping can take up hours and hours of your time, and the time spent is away from your business. But when you take into consideration the above mentioned positive aspects, what reliable and in-time reports from your accounts offer you, this time might be well better spent than you might think.
The lack of time is by experience the most important reason why many businessmen do not keep their finances up to date on a monthly basis. The second most important reason is the lack of knowledge about the benefits of proper reporting from your businesses books. The third reason I want to stress here is that the businessmen often follow too much the schedules set by the accountant.
Also, some businessmen want to save money and order business reports from the accountant only once a year.
When taking time to run your administration and bookkeeping, remember that bookkeeping offers you the means for quality information necessary to manage and grow up your business, and avoid risks in taxation.
Below, there is a list of some some important points to consider when you have entered into business and you 'must' do the bookkeeping:
1. Improper records in bookkeeping
Improper or poor receipts, and/or improper or poor record-keeping is a common fault for a small businesses. It is so easy to lose receipts or to forget those small expenses that seem insignificant...
But as we all know, many small expenses amount to a large sum, and if the records are kept carelessly, the taxman in Finland has the capacity to consider these expenses not-business-related and tax these costs from you and/or from your company, depending on the type of the company you run your business in.
So, it is your duty as a businessman to collect and deliver all receipts related to your business to your bookkeeping, regardless of the sum of the receipt.
In running a business in Finland it is important to separate the receipts related to your business from the receipts related to your personal account. With some of the receipts this distinction is easy to make, but sometimes it might be difficult. If you do not have a clear idea of what to do with a receipt, you should show the receipt in question to your accountant and simply ask.
-Purchases for your business or personal account?
From this perspective, when you purchase something you must reason carefully: is this purchase for your business or is it something for your personal account? In this consideration the most important point is to assess, is the purchase really for the business purposes? If your answer is yes, then it is a business expense and the receipt should be included to your bookkeeping.
If the purchase is only for the private account, you should take the receipt for your personal account but not record it to your businesses bookkeeping, as it is not by definition a business expense at all.
The smaller the business is, the more common it is that businessmen take also personal expenses to company records. Problems from this may arise, if there is a tax inspection or if your business runs into insolvency as in these circumstances this kind of finance of your personal life may be considered tax evasion or causing damage to debtors of the business.
It might even be considered or argued that your bookkeeping is not considered 'real' and/or reliable at all, and taxation or claims against the entrepreneur are estimated without taking the books of the business into account. We are going to cover the case of tax inspection and insolvency more thoroughly later in our article series.
Sometimes the expense can, and should, be dived in two to the company and for a private account. The general consideration of this division is discussed briefly above, but in order to make sure you may want to discuss this consideration also with your accountant or legal expert.
From the point of view of being able to manage your business on the basis of the reports from your accountant, it is important that the information is not biased and/or unreliable because you have provided a lot of records from your personal account to your bookkeeping.
If the information received from your reports is biased, it does not properly reflect your business and proper decision-making is either not possible or is at least more uncertain than it would be if the reports only reflected your 'real' business.
If you maintain accurate bookkeeping records on a monthly basis and have an exact filing system, it can save you a long penny of income taxes. It will also provide the needed 'reliable' documentation in possible tax audits ensuring that your business is not hit by unexpected tax consequences.
2. Dependence on your accountant
If your accountant does not have a proper knowledge of bookkeeping practices and regulations, you might be in serious trouble.
There are quite a few very unfortunate cases I have faced in my professional career that the real reason behind inaccurate bookkeeping is actually the ignorance or carelessness of the accountant. This is especially true when a businessman is too busy or is not for one reason or another willing or able to read the information from the reports of the bookkeeping.
If you are a foreign background entrepreneur, it is also too often that there is no real common language with an entrepreneur and the accountant. Many times this leads to lack of communication or even miscommunication, for example:
- The accountant might in good faith consider that the entrepreneur understood everything which was explained, or might consider still after many years of accounting relationship that the entrepreneur is able to read the reports from the books of the business, often only in Finnish language. But the reality might be that the entrepreneur did not understand anything and is not able to read the reports the accountant provides.
- The entrepreneur may in good faith consider that the accountant understood and was able to take into consideration everything he/she explained to him, when delivering monthly receipts to bookkeeping. But the reality might be that the accountant did not understand anything and was not able to take into consideration anything explained.
In Finland it is practically always considered the responsibility of the entrepreneur to understand your accountant, and to be able to follow the reports the accountant delivers.
This means that you should take and spend all the time needed, that there is proper communication with your accountant, and that the reports from the bookkeeping are properly explained to you. After all, it is you who pays for the service.
The burden, however, does not lay only on the accountant. If your accountant asks you to deliver receipts or asks questions from you related to any issue of your bookkeeping, you should deliver and answer properly.
From this perspective, you should understand that if receipts are not delivered or questions are not answered, your accountant might do the bookkeeping on his/her best judgment, which might even lead to totally something else that in reality happened.
The conclusion is that it is very important to have often discussions and other kind of communication with your accountant.
