Accounting is an important aspect of every business, especially small businesses where every penny makes a difference to its bottom line. And let’s face it – accounting is complex. If only it were as simple as basic addition and subtraction, the life of every entrepreneur and his accountant would be much easier.
Many a time, small business entrepreneurs make the mistake of handling their accounts function by themselves or they hire a trainee to do it on their behalf in a bid to save money. They fail to realize that the slightest error could prove to be their undoing and may lead to the wrapping up of the business. Compromising here may not be a good idea!
The hard truth is that a lack of appropriate and adequate accounting procedures can hinder the growth of your venture. Keeping the books is one of the more challenging aspects of running a business successfully. Accounting errors can prove to be lethal to it.
Mentioned ahead are a few common accounting mistakes that small businesses must avoid at all costs.
1. Failure to Keep Tabs on Your Receivables
Making money is one of the most exciting and rewarding outcomes of doing business. But in order to make money, you need to ensure that you’re getting paid by keeping track of your receivables.
The process is simple and known to all – you issue an invoice to generate a receivable. This means your client/customer owes you money. It is important that you keep checking your receivables list to keep tabs on outstanding payments. As soon as you receive the payment, it should be marked as paid.
Several business owners leave the settlement of payments for later for one reason or another. At the time of tax calculations, however, the receivables report takes up a lot of time to be updated and the businessman may also realize that he has a lot of bad debts.
It is, therefore, important to track your receivables on a monthly basis as that can save you a lot of time and grief in the long term.
2. Failure to Record Cash Expenses
One of the biggest favors entrepreneurs can do for themselves is track all the expenses related to running their business. These costs will have to be deducted from the total income in order to get a clearer picture about business profits.
It is a good idea to have a dedicated credit and/or debit card which can be used to make and record all the expenses accurately.
3. Not Keeping Expense Receipts
Do not make the mistake of not saving business expense receipts as doing so can go on to cause major tax, accounting and cash flow-related errors in future. Having a systematic procedure for keeping your expense receipts in place would reduce/negate confusions about where and when you have incurred costs.
Plus, they can be extremely helpful in providing the correct picture at the time of tax calculations and audit.
In case you thought this was a complicated procedure, it is not! It is as simple as saving the physical copy of every business purchase. To make it less cumbersome, make sure you use only your business bank/credit card to pay for business expenses and keep an envelope in your bag or car to store all your receipts (instead of putting them in your pocket). Do make it a point to file them to your tax folder on a regular basis.
4. Not Distinguishing Between Cash Flow and Profits
A lot of newbie entrepreneurs have a hard time telling cash flows from profits. Simply put, cash flow is the money which flows in and out the company due to its financial activities, investments and operations. Conversely, profit is what remains from revenue after the company’s expenses have been deducted.
Cash flows may not necessarily be money earned.
It is important that you don’t take this distinction for granted as only being clear about it can give you a clear idea of the exact financial condition of your business.
5. Managing Everything by Yourself
While it can be understood that you’re passionate about your business, you also need to make sure that you don’t get too carried away by it and try managing every aspect of it on your own. Proper accounting requires a certain level of expertise and as your business grows, so will its accounting needs.
It is suggested that you refrain from handling everything on your own and instead build a team of qualified, experienced and trustworthy staff, and delegate responsibilities to them. Hire an expert accounting professional to take care of the accounts department. This will help you focus on the other areas of your business better.
6. Not Harnessing Technology
In order to simplify the accounting procedures and bookkeeping requirements such as payroll and budgeting, you will do well to invest in high-quality accounting tools. Not only will this help you save a lot of time and effort, it will also make calculations more accurate and automatic.
Cloud-based programs are increasingly gaining popularity thanks to the efficiency and convenience they offer. By having one in place, you will find yourself with ample time and energy to focus on other areas of your business. Do use such technology to help your business run more smoothly.
7. Failure to Perform Regular Backups
You may use the best computers in your office, but know that they’re all prone to physical damage, crashes, virus attacks, hackers, and even robbery. You need to be prepared to face these kinds of situations.
It is, therefore, recommended that you have multiple backups of your accounting data, not just for its security, but also to ensure that you have access to it for years to some. You can save all pertinent files and documents to portable external hard drives and/or to the cloud.
Do make it a point to always schedule routine backups of your financial data, even in other locations, ensuring its safety and your peace of mind.
8. Mixing Business and Personal Finances
Mixing your personal and business finances is a one-way ticket to a financial disaster for your business. To prevent this, it is advised that you open a separate bank account for your business right from the beginning. Use this account only to deposit business income and incur business expenditures.
Even if you’re paying for several company expenditures out of own pocket, do keep a record of such expenses as they can entitle you to valuable tax deductions. If there is no record, it may result in the loss of a lot of money.
The last thing that any businessman wants is to be misled into taking the wrong business decisions emanating from incorrect figures. Instead of taking chances with your money and testing your number-crunching skills, keep the above pointers in mind to enable yourself to do the right thing as far as business accounting is concerned.