Starting your own business can be an exciting as well as a nerve-wracking time. Exciting because you have this commercial entity that is all yours and you can mold it to suit your dreams. And nerve-wracking because any mistake you make, even a minor one, can come back to haunt you.
Irrespective of the stage your business is in, the accounting function is going to be an integral and complex part of it. Several small businesses bite the dust because of their failure to handle accounts well.
No business is immune to accounting errors. Mentioned ahead are a few common accounting mistakes that all small business owners should make a note of to keep their business safeguarded.
1. A Lack of Effective Accounting Processes
Several times, entrepreneurs forget to instruct their employees and/or contractors about the systems and procedures of their business. Having rules and processes in black and white can ensure that everyone associated with the business knows about them and reduces the chances of non-adherence to important regulations.
hen setting accounting procedures, include everything – from accepting and making payments, depositing them, documenting important papers, dealing with routine tasks like payroll and GST, and all that comes in between. This should help you stay abreast of every transaction that your business makes and result in systematic and error-free procedures.
2. Mixing Business and Personal Finances
Mingling business and personal finances can spell doom for a business. Without boundaries, your finances can get out of hand very quickly. It also makes it extremely difficult to figure out how much money you’re making and spending.
Combining the two will create difficulties at the time of filing your taxes and audits as well because all the transactions will reflect on the same statement. It can also be tricky to pick out the individual deductions for your business. With this problem, it is easy to miss out on several deductions that were actually owed to you.
3. Working Without a Budget
Want to know for sure where your business stands currently and where it could after a particular duration? Make a concrete budget instead of just “watching” over your finances. If you thought making one is complicated, think again!
Start by looking at the bills and the deposits of the last few months and add other elements to it later.
Working without a budget is a serious mistake as it leads loss of control over expenditures, and missing out on investment opportunities in case of a surplus that you’re not aware of.
4. Losing Track of Account Receivables
Every time you make a sale, be sure to bill your customers for it. When you issue an invoice, you create a receivable, which needs to be recorded. Whether you sell items for cash, or provide cash for unwanted gold, do record every detail.
Having a detailed report of accounts receivables which includes client’s information as well as all late/outstanding payments is extremely essential to be able to follow up with delinquent ones and convert your sales to cash as well as blacklist such clients.
5. Not Keeping Tabs on Expenses
It is crucial to track all your expenses as it is a fundamental part of bookkeeping. An easy and effective way of doing so is to have a dedicated bank card or credit card for making business expenditures. You can also use apps which allow you to upload transaction receipts and enter information real time for accounting purposes.
6. Not Distinguishing Between Cash Flows and Profits
In order to avoid accounting errors, it is important that you understand the difference between cash flows and profits. Your business can have positive short-term cash flow and yet not be profitable. It can also have a negative cash flow in the short term, but be profitable in the long term.
To have the exact picture of your business’s financial condition at all times, it is important to create financial statements or at least a profit & loss statement on a monthly basis.
7. Failure to Integrate Bank Accounts
It is necessary to integrate your business’s books of accounts with your business bank account on a monthly basis. Account reconciliation is quite easy. Simply compare your books with your bank statement and make sure there are no inconsistencies. If there are, get in touch with your bank to get them resolved. Doing this helps identify and correct accounting errors before they result in major financial problems.
By being aware of the above mentioned accounting gaffes in your business operations, you can look forward to removing them and enabling more accurate accounting and spend less time trying to sort out the mess that these blunders leave behind.