The availability of a wide range of accounting applications for small and medium-sized businesses have made managing a company much easier. Accounting tools helped business owners to keep an accurate record of where the finances are spent. However, not all of these tools are perfect. In fact, a host of them has made accounting mistakes, such as improper categorizing of transactions. While some errors are minor and easy to rectify, other common accounting mistakes can mean the downfall of a business.
Poor accounting practices can falsely give business owners an overview of their company’s financial health. In this article, we’ll discuss the common accounting mistakes that small businesses make.
Profits = Cash Flow
To assume that a projected profit equates to cash flow is a common accounting mistake. It is quite tempting to place a closed deal as an income. For a new business, it is a gratifying task. After all, it’s an income for the business. However, by doing that practice, it can give a false sense of a company’s financial status. For instance, you booked a deal for $60,000. This deal will take the company about four months to fulfill. The project will cost $30,000 in expenses for your company, and so you write down $30,000 as a profit even before delivering anything. Wrong. It is crucial to take into account any uncertainties during the completion of the project. What if, for example, a machine broke down and you have to shell out money for its repairs. It would cause a delay on the deliverables and the $30,000 costing would not be inaccurate.
Absence of Accounting Procedures
In accounting, it is crucial to have a documented and detailed procedure of bookkeeping and procedures. Without checklists and standardized forms, it will be hard to keep track of all the items necessary to keep the records up to date. For instance, setting up a new vendor account needs company name, contact details, Employer Identification Number (EIN), signed documents, and other documents. All these details are necessary to process payments. It is best to have a checklist, so none of these details are missing, allowing for a more streamlined process within the department.
Insufficient Bookkeeping Practices
One of the critical processes in accounting is recording transactions. This bookkeeping process helps owners to have a better picture of their financial health. All transactions – big or small – must be documented and categorized accurately in the accounts.
Taking bookkeeping seriously also involves the monthly checking of books of accounts. It helps keep the business financially secure.
Classification of Employees and Contractors
From an accounting standpoint, it is a must to differentiate if the company has employees or contractors. While some may think this differentiation is unimportant in terms of business operations, there is a big difference, and it must be accounted for. Businesses must correctly classify their workers appropriately to avoid audits from the IRS.
In-House Accounting
For small business owners who want to trim down their operational costs, it is tempting to do all the bookkeeping and accounting in-house. What they don’t know is that this process only costs their business more money. Yes, an accountant will be an additional cost, but they also come with financial savings. They are more knowledgeable when it comes to tax deductions. They can also spot accounting mistakes that can ultimately save you money on penalties.
Failure of Reconciliation of Accounts
Most business owners fail to do a regular reconciliation of their bank accounts with their books of accounts. This practice allows them to see whether the records in the books of accounts are accurate and up to date. Small businesses must do this reconciliation of accounts at least once a month to ensure all records are correct and no transactions are missing.
Ignoring Small Transactions
It is tempting to ignore small transactions and not record it. However, to successfully run your business, even little spending should be recorded. No matter how insignificant the cost may be, it has a major impact on your business, especially if it happens often. These small transactions can also help business owners see where expenses go so they can come up with a wise business decision.
Data Entry Errors
Errors in data entry is a common accounting mistake that can happen from time to time. However, when it becomes too frequent, the business can suffer. It might be time to come up with a policy regarding reconciliations to counter-check all entries and make corrections as necessary. This reconciliation process can also be used to review unusual transactions.
No Budget for Projects
When a project does not have a set budget, it can be easy to spend more than the company can allow. Similarly, it can result in spending the budget towards a project that does not have a return on investment. If this happens far too often, it can cause insolvency of the business. Setting a budget means working with a project that can help effectively sustain the business.
Poor Communications with Bookkeeper or Accountant
It is crucial for business owners to maintain a collaborative communication with the bookkeeper so they can appropriately update the records. Bookkeepers must be properly informed of all transactions involved in running the business, especially concerning recurring products and services.
Key Takeaways
Accounting is a tedious but necessary process. Once you’ve set a clear procedure of a business’ finances and transactions, it is easy to avoid these common accounting mistakes.
