Accounting can be a challenge for small businesses due to time constraints, lack of knowledge and its complexity. Therefore being aware of the most common accounting pitfalls in 2025 has never been more important for SMEs.
With this in mind, the experts at Nottingham Accountants Archimedia Accounts have analysed the most common accounting mistakes small businesses make and provided their guidance on how to avoid them.
The most common accounting mistakes made by small businesses
1. Lack of backup systems for financial data
One of the most critical accounting mistakes small businesses make is the lack of reliable backup systems for their financial data. Whether a business is using a spreadsheet, traditional desktop software, or a full-scale ERP solution, failure to have a backup strategy when there is a cyber attack, for example, can make recovering financial data costly or even impossible. This can then potentially lead to compliance issues, delayed reporting, or lost revenue.
It is recommended to therefore follow the 3-2-1 backup rule, whereby businesses are able to store two copies on different devices and one copy is kept offsite. This will help with the ability to recover data if faced with unexpected events.
2. Incomplete accounting methods
Many small businesses typically rely on cash basis accounting or single-entry bookkeeping systems because they are simple. While these systems are simple, they can create dangerous gaps in financial reporting. One issue is that a method that saves you time today may lead to problems tomorrow; examples include inaccurate profit margins, inaccurate forecasts, and compliance issues.
As you grow, you should improve your accounting systems by establishing accrual accounting using double-entry bookkeeping, which records every transaction accurately, such that each transaction is a debit and a credit. Essentially, double-entry bookkeeping provides a reliable, comprehensive financial picture of your company. While balancing the books is essential, developing an accurate understanding to help you make better decisions to support sustainable growth is far more important.
3. Mixing personal and business finances
Mixing personal and business expenses is a trap that many small business owners fall into, but it’s one of the worst! Losing separation of expenses can derail your business in terms of growth and credibility, from messy bookkeeping to inaccurate cash flow. By the time audit season occurs, everything has become so grey it’s hard for anyone to have faith in your financial stance.
You don’t need to change your entire process; you simply need to open a business bank account, get a business credit card and establish some separate processes. Making a few adjustments can really bolster compliance, improve financial transparency, and help to build a strong foundation for your business that will make it sustainable going forward.
Chris Demetriou, co-founder of Archimedia Accounts, states:
“Unless the expense is necessary, work-specific, and backed by proper records, it’s considered a personal cost and not deductible. Claiming items such as a daily coffee or a personal laptop as ‘work expenses’ without clear justification is not accurate, and you could incur serious fines or even legal consequences if you try to claim personal spending.”
4. Lack of budgeting and forecasting
Effective budgeting and forecasting are critical for businesses of every size, therefore having a clear financial plan in place helps organisations to understand their financial situation and plan for their future. By implementing a budget and cash flow forecast, businesses can allocate their resources more strategically, stay in control of spending, and ensure they’re financially prepared to support day-to-day operations and future growth.
The rising cost for SMEs to run their business is a primary concern for 76% of UK-based SMEs, with three-quarters (75%) having economic uncertainty. While the rate of inflation has gradually decreased from its peak of 11.1% in October 2022, business costs still remain high, and financing options will help SMEs manage cash flow, such as invoice financing or asset-based lending.2
5. Failure to set aside money for tax obligations
Tax compliance isn’t something to just tick off a to-do list. It is a commitment for your business that can impact its financial performance. There are various taxes that your business must pay for, including VAT and corporation tax, and knowing the different taxes your business is liable to pay and understanding the HMRC guidelines3 is an essential task.
This includes keeping accurate records, and ensuring payments and returns are filed on time. A great tip is to regularly save a portion of your income, preferably in a separate savings account, to prevent last-minute surprises. To prevent further peace of mind as well as financial control, you may consider working with an accountant who can help you with estimating your tax liabilities throughout the year to relieve the stress, when the deadline comes around.
6. Delayed or incorrect invoicing:
Despite solid arguments for legal compliance, errors in invoicing can have longer-term impacts: damage to client trust and inaccurate financial forecasting. To keep your records in check, businesses should definitely process invoices consistently, use accounting or bookkeeping software that can automate and track invoices, and check important details such as due dates or billing contacts before submitting invoices by email. It keeps organisations compliant, professional and financially sound.
Chris Demetriou, co-founder of Archimedia Accounts, comments on how SMEs can avoid making common accounting mistakes:
“Many of the most common and costly accounting errors we see among small businesses are avoidable with the right strategies in place. It is recommended to use cloud-based accounting software, as it gives business owners real-time visibility over their finances, simplifies compliance, and reduces manual errors.
Scheduling quarterly check-ins with a qualified accountant is also pivotal, as it allows businesses to spot small issues and prevent last-minute penalties and stress. Lastly, with the guidance of their accountant, businesses must choose the appropriate accounting methods and standards for their business, ensuring that their financial information is reported in an accurate and transparent way.”