Nine accounting mistakes small businesses must avoid

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As a business owner, it is important to be involved in all aspects of your operation. That doesn’t mean, however, that you are an expert at everything. Business owners may wear those strategic and customer-relations hats well, but many have a much more difficult time when it comes to donning that accounting chapeau, according to http://quickbooks.intuit.com.

Even worse, financial mistakes can actually stunt growth or adversely impact your bottom line, clog cash flow, damage reputations with suppliers, customers and employees.

To avoid those scenarios, here are 10 accounting mistakes business owners commonly make and the reasons why these errors, both calculated and inadvertent, can be so detrimental.

  • Falling behind in entries and reconciliation: Time is definitely not on the side of the small business owner, especially when there may be daily fires to put out. Suddenly, months have passed without making any entries in the books nor reconciling any business current statements, credit card statements, sales tax accounts or other types of financial accounts. This means financial statements and reports are not current. Without up-to-date information, it is challenging to make sound business decisions.

For example, spending money may result in a negative balance or reduced profitability, because unpaid invoices have gone unnoticed. Not entering financial data can also lead to problems with suppliers, where invoices to be paid may go unnoticed, leading to problems in getting materials or even a bad credit rating for the business.

  • Struggling to be accounting software savvy: In a rush to get the business set up, some business owners may not have spent time to properly learn the accounting software they selected. Not knowing what the accounting software is capable of doing means you can easily make a mistake or miss out on some powerful functionality. Not setting up a software system correctly can also lead to unused reporting capability and incomplete information that results in bad business decisions.
  • Not seeing the reports for the tools: Accounting is not just a tool for entering financial data in order to fulfil regulations or tell you how much money is in the bank. Instead, accounting is a powerful mechanism that provides answers to questions related to how a business owner’s strategic decisions are working or not working.
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That’s why a big mistake is not using the plethora of business reports that can be made from the financial data, including accounts-payable aging, accounts-receivable aging and reports about company profitability. These reports can show where issues are, including determining where clients are not paying in order to maintain cash flow. If these aging reports are not produced, a business owner will not know who is behind on payments and may miss clients who are not happy with quality.

  • Mixing business and personal finances: One of the most common accounting mistakes business owners make is to mix their business and personal finances. Keep these separate and distinct to provide a more accurate track record of what was really used for business and what specifically related to personal use only.
  • Trashing receipts: Paper trails still count, but even those can become digitised. However, receipts are kept, the point is that they need to be retained. Receipts provide answers to any mistakes or gaps in accounting records, and many offer additional deduction opportunities come tax time.
  • Making math mistakes: In the rush to get the books done after a long day, math mistakes can happen quite easily, even when using automated accounting solutions. Math mistakes can also result from posting entries to the wrong account or even just making typos.
  • Focusing only on the short term: With the day-to-day issues of running a business, it is easy to fixate on the short term and completely forget about the future. Accounting, however, is not just keeping track of today’s numbers. It is also about forecasting future growth and identifying any financial risk from current financial decisions or results.
  • Hiring the wrong person: Whether it is a family member, an inexperienced office temp or even the business owner who hires themselves to do the accounting, the wrong person can create financial problems that go beyond just making uninformed decisions. In fact, trying to save money or help a loved one out can actually lead to audits or penalties. Hiring the wrong person can create issues that haunt your business for many years to come.
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This can occur if the person hired does not know how to classify expenses correctly or create accurate journal entries.

  • Thinking technology is always the solution: Throwing money at technology does not guarantee accounting mistakes will be avoided. After all, you still need to make the technology work correctly. Also, not all technology was created equally or is relevant to a specific business.

For example, a small business owner does not have to invest in expensive enterprise accounting systems, but can likely utilise a system that works well with simpler financial statements and be able to scale as the business grows. Therefore, it is important to select the technology that matches the individual need and application for a business. This is where good planning, strategic thinking and research become invaluable to ensure that technology does not add to the accounting mistakes.

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