Here are 10 accounting mistakes business owners commonly make and the reasons why these errors—both calculated and inadvertent—can be so detrimental.
1. Falling Behind in Entries and Reconciliation
Time is definitely not on the side of the small business owner, especially when there may be daily fires to put out. Suddenly, months have passed without making any entries in the books nor reconciling any business checking statements, credit card statements, sales tax accounts or other types of financial accounts. This means financial statements and reports are not current. Without up-to-date information, it is challenging to make sound business decisions.
For example, spending money may result in a negative balance or reduced profitability because unpaid invoices have gone unnoticed. Not entering financial data can also lead to problems with suppliers, where invoices to be paid may go unnoticed, leading to problems in getting materials or even a bad credit rating for the business.
2. Struggling to Be Accounting Software Savvy
In a rush to get the business set up, some business owners may not have spent time to properly learn the accounting software they selected. Not knowing what the accounting software is capable of doing means you could easily make a mistake or miss out on some powerful functionality. Not setting up a software system correctly could also lead to unused reporting capability and incomplete information that results in bad business decisions.
3. Not Seeing the Reports for the Tools
Accounting is not just a tool for entering financial data in order to fulfill state and federal tax regulationsor tell you how much money is in the bank. Instead, accounting is a powerful mechanism that provides answers to questions related to how a business owner’s strategic decisions are working or not working.
That’s why a big mistake is not using the plethora of business reports that can be made from the financial data, including accounts-payable aging, accounts-receivable aging and reports about company profitability. These reports can show where issues are, including determining where clients are not paying in order to maintain cash flow. If these aging reports are not produced, a business owner will not know who is behind on payments and may miss clients who are not happy with quality.
4. Mixing Business and Personal Finances
One of the most common accounting mistakes business owners make is to mix their business and personal finances. Keep these separate and distinct to provide a more accurate track record of what was really used for business and what specifically related to personal use only.
For example, while the IRS can understand that a certain number of meals throughout a month might be business-related, those tickets to a concert or video games on the business credit card clearly do not. The business can also be impacted because more money is being spent on the owner’s life rather than being reinvested to grow the company.
For these reasons, it is better to maintain separate accounts in order to mentally and physically look at the business as a separate entity rather than an ATM. In the long run, this will help the business to grow and still provide a business owner with significant income.
5. Trashing Receipts
Paper trails still count, but even those can become digitized. However receipts are kept, the point is that they need to be retained. Receipts provide answers to any mistakes or gaps in accounting records, and many offer additional deduction opportunities come tax time.
Even more importantly, if the IRS comes calling, those receipts deliver proof to validate the numbers on financial statements. Not having those receipts means the IRS can deem those entries as invalid deductions, changing tax amounts and potentially leading to penalties.
6. Making Math Mistakes
In the rush to get the books done after a long day, math mistakes can happen quite easily, even when using automated accounting solutions. Math mistakes can also result from posting entries to the wrong account or even just making typos.
Combine that with Accounting Mistake No. 1 on the list, and this can be a recipe for financial disaster because these math mistakes can then go unnoticed for months if not regularly checked for accuracy. Suddenly, one math mistake results in a tangled web of accounting errors, leading to bigger problems.
7. Focusing Only on the Short Term
With the day-to-day issues of running a business, it is easy to fixate on the short term and completely forget about the future. Accounting, however, is not just keeping track of today’s numbers. It’s also about forecasting future growth and identifying any financial risk from current financial decisions or results.
With the need to look to the future, there are many issues to consider, including long-term accounting issues and opportunities for company growth. Also pay attention to any related operational concerns, such as the need to add more accounting staff to handle the growing business. For example, a business owner may add a new subsidiary that makes different products or add locations in other countries.
8. Hiring the Wrong Person
Whether it is a family member, an inexperienced office temp or even the business owner who hires themselves to do the accounting, the wrong person can create financial problems that go beyond just making uninformed decisions. In fact, trying to save money or help a loved one out can actually lead to audits or penalties. Hiring the wrong person can create issues that haunt your business for many years to come.
This can occur if the person hired does not know how to classify expenses correctly or create accurate journal entries. He or she may not have knowledge of tax laws, including what can be included in the accounting for a business and what must be kept separate. He or she may also not be familiar withinvoicing or currency exchange when accounting for business elsewhere in the world.
The right accounting professional can help a business owner to avoid errors that are detrimental to the business. These inadvertent errors could include the type of accounting method used, such as cash versus accrual, as well as mistakes related to interpretation of facts about assets, bad-faith estimates that involve unrealistic conclusions about specific assets and incorrect recognition related to accrual of expenses.
9. Thinking Technology Is Always the Solution
Throwing money at technology does not guarantee accounting mistakes will be avoided. After all, you still need to make the technology work correctly. Also, not all technology was created equally or is relevant to a specific businesses.
For example, a small business owner does not have to invest in expensive enterprise accounting systems, but can likely utilize a system that works well with simpler financial statements and be able to scale as the business grows. Therefore, it is important to select the technology that matches the individual need and application for a business. This is where good planning, strategic thinking and research become invaluable to ensure that technology does not add to the accounting mistakes.
10. Not Letting Go
As a business owner, it is tough to admit when the Superman or Wonder Woman cape doesn’t fit, but there are situations where not getting professional help is a major mistake. It is okay to admit that accounting may not be your area of expertise.
You likely started a company with a great idea or solution that had nothing to do with accounting, and that is where you should focus. There are accounting professionals out there that can handle invoicing or other accounting functions in order to let you concentrate on what you do best. As the business grows, there is a time to migrate from the DIY approach and to utilize other responsible parties, including an accounting professional.
The financial side of running a business can make or break your company. Learning when to use tools or professionals to help in areas you struggle with can be one of the biggest issues for business owners. For more tips on how to improve your accounting, see the article on the seven accounting formulas business owners need to know.