While accounting software has made bookkeeping and accounting easier for small businesses, it has also increased the frequency of errors and accounting mistakes, ranging from incorrectly categorizing a transaction to doing all accounting yourself. Some accounting errors are minor, insignificant, and simple to correct when discovered by someone in your company. Others, however, are more serious and could have a significant impact on the financial health of your company. Poor accounting practices can distort the reality of your company’s financial health over time. In severe cases, repeated accounting errors and poor accounting practices can lead to insolvency or company administration.
In this article, we’ll look at five of the most common small business accounting mistakes and explain how they can cause problems for your company, both small and large.
- Failure to hire an experienced finance professional
Even experienced accountants and bookkeepers make mistakes, but they’re finance professionals, and you probably aren’t. Even if you are, is it really worth the extra time commitment to manage your company’s books on your own?
Hiring a professional will help to reduce the possibility of errors in key areas such as expense tracking, timely payment of vendors, balancing bank accounts, and staying on top of payroll.
Are you certain you’re properly handling your employees’ withholding taxes? Are you keeping track of all your financial transactions, no matter how big or small? A few errors in these areas, and you’re suddenly not saving money by not hiring qualified help.
- Inaccurately tracking business costs
Accounting and bookkeeping are rendered ineffective if records are not kept accurately.
When this happens, your company is vulnerable to losing money, being late on important bills, causing headaches during tax season, and other issues that can stymie a growing business. It’s not just mistakes made when entering transaction data into a spreadsheet or forgetting to mark a bill as paid. Inaccurate financial tracking ultimately costs your company money and impairs your ability to plan for the next month or beyond.
It’s critical that your accounting system – whether it’s just you and a spreadsheet or the people you hire to keep your books – works properly.
- You are not effectively managing billing.
Cash flow is critical to a company’s ability to operate from one day to the next. Billing or invoicing customers efficiently helps to ensure that your revenue arrives on time so that you can use it for expenses, payroll, and other needs.
However, businesses that do not have a firm grasp on the accounting side of their operations may fall far short of this standard. Invoicing is delayed, and customers naturally take longer to pay, leaving your company stretched thin to cover its own bills.
- Failure to allocate specific budgets to each project
Does your company begin projects without first establishing a budget for each one? Going into a project with no idea of how much it will cost your company is a sure way to spend far more than you intended.
Failure to budget effectively also makes it difficult to rein in a project that has clearly cost your company more than it should have. This can lead to your company spending its limited resources on projects that will not yield a return on investment.
- Separate your business and personal finances.
When you’re out and about, it’s easy to pull out a business credit card and spend money on personal items. Is the accountant, on the other hand, supposed to go over every single purchase and painstakingly separate them? Was the creamer intended for use at the office or at home? Will you remember what you need for your home or business in a month or a year? Including personal expenses that cannot be deducted with business expenses may raise an eyebrow with the IRS. To reduce stress, open a personal checking account as well as a business checking account.
According to a survey, while more than 93% of small businesses are very or somewhat confident in their ability to file their taxes correctly, nearly one-third believe they end up paying too much come tax time. Everyone becomes complacent about receipts and records every now and then. The best approach is to minimize errors and oversights by ensuring that your company uses an accounting system that tracks company expenses, payroll, and other basic components of your profit and loss statement. Enlisting a qualified tax professional to check in on a regular basis and perform tax-related organizing sweeps of your business can also assist in identifying potential savings or things that your business could be doing differently well before the tax year is over.
In summary, it is always a good idea to seek out professional accountants or outsource your accounting to certified accounting firms. There are a lot of them out there, some better than others. If you would like to engage an accounting firm for your bookkeeping or payroll, look no further than EBOS Cloud Accountants!
