Amidst various projects, you can easily overlook some important accounting details that could later lead to mistakes in your books. In return, it can have many negative effects on your business, such as being late with paying your business partners or filing incorrect tax forms.
The good news is that some of your business associates will understand your problem if you offer a reasonable solution. Unfortunately, the tax authorities won’t accept your excuses. Moreover, some business collaborators also might not be too understanding.
Therefore, we’ve analyzed some common accounting mistakes that could put every small business at risk. For each of them, we offer a solution that will keep you away from bookkeeping errors.
1. Spending cash without tracking it
Contemporary businesspeople can use a wide range of e-banking services and credit cards for their payments. Apart from that, modern entrepreneurs can rely on automatic billing, as well.
On the one hand, utilizing software tools to track your business-related expenses is a wise thing to do, since it reduces the risk of omitting some of those transactions. On the other, this is exactly what might happen if once in while you make a payment in cash.
For instance, let’s say that you want to celebrate a business deal by taking your partners out for lunch. You leave your credit card in the office and you pay the bill with cash. After that, you forget about that payment and don’t include it in your business expenses for that month. A few such oversights and your balance sheet might be in a serious discrepancy with your business account.
In order to avoid such situations, you should always scan or photograph checks every time you make a cash payment.
Apart from that, set a reminder on your phone, so that you don’t forget about it. That way, you’ll remember to add that expense to your balance sheet.
2. Not having a professional accountant
If you think that you can cover all the bases of your business finances on your own, you’re on the wrong track.
An average business has to prepare numerous financial reports and analyses monthly. If all these features are done by the owner, that person won’t be able to focus on their primary duty – business management.
Moreover, a business owner can’t turn into a professional accountant overnight.
Because of that, it’s imperative for every independent entrepreneur to establish a collaboration with a reliable accountant or a team of such experts. Their number will depend on the size of your business, as well as on your budget. This person needs to be an experienced professional in that field of work, for the reasons explained in the following paragraph.
3. Working with inexperienced accountants
It takes years of hard work and sweat to become a knowledgeable accountant.
So, business owners should bear this thought in mind when they’re looking for an accountant. Since a limited budget is the biggest issue for many entrepreneurs, they often opt for a less experienced but more affordable accountant.
However, such a decision might pose a threat to your entire business system.
Therefore, you should try to find the right bookkeeper in an alternative way. Namely, instead of going down to the nearest accounting company, think about searching the Web.
A large number of bookkeeping professionals work online and you can easily find remote accountants. They come both as individual freelancers and as online accounting agencies. The greatest benefit of recruiting an accountant this way is that you can get an immediate insight into their previous work. Also, you can easily contact their former employers and check the information from their portfolios.
Apart from that, you don’t have to add them to your payroll, but it’s possible to hire them as outsourcers. All these benefits will save your time and assets during your quest for the best professional to keep your books in order.
4. Missing monthly reports
If you have too much on your plate, you might neglect your monthly reports. However, this is one of the essential things that every business owner needs to do.
Given that you’ve followed our tips related to choosing the accountant, these reports will contain the crucial information about your business, such as the revenues, the income and the expenses. If you miss any of those reports, you might not have a clear insight into your finances.
As a result, the decisions you make about your future investments and business deals will be based on wrong assumptions.
What’s more, you might miss some important invoicing dates, which could in return infuriate some of your clients. For all these reasons, make sure with your accountant that you get your monthly financial reports at the beginning of every month and take your time to analyze them. It will improve the way you run your business and manage your budget.
5. Not reconciling your cash book
A conscientious business owner will never miss reconciling their cash book with their bank statements.
The main purpose of this action is to conduct regular internal audits so that you compare your own financial details with the ones tracked by your bank. Banks usually send these reports once a month.
What you could do upon the reception of that statement is meet your professional, experienced accountant and reconcile that report with your in-house cash book. Here’s what you need to pay attention to:
- Analyze all the transactions – Look for any discrepancies between the cash book and the statement. Label the transactions that don’t match, if any.
- Deduct special checks – If any of your transactions aren’t included by the bank statement, deduct them from it.
- Check bank errors – Banks also make mistakes. Check if they’ve missed any dates or added any incorrect data. Inform your banker if that happens.
- Compare the balances – The cash book balance and the bank statement balance should match. If not, start the entire process over again.
If your cash book and your bank statements show different numbers, your business will be in big trouble when an external audit pays you a visit. Apart from that, you might be working with assets you don’t actually have. This is why reconciling these two financial reports is an extremely important part of work.
6. Neglecting your obligations
Assets that a business owes to other parties are called accounts payable. On the other hand, assets that other companies need to pay to a business are accounts receivable. If only one of these obligations slips your mind, you might find yourself working with assets you don’t have.
In order to prevent such an outcome, you should track your obligations regularly.
For starters, you should ask your accountant to adjust your invoice software for weekly reports on the payments you should make towards other businesses. The same pattern should be applied to the receivables you should collect. By performing these weekly checkups, you’ll ensure a smooth flow of cash through your business and provide it with a sufficient amount of assets for proper work.
Furthermore, when you keep track of all your payables and receivables, you’ll know when to take legal actions against your debtors.
Collecting your debts on time will ensure a stable budget and build your reputation as a professional business owner who knows how to run a business.
7. Misclassifying business costs
Due to a huge amount of work tasks, small business owners are more susceptible to making mistakes than professionals who can rely on larger teams of workers.
One of the common mistakes that can cost you a lot of money and energy is misclassifying your accounting data. Many types of business information can be misclassified, with different potential outcomes.
- Depreciable assets vs. expenses – Unlike current expenses, such as accounts receivable and payable or raw materials, depreciable assets can be tax deductible. Therefore, treating them as expenses will cost you some money, as well as cause problems with your tax return.
- Mistakes during data entry – Business owners and accountants can entry business data in the wrong section of an accounting software. As a result, incomes and expenses won’t match. To prevent these problems, you can implement a double entry.
- Workers reported as contractors – When you report your employees as individual contractors, you pay a significantly lower amount of money on account of their payroll taxes and insurance expenses. However, employee misclassification is a serious breach and it could bring your business to an end.
While misclassification of business costs can be caused by unintentional mistakes, your business might be faced with some harsh consequences. This is why you should establish a closer collaboration with your accountant, to reduce the risk of such unpleasant outcomes.
The basis of successful accounting are committed and educated bookkeepers. However, these professionals can’t do everything on their own. On the other hand, business owners have neither time nor knowledge to cope with these issues. Therefore, the best solution for every entrepreneur is to recruit an accounting team that will add a new value to their business.
They shouldn’t be only your accountants, but also your advisers and active members of your business team. Such a relationship will reduce the number of mistakes to a minimum, leading your business into a more accurate accounting future.
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