In practice, I have noticed that if you keep your accountant properly informed and well involved of what is happening in your company, it helps him to understand and create financial statements which reflect the true operational needs of your company and business. And remember to tell and discuss with your accountant also what are you planning to do in future steps.
How to choose a good accountant for your business is a subject to be dealt with in a separate article.
3. Categorizing expenses, making tax announcements
If you have good communication with your accountant and you understand each other, matters related to taxation should not be an issue -provided, of course, that your accountant has adequate knowledge of taxation.
Even though taxation is a science of itself, the basic rule is that tracking accurately the income and expenses of your business (and only your business) to correct bookkeeping categories ensures proper measurement of your business profitability, and enables accurate decision-making related to your business.
Understanding and knowing the different tax treatments of each income and expense categories can result in significant tax savings, and in an opposite case it may cause big losses!
As a first practical advise I would want to say that it is always worthwhile to know the basics related to your businesses taxation also by yourself.
My second practical advice is always remember to ask and critically wonder the information figures provided to you before you accepting the totals, the bookkeeping, and the annual report. In case you do not understand something, do not sign it.
My third practical advice is always understand that it is the entrepreneur, who is in practise responsible for announcing the taxes. Therefore, you should read and understand the tax announcements your accountant may do or deliver on your businesses behalf before they are sent to the tax-office.
4. Cash management is important
In spite of digitalisation businessman often operate, and are also compelled to operate, with petty cash. When operating with cash, you must make sure that all transactions are marked reliably down in order to avoid any future problems. You should have a cash management system in a recorded form in which is reliably explained, how the cash flows of your business are followed and marked down.
Your cash management system should reliably explain:
- How the incoming cash is recorded and linked to your business activity (and at the same time allow you to keep the cash on hand for the business), and
- How your outgoing cash is recorded and linked to your business activity. If you have a system in which both the incoming and outgoing cash flows are reliably recorded preferably in daily basis, you should be able to avoid many of the risks related to tax-inspection.
Buying a cash-lock-box for petty cash and keeping in safe all receipts for your businesses disbursements is a good and easy way to start your cash management. And if you reliably write down the incoming and outgoing cash to a notebook or a computer-record in daily basis, you should have a decent cash management system.
5. Is it worthwhile to select the cheapest services?
While saving cents, there is a point where your parsimony can even cost more expenses for your business than the savings you are able to receive.
In many cases, the phrase that 'you get what you pay for' is true in practice.
Spend a little extra money to get a quality accountant (true also with other experts) rather than finding a cheapest bookkeeper available. If your accountant considers that it might be worthwhile of acquiring some extra expert consultation, listen and take this consideration seriously, and find out the reasoning behind this consideration.
Prevent, and act early enough. Many times the best and also the cheapest solution to a problem is found, when you invest to preventing and/or tackling the problems before they fully materialize. This means, for example, that you have adequate insurance coverage for your business, and that you have networked yourself also to other experts than just with your accountant. Networking also with your peers in your business is also consideration.
The other main author of this article-series, Jukka Autio, is a lawyer and has also an university degree from the business. He has many times stressed to me that it is often cheapest and most economical to tackle legal issues straight from the beginning, meaning that the clients should have courage to contact the lawyer even if the dispute has not yet flamed up.
He has also stressed that all starting businesses, and especially businesses of foreign background entrepreneurs, should ensure that they have an insurance coverage for legal disputes, as practically all other companies have this kind of insurance and as it is also relatively cheap. Both of these advice are something I fully agree.
6. Remember not to over-spend and over-invest!
Especially when starting your business, do your research before spending money to long term business services and to any business-items that have a working life of more than a few months. These may be regarded as investments and should be considered as such. As in any investment you should take into consideration the term of the investment, and also the financial cost of the investment.
There are many examples of businesses that have failed because spending too much money at the start, or committing to contractual and/or other liabilities straight from the beginning.
As starting a business is always at least to a some extent a jump to uncertainty, the outcome is that your numbers, budgets and plans are most uncertain during the first three years of your business operation. One way to tackle with these uncertainties is to avoid over-spending in the beginning of your business.
Practical advice from this perspective is, for example, that when purchasing business-items like office furniture, equipment, or software, a good rule of thumb to follow is to select a moderately priced item, and purchase it when it’s on sale. You can do the updating later, after your business has matured and is more accurate to predict.
Now, when you have read through the above mentioned practical points, consider if there is anything you should change or rethink in your ongoing business operation.
If you have not started your business yet and you are still on the planning-phase, consider if you should re-plan, re-budget or recalculate something.
Remember that good accounting information is one of the most important things for your business management and success. Short term personal interests should not be the deciding factor, if you are aiming for a successful long term business.
Understand that using experts is often the cheapest and most effective, when you use them early enough.
WHERE TO CONTACT?
If you are facing an inquiry or some action from any authority and you do not feel comfortable dealing with the matter yourself, or you seek any other advice related to your business, please feel free to contact the authors of this series of articles through the email address [email protected]