Maintaining adequate business finance records is critically important for several key reasons, especially for company directors and business owners. In cases where directors are accused of misuse (as with COVID-19 loan fraud), having comprehensive business finance records helps show that the director acted in good faith and complied with regulations.
Here is why maintaining adequate business finance records is so important:
Legal Compliance – Directors are legally required to ensure that the company keeps proper accounting records that accurately reflect the company’s transactions. This is stipulated under the Companies Act 2006 and other regulatory frameworks.
Taxation and HMRC – Without proper accounting records, it’s nearly impossible to accurately calculate the tax or VAT owed. Directors can face disqualification if the company fails to pay these liabilities, especially if it’s due to poor record-keeping.
Transparency and Accountability – Good records help ensure that the company is operating transparently and provides valuable information when making critical business decisions. If there are discrepancies or financial issues, proper records can help identify the cause.
Financial Reporting – Directors need to prepare annual financial statements based on these records, which are submitted to Companies House. Inaccurate or incomplete records may lead to false reporting, which could have further implications at a later date.
Legalities for Maintaining Adequate Records
If a director is found guilty of failing to maintain adequate business finance records and it impacts the company’s ability to comply with legal or financial obligations, this could be seen as a breach of their duties, potentially, in certain scenarios, result in the insolvency service concluding an individual not fit to be a director in the future. In severe cases, especially if there is evidence of negligence or fraud, the director could also face criminal charges or personal liability for the company’s debts.
Preventive measures to avoid claims
Here are measures you can take to ensure you are keeping adequate business finance records and avoid any claims.
Implement Proper Accounting Systems – Directors should ensure that their company has a sound, reliable accounting system in place. This includes using accounting software and hiring qualified professionals to handle bookkeeping. Systems like QuickBooks, Xero, or Sage are widely used and help maintain records, but this doesn’t remove the risk of human error; therefore, seeking the support of a qualified accountant is beneficial.
Keep Accurate and Up-to-date Records – The most basic and crucial step is to ensure that all financial transactions are recorded in a timely and accurate manner. This includes sales receipts, invoices, payroll records, bank statements, and any other relevant financial documents. Regular updates to financial records can prevent missing information and offer a clearer picture of the company’s financial health.
Ensure Compliance with Tax Laws – Directors need to keep up with tax obligations, including VAT, PAYE, corporation tax, and other taxes relevant to their business. It is essential to ensure that these taxes are calculated correctly and paid on time. Regular internal audits and external advice from accountants or tax professionals can help ensure compliance.
Regular Audits and Financial Reviews – Directors should schedule regular internal audits or reviews of the company’s finances to ensure records are being kept properly. These internal audits can catch any discrepancies early, preventing larger issues down the line. If the company is too small to afford regular audits, a qualified accountant can still provide regular reviews to ensure everything is in order and scrutinise figures that, on the face of it, may seem unusual or unexpected.
Prepare for Financial Contingencies – Even if a business is struggling, it’s crucial to maintain financial records that reflect the company’s true position. It’s not unusual for directors to not fully understand the financial figures, but having an understanding of the company’s break-even point is very important when working out what happens in scenarios.
Seek Expert Advice– Directors should seek advice on their responsibilities during financial distress. If a company faces the risk of insolvency, having proper records can make the process much smoother when evaluating the director’s options. In contrast, missing records can delay proceedings and negatively affect the outcome when looking to rescue the business.
Working with BRI and Maintaining Adequate Business Finance Records
If your company is struggling financially, BRI will help you explore all of your options. However, successful recovery of your business or making informed decisions is more achievable if the company maintains adequate business finance records. Relying on the support of your internal accounts team, bookkeeper, or external accountant should not be underestimated or even undervalued during any stage of the business lifecycle. If you are concerned about your business finance records, then seek professional advice to ensure you are following the correct procedures.