Accounting 101: The Top 7 Small Business Accounting Mistakes
Despite the economic difficulties in the past two years, small businesses are still on the rise. The growing number of online platforms, marketing touchpoints, and innovative tools available has levelled the playing field for small businesses.
For instance, accounting software for small and medium-sized businesses makes it easier than ever to maintain track of your company's finances. It is possible to optimise all accounting processes yourself by using accounting software to make bookkeeping and accounting simpler for your operations. However, simplified procedures aren’t always free from errors.
Some accounting problems are minor and easy to fix when detected by your firm. Others, though, are more serious and may have a significant influence on your company's financial health.
Inaccurate accounting might distort your company's financial health over time. Accounting errors and inefficient practices can lead to insolvency or corporate administration.
Let's explore the seven most prevalent small business accounting mistakes and how they might hurt your company:
1. Inability to Reconcile Books and Accounts
Accounting requires that everything is recorded—from small purchases to large payments, from customers and clients. It presents a reliable picture of your company's health, allowing you to judge how well (or poorly) you've done over time.
Your company's thorough and routine bookkeeping and accounting system are essential to its financial security—from appropriately categorising assets and liabilities to regularly checking your books and accounts. Since small costs and expenses may go overlooked from time to time, reconciling your accounts allows you to track your financial condition precisely.
2. Assuming Profits Equal Cash Flow
When a transaction occurs, it's tempting to record it as income right away. However, this can give you a false impression of your company's health. You need to account for possible delays and unexpected costs that can arise. It's better to count your profits when projects or services have been fully delivered and paid for.
3. Internally Managed Accounting Department
Does your business perform all of its bookkeeping and accounting functions? Small businesses with minimal revenue may be tempted to save money by handling their accounting.
While doing your accounting in-house may seem like a great way to save money, it may cost your company more. An accountant is more expensive than managing your books yourself, but they save you money, time, and other essential resources.
Accounting errors that are difficult to identify in your own company but easy to spot by a professional are only some of the ways managing your in-house accounting costs you money.
4. Inadequate Specification of Employees and Contractors
What is the size of your workforce? Do they work for your company, or are they independent contractors? You'll need to understand the distinction between an employee and a contractor.
As a business owner, you must be aware of your responsibilities between employees and contractors. Additionally, you must know the logistical implications on your business's finances so that you don't record the wrong amount of money.
5. Forgetting to Record Minor Transactions
How does your business deal with small transactions? Petty cash transactions may seem minor, but your organisation must keep track of all expenditures, large or small.
Keeping track of little transactions makes managing larger ones much easier. Keeping track of minor transactions will assist you in managing your books as the number of transactions of your company rises.
6. Ineffective Bookkeeper Communication
Is your bookkeeper up to date on corporate news? Maintaining accurate transaction records is crucial, as is communicating this information to bookkeeping. Buying products or services without reporting them to your bookkeeper might lead to severe issues and a lot of wasted labour later.
7. Insufficient Funding for Each Initiative
Going into a project with no idea how much it will cost your company is a definite way to overspend. Budgeting inefficiently also makes it hard to stop a project from going over your budget. This can lead to your company wasting resources on non-profitable endeavours.
Accounting errors in small enterprises are serious and can lead to long-term failure. A professional manages accounting and bookkeeping activities, and data should be reviewed routinely. This is why it’s best to have a specialist handle the foundation of your operations.
New Wave Accounting has the best business accountants in the Gold Coast area. All of them can help you minimise tax while maximising profits. For small businesses in need of complete accounting services, our accountants are standing by to assist you with your accounting needs. Book a consultation today!