The accounting department is key to the financial success of a small business. But when small businesses make certain errors in accounting, such errors can lead to tumultuous times for such small business. Which is why you must deal with every small business accounting mistakes
Accounting within any startup plays a vital role that cannot be overstated. Through accounting, you keep an eye on the cash that’s going in and out of the company. This helps you to better manage the financial affairs your startup. Simply put, effective accounting can make the difference between a startup going broke and a small business staying afloat.
However, errors in accounting is inevitable because humans are inherently flawed. A few accounting mistakes are likely to pop up occasionally. Some of these mistakes might be rectified by a mere stroke of the pen. Others might require a miracle to steer your start up back on track. Here are some of the accounting errors you should avoid as a startup.
Mistake 1: Failing to keep an eye on receivables
It’s always a happy moment when money comes into your business as it indicates growth. But failure to keep track of every Kobo coming in can lead to some serious issues in the future.
For instance, you issue an invoice to a customer, you would record a receivable. But what if the customer hasn’t actually paid yet? When the customer finally pay, the account should record it against the invoice to indicate that settlement of the bill. Unfortunately, due to various other tasks and other factors, one may easily neglect or ignore marking a payment received. If this occurs with just a single payment, it might be ignorable. But when it occurs with several payments, it can lead to a huge mess and unbalance. This is because there’s money in the revenue account that is unaccounted for.
Fortunately, such an error can be rectified by updating the receivables listing, but before being rectified, it might have already cost the company in high bad debts and overpaid taxes. Even worse, there could be an unscrupulous employee who’s aware of the situation and has been taking advantage of it by siphoning funds from unreconciled cash in the revenue account. Thus, it is important to update receivables and reconcile invoices at least monthly. Fortunately, there are various software available to make this chore easier.
Mistake 2: Failure to manage and file expense receipts
If you do not want to experience problems with paying taxes or making heads or tail of your cash flow, it is important to save copies of business expense receipts. By storing receipts, you can keep track of exactly what was spent, when and on what helping you avoid further small business accounting mistakessmall business accounting mistakes. In the event there’s a failure to maintain and keep receipts, it can lead to complications such as incorrectly reported tax expenses due to inaccurately entered information in the absence of the receipt and this can in the long run result in a high tax bill.
Thus, it is important to save receipts of any purchases made with money from the business account. It might be difficult keeping track of such receipts so make sure there’s a designated envelope for such that you keep close by and can deposit receipts in pronto. You can later on file the receipts in the tax folder or make digital copies of them.
Mistake 3: Not making record of cash expenses
It’s pretty easy to lose track of cash that’s spent out of pocket but that is one habit you need to endeavour to drop. Every cash expense that is unrecorded can complicate accounts later. Instead of spending wildly, cultivate the habit of keeping track of all cash expenses related to the business so such costs can be deducted from total income when it’s time to do taxes. Recording cash expenses will also give you a clearer picture of your business’ overall profitability in a fiscal year. You might have noticed these small business accounting mistakes.
It’s much easier to monitor transactions with debit/credit cards, and cheques since they leave a paper trail. This does not mean you should ignore expenses paid in cash. Monitor cash expenses or risk overstating income for the year.
Small Business Accounting Mistake 4: Trying to DIY your Accounting
At the onset, it might seem like a cheaper option to simply handle the accounting aspects of your business yourself. Such an approach might be smooth sailing at first but as your business grows, accounting chores will expand while you have less time to deal with them. This can lead to obvious accounting errors a professional would have caught. So instead of trying to handle everything on your own, get some help with your taxes so you can focus on other aspects of your business.
Mistake 5: Mixing business with personal finances
Mixing business with pleasure is just as ill-advised as mixing your personal finances with business. The two should be kept separate so that you can properly keep track of what is going on and avoid any erroneous or unaccounted spending. The first and most important step to avoiding such an error is having separate bank accounts for business and personal. Never should transactions on the two accounts mingle. Keeping accounts separate allows for better bookkeeping and makes it easier to take advantage of valuable tax deductibles.
Mistake 6: Failure of communication with accountant
While it’s true most professional accountants tend to speak in technical terms no one else understands, it is important that a business owner makes the effort to get an accountant to communicate in lay man terms. If a business owner just pretends to understand each time the accountant speaks, this can lead to problems later as a vital bit of information is shared but lost in translation. Thus, it is important that an accountant makes an effort to communicate in terms that everyone else understands and it is also important that those receiving the information ask questions whenever they require clarification. With effective communication, everyone involved in the business can better perform as a cohesive unit.
Your small business has a chance to grow into a bigger company someday. If you would avoid the above mentioned accounting errors for small business and focus on the solutions.