Thanks to the huge range of accounting applications available for today’s small and medium-sized businesses, it’s easier than ever to keep an accurate record of where your business’s money is going.
While accounting software has made bookkeeping and accounting easier for small businesses, it’s also made errors and accounting mistakes—from incorrectly categorizing a transaction to doing all accounting yourself—much more common.
Some accounting mistakes are minor, insignificant, and—when they’re inevitably noticed by someone within your business—easy to correct. But others are more serious and could have a significant effect on your business’s financial health.
Over time, poor accounting practices can distort the reality of your company’s fiscal health. In severe cases, repeated accounting mistakes and bad accounting practices can lead your business toward insolvency or company administration.
In this article, we’ll examine eight of the most common small business accounting errors and explain how they can create issues, both small and significant, for your business.
1. Assuming profits always mean cash flow
You just closed a $50,000 deal that will take your company three months to fulfill. It’s going to cost your business $20,000 to fund the project, so you book a $30,000 profit on the deal before you’ve delivered anything.
Big mistake. What happens if the deal, rather than taking three months, runs into an issue that causes an additional three months of delays? What is your costs increase, making the $20,000 costs estimate inaccurate?
It’s tempting to write down each deal as income when it happens—after all, it’s new income for your business. But doing so can make your company seem healthier than it really is and give you a distorted picture of your company’s real condition.
2. Not taking bookkeeping seriously enough
The key to effective accounting is recording everything. From small transactions to large payments from customers and clients, it’s important to ensure that everything is recorded and properly categorized in your accounts.
No matter how small your company might be, taking accounting seriously gives you an accurate, reliable picture of your company’s health, letting you determine exactly how well (or poorly) you’ve performed in a given period.
From categorizing different types of assets and liabilities correctly to performing a monthly check of your books and accounts, establishing a serious bookkeeping and accounting system for your business is the key to keeping it financially secure.
3. Failing to specify employees and contractors
Does your business have employees? If so, are they employees of your business, or people and companies you’ve hired on contract? There’s a big difference between an employee and a contractor—a difference that you’ll need to account for.
Understanding the difference between an employee and a contractor, as well as the accounting consequences of this difference, is vital to avoid your business recording its accounts inaccurately.
4. Managing all of your accounting in-house
Do you handle all of your bookkeeping and accounting in-house? When you run an extremely small business with limited revenue, it can be tempting to lower costs by handling your accounting on your own.
While taking care of your accounting yourself 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 will also save you money.
From tax deductions that you didn’t know about to errors that are difficult to see in your own company but easy for an expert to notice, managing all of your accounting in-house causes you to miss an opportunity to save money.
5. Failing to reconcile books with bank accounts
It’s important that your business reconciles its accounts frequently. Reconciling is the process of checking that an account balance as listed on your books is accurate and correct, ensuring that it matches the real balance of your bank account.
From time to time, small costs and expenses that you might not think about at the time could go unrecorded. Reconciling your accounts—from your business’s bank cash to its payable accounts—lets you accurately track your financial situation.
Small businesses should always reconcile their books every month to ensure all of their transactions are accurately recorded, preventing their books from becoming out of sync with the real status of their accounts.
6. 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 that your business has a record of all of its spending, no matter how insignificant.
This is especially important in retail environments, where many transactions are cash based. It’s also important to record small transactions like paying for a postal delivery, even if the cost is insignificant.
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.
7. Poor communication with your bookkeeper
Does your bookkeeper know what’s going on in your business? It’s important that your business keeps full information of its transactions, and even more important that this information is clearly communicated to bookkeeping.
Seemingly small mistakes like purchasing products or services—especially those with monthly recurring costs—and not reporting this to your bookkeeper can end up causing serious problems and lots of extra work further down the line.
As well as clearly communicating with your bookkeeper, keeping a paper record of all transactions, whether the record is digitized or otherwise, makes it easier to monitor all of your income and spending.
8. Not assigning clear budgets to each project
Does your company start projects without assigning each one a clear budget? Going into a project without any idea of how much it could end up costing your company is an easy way to end up spending far more than you intended.
Failing to effectively budget also makes it difficult for you rein in a project that has clearly cost your company more than it should have. This can cause your company to spend its limited funds on projects that won’t produce a return on investment.
As your business becomes more established, you’ll be aware of how much your business needs to spend to continue operating. This makes it easy to set budgets for projects that are large enough to make success possible, but not excessive or wasteful.
Has your business made any accounting mistakes that other entrepreneurs can learn from? Do you have further accounting questions? Let us know in the comments.