Starting and growing a business is exciting but challenging for all business owners. Managing one isn’t as simple as it sounds.
Several considerations have to be in place for a company to thrive. One of the critical procedures in a business, whether big or small, is accounting. This area needs to be well-managed to ensure efficiency in financial transactions.
While big businesses employ dedicated accounting staff to manage their boosts, most small businesses struggle to do so. For most small enterprises, setting up an accounting team is costly. This explains why many small business owners opt to handle accounting tasks by themselves instead of hiring qualified personnel to keep their books.
Failure to set up proper accounting procedures is detrimental to the success of your business. The lack of accounting procedures exposes you to costly accounting errors that affect your business finances and impede their growth in the long run.
If you have a small business, here are costly accounting mistakes you need to avoid:
1. Failing to automate accounting processes
Many small enterprises fail to utilize accounting software to automate their accounting processes. Small businesses can leverage tech innovations like accounting systems to automate bookkeeping procedures like budget and payroll management.
Automating processes allows entrepreneurs to improve turnaround time and spend more time on valuable things like running the business.
Small business owners should utilize accounting software to automate tedious and error-prone tasks and avoid compliance issues. Further, entrepreneurs should leverage cloud-based accounting software that’s highly interactive and capable of applying double entry to their transactions to prevent transaction errors.
Small businesses can rely on automation experts, such as Traverse Automation, leaders in financial RPA. These experts can facilitate automating tasks such as account reconciliation and cross-referencing records from diverse sources to guarantee precision and alignment. Account reconciliation is invaluable to businesses in managing cash flow, fostering supplier relationships, and establishing robust accounting process controls.
2. Considering bookkeeping as unimportant
Practical accounting starts with maintaining a proper record of business transactions. All transactions made by a business to its clients or suppliers should be recorded and categorized well in your books of accounts. This process is known as bookkeeping.
Many small businesses err by viewing bookkeeping as an accounting practice they don’t need. By failing to take bookkeeping seriously, small enterprises risk themselves not having accurate and reliable information on the financial health of their business. This means they cannot accurately determine the company’s performance at any given time.
Bookkeeping makes it easy for enterprises to categorize their assets and liabilities. Business owners are constantly aware of their financial situation and better positioned to make better financial decisions with such records.
3. Assuming cash flow means profit
Another costly accounting mistake small enterprises commit is confusing cash flow with profit. For instance, an enterprise closes a GBP£ 100,000 deal that will take six months to fulfil. The business estimates it’ll cost GBP£ 40,000 to complete the order and therefore assumes it’ll register a GBP£ 60,000 profit, even before delivering the order.
Businesses that take this approach make a big mistake because many factors can affect the order and the costs associated with its delivery. Delays in delivering the order could increase the cost of fulfilling it-which makes the cost estimates inaccurate.
While small businesses may treat closed deals as income, this practice is extremely risky. This gives them the wrong impression about the company’s situation, making it appear financially stronger than reality.
4. Failure to hire an accountant
As entrepreneurs, small business owners are passionate about their establishments and want to manage everything themselves. While this might work when the business is just starting, it gets more challenging as it grows.
Maintaining accurate accounting records consumes time. As the business owner, you need to focus on growing the company. Also, handling accounting tasks on your own might seem like a way to reduce costs. However, doing so may become highly costly to the business in the long run.
You risk failing to make essential tax deductions and committing errors that are challenging for you to see but easy for an accounting expert to detect. These mistakes could lead to enormous losses for the business compared to the cost of hiring an accountant to manage your books.
When researching potential accountants, verify their qualifications, such as certifications like CPA or CA, and check their affiliations with professional memberships and associations. You can schedule interviews with multiple candidates to assess their qualifications and determine their compatibility with your needs. During these interviews, inquire about their industry experience and approach to addressing accounting challenges.
5. Failure to prepare bank reconciliation
The other costly accounting mistake that small enterprises make is failing to reconcile their book balances with the bank balances. Failure to do so makes it difficult for a business to establish its financial situation.
Businesses need to reconcile their books with bank accounts frequently to determine the accuracy of their book and bank balances. This is critical because some expenses may go unrecorded from time to time, leaving an overstated bank balance.
