Running a small business comes with lots of challenges. These challenges can make you focus on many things at the same time. One crucial thing to focus on is the company’s finances. If you want your business to succeed and grow over time, you must closely monitor your finances. However, many small business owners don’t pay enough attention to important financial matters. Here are five common accounting mistakes that small businesses often make. I’ll also share some tips on how you can avoid these mistakes.
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1. Not bringing in finance experts
Are you sure you’re doing right by your employees’ tax withholdings? Are you keeping tabs on every financial move, no matter how small? Messing up here could cost you more than what you’d save by flying solo.
Even skilled accountants and bookkeepers can slip up, but they’re the finance experts, not you. Maybe you’re good with numbers, but think about it: is it worth the hassle to handle all your business’s finances yourself? Not bringing in a professional can make mistakes, such as:
- Goofing up expense tracking.
- Missing vendor payments.
- Messing up payroll.
The best solution
Consider hiring a bookkeeper to diligently record every financial move your business makes, often using top-notch accounting software.
They’re your wingmen for tax planning and spotting trends in your financial data. They’re like guardians, keeping you from stumbling into financial pitfalls.
2. Inaccurate monitoring of business costs
Accurate records are essential for effective accounting and bookkeeping. Without precise records, your business could lose money and miss necessary bill payments, which could lead to headaches during tax season and hinder growth.
Inaccuracies in financial tracking go beyond simple data entry errors or missed bill payments. They directly impact your business’s bottom line and make it difficult to plan for the future.
The best solution
Tracking every transaction is vital. This allows for an accurate assessment of your business’s financial well-being. Having a financial professional handle your books is beneficial. Integrating accounting software can also enhance efficiency. Accounting software automatically records all financial transactions, including bill payments, deposits, withdrawals, and invoices.
also read: Accounting services for small business for maximum growth
3. Mixing business accounts with personal finances
Small business owners often mix up their personal and business finances. This happens often, especially when a business is just starting. You might head to a big store like Costco or Walmart to grab office supplies. While there, you might also pick up a few things for your home.
But it’s not just about putting business and personal stuff on the same receipt. A survey by Clutch found that more than a quarter of small business owners don’t have a separate bank account for their business. That’s not good.
- Having only one account can make it hard to tell which transactions are personal and which are for your business.
- This can cause significant problems when it’s time to do your taxes. If your financial records are messy, you might miss out on deducting business expenses.
- Mixing business and personal accounts could also cause issues when applying for a loan or credit line. Lenders must clearly see a business’s finances when requesting a loan.
The best solution
It’s time to stop. Open a separate business bank account. Your bank might even offer you some perks for doing this. When you’re out shopping, keep your business and personal purchases separate.
4. Inefficiently managing billing
Cash flow keeps a business going every day. Billing customers efficiently is key to ensuring money comes in fast, which allows you to pay for expenses and payroll.
But if a business isn’t good at accounting, it can have cash flow problems. Invoices might be late, and customers may take longer to pay, leaving the business struggling to pay its bills on time.
Not paying bills on time isn’t the only issue. Many businesses fail because of cash flow problems, and some even run out of money completely.
The best solution
To improve billing, send invoices right after you finish a transaction. Emailing invoices is faster than sending them by mail. You can also use software to send invoices automatically, making the whole process smoother.
5. Going paperless without backups
In today’s digital world, many companies are ditching paper, which has pros and cons. Without paper, they no longer have to deal with bulky file cabinets, but the tax authority will ask for the necessary documents during an audit.
The best solution
It’s necessary for any small business to have a backup plan, just in case they lose important data or it gets messed up. Saving certain documents for at least seven years is smart. Here’s what you should keep:
- Payroll tax records.
- Business tax returns.
- Business ownership records.
- Records from operations.
- Current employee information.
- Accountant records.
Final thoughts
For small businesses to thrive, handling money well is key. Making accounting mistakes can hurt a business, so it’s super important to get it right. Bringing in finance pros can help a lot. They keep track of money accurately and stop mistakes in spending, paying vendors, and paying employees. Keeping a close eye on how much the business spends, keeping business and personal money separate, and managing bills well are all important things to do. These steps help keep the company safe from money problems, make things run smoothly, and help owners make wise choices.
also read: Profit and loss accounting: Secrets to business success
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FAQs
Why is budgeting important for small businesses?
Budgeting is necessary for small businesses for several reasons.
- Firstly, it helps in planning expenses effectively.
- Secondly, it allows for managing cash flow efficiently.
- Thirdly, it assists in setting financial goals.
- Lastly, it helps identify areas where costs can be minimized, ultimately leading to better decision-making and financial success.
How often should I reconcile my business accounts?
It’s essential to reconcile your business accounts, such as bank and credit card statements, at least once a month. This regularity ensures your financial records are accurate. Additionally, it helps promptly identify any discrepancies or errors that may arise.
How can I avoid cash flow problems in my small business?
To avoid cash flow problems, you can take several steps.
- First, monitor your cash flow regularly to stay informed about your financial situation.
- Second, maintain adequate reserves to cover unexpected expenses.
- Third, ensure your invoice promptly and follow up on overdue payments to improve cash inflow.
- Fourth, negotiate favourable payment terms with suppliers to manage cash outflow better.
- Lastly, consider securing a line of credit as a backup measure.
When should I get professional accounting help for my small business?
Certain indicators suggest that your small business needs professional accounting assistance. These include struggling to keep up with bookkeeping tasks, encountering complex tax issues, experiencing cash flow problems, and requiring financial planning and analysis assistance.