With limited time, resources, and multiple hats to wear, business owners often find things like accounting, bookkeeping, and filing tax difficult to get right.
Yet proper accounting is key to an accurate picture of your overall financial health. If you don’t know how your business is really doing, then expanding it or even staying afloat could be a struggle.
You might also miss out on cost-saving opportunities as a result of accounting mistakes. Worst still, mix-ups and errors could get you into trouble with tax authorities.
If you want to get the financial side of things right, here are nine accounting mistakes to avoid.
1. Not tracking cash flows
Turning a profit doesn’t mean you’ll have cash in the bank when you need it.
Your ability to stay in business depends on whether you can pay your suppliers, employees, and other creditors, which is why preparing and analyzing cash flow forecasts is so important. By recording the timing and amount of money you’re expecting to come in and go out, you can identify potential shortfalls in cash flow and take steps to resolve it.
2. Not recording all financial transactions
Even transactions involving seemingly small amounts add up over time, so every financial transaction should be recorded and categorized.
With your books complete, you can analyze financial data and gain insight into your revenues and costs, who your customers are, how well you’re managing debts, and look for improvement opportunities.
Accurate records also allow you to pay the appropriate amount of tax and claim all deductions you’re entitled to.
3. Categorizing assets and liability incorrectly
Classifying financial transactions isn’t always easy, as there are technical and accounting principles that drive what, when, and how much to recognize your financial statements as assets and liabilities. While some transactions are straightforward, accounting for stock, prepayments, accruals, leases, and intangibles can be particularly tricky without the help of an accounting professional.
4. Not performing regular reconciliations
A reconciliation allows you to check the accuracy of an account balance by comparing it to information recorded somewhere else. For example, in a bank reconciliation, you would compare the cash balance in your books to your actual bank balance. In a stock reconciliation, you could compare your stock records with a physical stock count.
If you don’t reconcile account balances regularly, then discrepancies could go unnoticed and lead to inaccurate reporting.
5. Not having an integrated financial system
An integrated financial system based on cloud technology gives you access to apps and online tools that are connected with one another. This allows financial transactions to be tracked in multiple places automatically. As a result, you won’t have to waste time updating different databases or spreadsheets, and it reduces the chance of data entry errors.
Whether it’s paying bills, invoicing, or capturing receipts, it’s simply quicker and less effort with the cloud. Most accounting software relies on the double-entry bookkeeping method too, and this captures the effects of business transactions more fully and minimizes arithmetic mistakes.
6. Mixing personal and business finances
Having a business bank account may not be an urgent priority in the early days of your operations, but as business transactions grow in volume and complexity, it can be difficult to separate personal and business items. Not only could this lead to more work at tax time, but you could also end up missing out on claiming a tax deduction or unintentionally making a false claim.
If you’re looking to secure additional funding to grow your business, then mixing personal and business transactions could make it more difficult for a potential lender to evaluate your finances.
7. Not keeping receipts and records
Throwing away receipts could lead to financial transactions not being recorded or entered incorrectly into your accounting system. The risk here is that the true cost of doing business isn’t being tracked and reflected in your expense reports or financial statements.
Small business owners often end up paying too much tax as well because they can’t file an expense claim without supporting documents or receipts.
8. Not scheduling regular backups
Whatever technology you’re using to account for your business transactions, it would cause serious problems if important data files were lost because of a system crash, hard drive failures, or destruction of servers. Files can be deleted by accident too and major changes like operating system upgrades can also cause unintended data loss.
Without backup copies, it would be impossible to restore files or databases. You would lose records and reports that support tax returns and satisfy audit requirements.
If you would like to avoid disruptions to your operations, you can schedule backups to occur outside of operating hours.
9. Trying to do everything on your own
Although it may seem a good idea to handle company financials on your own, a DIY approach could put your business at a disadvantage. You could miss tax-related filing deadlines, under-claim deductions, forego tax planning opportunities, and make mistakes in technical accounting areas.
Apart from offering technical advice, an accounting expert could help you get more out of your accounting software and identify errors in your books.
Having a strong accounting process is the cornerstone to good financial health. If you’re looking to strengthen your accounting practices, becoming aware of potential mistakes and finding ways to avoid them are great initial steps.