Reconciling your payable accounts with the bank balance enables you to keep tabs on your financial situation. Ideally, bank reconciliation should be done every month to record all business transactions correctly. Doing so ensures your books are in sync with your bank accounts.
You can leverage technology for bank reconciliation. Robotic process automation (RPA) can automatically extract financial data from bank statements and accounting systems with high accuracy. This reduces the risk of manual errors common in data entry processes, ensuring that your bank reconciliation is precise.
6. Failure to capture small business transactions
Transactions involving small amounts may seem insignificant for a business, but they add to the cost. Most enterprises fail to record such transactions. Essentially, your business should have a clear record of all expenses, irrespective of how small or insignificant they may appear.
This is particularly critical in retail enterprises, where most transactions are in cash. Keeping tabs on such transactions makes it easier for the business to manage bigger ones as it grows and transactions increase.
RPA proves highly effective in streamlining the capture and processing of small business transactions. RPA bots adeptly extract data from various sources, including invoices, receipts, and bank statements, ensuring accuracy and consistency while reducing manual errors. These bots automate data entry into accounting systems, simplifying tasks like invoice processing, expense management, and inventory tracking.
Remember, money flows in or out of business with every transaction. Failing to capture small transactions like payments for postal delivery would overstate your profits and give you a wrong picture of its financial situation.
7. Opting for cheap alternatives
When buying products or services, many small enterprises want to save money by purchasing the cheapest alternatives in the market. However, this does not necessarily reduce costs because they may spend more in the long run.
For instance, hiring an accountant that offers the cheapest rate may seem like the least expensive option. But if such an accountant isn’t well-versed in your processes and frequently makes mistakes with payroll taxes, the business ends up spending more.
Spending a bit more on a product or service gives you quality results. Cheap alternatives deliver poor outcomes that are costly for the business-you’ll always get what you pay for.
8. Not backing up accounting data regularly
Most small enterprises fail to backup accounting data regularly. Failure to perform regular data backups exposes them to the risk of losing financial data. Many situations can result in data loss. They include computer crashes, loss of computers, and even disasters like floods that may hit your office and destroy your documents.
Scheduling regular backups allow small businesses to secure accounting records and make them easy to access for years. The best way to back financial data up is to use cloud-based online services that facilitate storage in encrypted formats. It also makes the data accessible anytime and from anywhere.
9. Failing to separate business and personal finances
As a business owner, the first thing you need to do in managing your enterprise is to open a separate company account as soon as you set it up. Most entrepreneurs fail to do this and mix personal finances with those of the business. This accounting mistake can cost your business dearly because it makes it easy to mess up with business funds.
Good accounting practices require companies to run their incomes and expenditures through business bank accounts. Even though you may be spending personal finances to meet business expenses, maintaining a record of those expenditures as crucial as those are subject to tax deductions.
You can’t make the deductions if you don’t have records to show you contributed personal finances to the business – which could cost you some money in lost deductions. Maintaining separate personal and business accounts makes it easier to have concise reports.
10. Failure to budget clearly for business projects
This costly mistake is common among small business enterprises. In starting a project, some fail to prepare a clear budget to determine how much it would cost them. Failure to budget for business projects or activities puts small businesses at risk of overspending without their knowledge.
Failure to prepare a clear budget also makes it challenging for small business owners to evaluate projects objectively to determine whether there’s value in spending on them or not. Without a budget, it becomes difficult to identify activities that don’t generate returns for the enterprise. Spending on projects that don’t offer returns causes small enterprises to lose money
As your enterprise grows, you begin to know how much you need to operate. It also becomes easier to budget for activities that contribute to business success and avoid excessive spending.
Accounting mistakes are common in many small enterprises. Although they appear insignificant, these mistakes can cost your business dearly sooner or later. Accounting is an essential function for any business. Like large businesses, small businesses need solid accounting procedures to grow.
Establishing such procedures enables small enterprises to keep tabs on their expenditures and incomes, comply with statutory requirements, and have accurate financial data to inform business decisions.
If you’ve been making the mistakes discussed above as a business owner, apply the tips provided to address them before they become too costly for your business.