With the ever increasing range of financial software available these days it’s never been easier to keep your finances up to date.
Whilst the software has made bookkeeping and accounting easier for small businesses it’s also made it far easier for errors and accounting mistakes to be made. Some mistakes maybe small and not have a major impact and then, well there are those mistakes that are serious, have financial as well as legal consequences and could lead to your business’s health taking a nose dive.
Let’s take a look at the seven most common small business accounting errors and explain how they can create issues, both small and significant, for your business.
1. Assuming Profit Always Means Cash Flow
Business owners counting profits as equal to cash flow is a common mistake. Profit IS NOT the same as cashflow.Although cash is critical, people think in profits instead of cash. We all do.
However, we don’t spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets (aka things/stuff) and couldn’t pay their expenses. Working capital (cash flow) is critical to business health.
2. Not Taking Bookkeeping Seriously Enough
It’s easy to be caught up in other aspects of the business. After all, it seems far more productive to be doing paid work than to have your head buried in “bookwork”. And it’s tempting to put off those small tasks to a less busy day – problem is, that day may or may not arrive.
Having to untangle a maze of neglected payments and invoices is no fun (well, except for accountants, they sometimes enjoy it!)
Record everything from small to large transactions (Xero is great for this). Investing 15 minutes a day – or every few days – will save you hours of headaches in the long run.
Taking bookkeeping seriously gives you an accurate, reliable picture of your company’s health, letting you determine how well (or poorly) you’ve performed in a given period – no matter the size of your business.
3. Failing to Separate Personal and Business Accounts
It may seem like a no-brainer, but failing to separate business accounts from your personal accounts is a common trap.
Keeping all your business finances in one place will make tax time much more bearable. Having a dedicated business credit card will ensure all relevant purchases can be easily accounted for.
It’s a good idea to keep invoices for personal and business items separate too. Whether you store them digitally or physically, having them in one place is essential. (Did you know external invoices and other documents can be stored in Xero?)
As a side note, if you have a bookkeeper and/or accountant and your business and personal finances are not separated it’s gonna cost you more because it’s more time consuming and complex to separate – just saying.
4. Failing to Specify Employees and Contractors
Does your business have employees? If so, are they employees of your business, or do you have people and companies you’ve hired on contract?
There are big differences between employees and contractors. Understanding the difference between an employee and a contractor, as well as the accounting consequences of this difference is vital.
5. Ignoring Your Accountant or Managing all of Your Accounting In-House
It can be tempting to lower costs by handling your accounting needs on your own. While it might seem like a great way to save money, it could actually be costing your business money. An accountant will have greater costs than managing your accounts by yourself, but can also save you money in other ways.
Don’t ignore your accountant! Almost 60% of surveyed accountants say they’re forced to spend extra time on an end of financial year as result of being left out of the loop all year. When you’re making a major business-related decision, give your accountant a call. This is their area of expertise after all, and they might be able to suggest a useful cost-saving alternative. You don’t know what you don’t know and some un-researched decisions can be costly.
6. Inadequate Knowledge of Accounting Software
The constant evolution of accounting software has simplified life for small business owners. The range of programs on offer means there is something for every budget. However, many businesses plough along never knowing the full capability of their software.
Setting aside some time for training will lead to significant timesaving’s down the line. All good programs offer free online courses to coach you through the software capabilities.
Get to know your accounting software, so your business can make the most out of it.
7. Forgetting to Record Small Transactions
How does your business manage its small transactions? It’s very easy to think of petty cash transactions as unimportant, but it’s essential your business has a record of all of its spending, no matter how small.
Stay on top of the small transactions and it becomes far easier to manage the bigger ones. By keeping a record of small transactions, you’ll be able to easily manage your books as your company grows in size and its number of transactions increases.