Accounting is the systemic and comprehensive recording of financial operations in a business. Business bookkeeping is the recording of financial transactions as a part of the accounting process.
The most common area where small business owners make mistakes is in accounting and bookkeeping. Small business accounting mistakes range from minor errors (e.g. to save a receipt of minimum amount) to big accounting and bookkeeping errors which cause serious threats to the business.
Entrepreneurs/owners often do not see the impact of the common small business accounting mistakes as a major threat to the growth of business in the long run.
8 Common Small Business Accounting Mistakes that Pose Risk to Business Stability
Business owners mix personal finances with their business account
- Business owners mix their personal finances with business expenses. Keeping these two finances separate is of utmost importance. If these two finances (personal and business) are not segregated then it cannot be known what was intended for business and what was used personally. The finances cannot be estimated correctly and the amount of profit generated out of invested capital cannot be calculated.
- A business credit card is utilized for personal expenses during a holiday trip or other excursions. Later on, this amount will be paid from the company’s income.
- During purchase orders for inventory of the company, purchases are also made for personal or private use.
Trying to manage all accounting and bookkeeping yourself
- A small business owner is often an all-rounder. They constantly try to manage all business functions themselves. Accounting and bookkeeping are hectic and time-consuming jobs. If you spend all of your time in accounting and bookkeeping, you will miss doing other important business operations.
- If you have an accountant to manage this, you will be able to keep a second eye on accounting and bookkeeping, but also free up time for other areas.
Entries are not done in time. Running behind in bookkeeping and the submission of entries of the expenses or sales will not yield an up to date picture of the business and allow you to make timely decisions. It can lead to a negative balance if expenses are made but no income statement is updated. Invoices to be paid by the company may go unnoticed and it can give your company a bad name. It can end terms with the suppliers. Business growth is halted or significantly reduced.
Covering small expenses out of pocket without recording
Sometimes, it’s easier to pay small expenses out with your own money in business. And, often, these payments are small and not entered into the bookkeeping record.
Paying out of your pocket falsely makes your company appear stronger in income than it actually is.
Starting new projects and ideas without a clear budget
If you start a new project in your business without planning for it, then you can run short of your budget for other business operations. You may have to quit the project in the midst of doing it if you don’t get the loan or find other investors. It’s always best to plan ahead before you make a big move.
Not saving the original receipts after entering them register/books
Keeping all receipts until all taxes are paid and an audit is produced is a must. Even after that time period, receipts are very important for matching data entries in a register or in software.
Not using accounting software or cloud technology
Failing to set up a correct software as needed by your company leads to poor decision making, because installing the improper (more complicated than required or lacking crucial functions) software can lead to more complexity in accounting. Accounting software prevents accounting and bookkeeping errors. Many software applications come with guided help boxes to make the accounting process easier to interpret. Inventory control tools are provided in the software. Tax matters are made easier using accounting software. It’s best to make the jump for your company and purchase the best software for your company.
Wrong interpretation of accounting information
- Accounting information software is just a tool to use. Decisions must be made after completely checking the financial reports and interpreting the data. Data interpretation is made by comparing financial statements with the cash flow statements and the balance sheets.
- Entrepreneurs/business owners/directors must focus on long-term consequences of decisions they make after getting a full picture of the company’s accounting information. Short term decisions after interpretation of accounts data do not provide the company with long term benefits.
Small business accounting mistakes are not small and can dissolve the business in the long run. Accounting and bookkeeping tasks should be managed by a trained professional and you must closely monitor your accounting and bookkeeping data. Use accounting software for bookkeeping. Neither mix personal expenses with the business account, nor pay out of pocket for business expenses. These small mistakes lead to big problems in the long run for your business.
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