The most common accounting mistakes made by small businesses and how to avoid them
Whether you’re a new or experienced small business owner, financial responsibilities—including accounting—can take a while to get the hang of. There are so many moving parts to keep track of, not to mention a lot of math to do, which makes mistakes almost inevitable. Some accounting mistakes are easy to avoid once you learn the ropes, while others might not be so simple to catch.
However, big or small, some accounting mistakes can have a major impact. What’s more, according to Wasp Barcode’s State of Small Business Report, only 26% of business owners consider themselves “very knowledgeable” about accounting. That’s why many companies bring on an accountant as soon as they can. But if that isn’t an option for you just yet, don’t worry. We’ll cover some of the most common accounting mistakes made by small businesses and how to avoid them, so you can protect your business.
Accounting mistake #1: Calculation errors
Unsurprisingly, simple mathematical errors are the most common accounting mistake that business owners and even accountants themselves can make. It’s only human to accidentally miscalculate when you’ve been manually crunching numbers, especially in large sets.
While the most obvious way to reduce calculation errors is to slow down and double-check your entries, that’s not the only solution. Switching over to automated accounting can eliminate the need for manual entry and increase accuracy by pulling data straight from the source.
Accounting mistake #2: Poor recordkeeping
One of the most important accounting practices is good organization. Every transaction needs to be recorded correctly or it can throw off your calculations for the entire month. Not only that, but records are required when it comes time to file your taxes. Otherwise, you could be in trouble if the IRS decides to audit you.
So, what can you do to improve your recordkeeping? Putting a system in place for how you store receipts and how you track transactions is a good place to start. It’s also wise to separate your business and personal expenses, so business transactions are easier to keep track of. Open a bank account specifically for business transactions—both checking and savings accounts are a good idea.
Accounting mistake #3: Mass data entry
Many business owners have been known to do their data entry in bulk. They’ll set aside one night a week or month where they record all of the transactions that have taken place during that period. While it might be tempting to wait and do your bookkeeping all at once, it can significantly increase your risk of making mistakes. Not only that, but it can take up way more of your time instead of streamlining your workflow.
Instead of recording a bunch of transactions at once, enter them as they occur, or cut out time at the end of every day. This will help improve accuracy and prevent anything from falling through the cracks.
If this sounds like too much work—which it can be—consider using accounting software, which can automate this process. That way, you can save time and the headache of going back through all those transactions. Plus, you won’t have to worry about missing any in the rush to get everything in the system.
Accounting mistake #4: Trying to do everything yourself
Running a business comes with a lot of responsibilities that must be juggled. And, when you have too many things to keep track of, some inevitably fall through the cracks. However, when it comes to financial records, this can have dire consequences. That’s why it’s important to delegate certain tasks, like handling your bookkeeping and accounting.
We understand that, as a business owner, it can be difficult to relinquish responsibilities, especially when it requires you to trust others with sensitive information. However, it’s important to delegate responsibilities—specifically those that require professional knowledge.
When it comes to accounting, it’s best to seek professional help if you can. Having a knowledgeable finance team to assist you with bookkeeping and accounting responsibilities can lighten your load and improve your company’s financial situation. Since they will have the know-how to complete your books correctly, you will have a better understanding of your financial standing.
Another measure you can take to ease your peace of mind is running a background check on whomever you plan to hire. This will give you some insight into their history and financial habits, allowing you to determine whether you feel they’re trustworthy. This is always a good idea when you’re hiring for positions that will have access to sensitive information like financial accounts and data.
Accounting mistake #5: Skipping key steps
To save time and resources, business owners have to find ways to be more efficient, which often involves cutting corners. However, your accounting processes are not the place to do this.
Some common steps that are often cut for the sake of time include failing to reconcile accounts, back up books, or record small transactions. While these might seem insignificant on their own, doing this for months can contribute to big problems in the long run. For example, not reconciling your accounts can cause you to miss fraudulent transactions, resulting in your business continuing to lose money.
To ensure you’re taking all the necessary steps when completing accounting tasks, consider creating a checklist. Or, you could bring on a dedicated financial professional to take over for you. That way, you know someone is dedicated to making sure everything that needs to get done, gets done.
Accounting mistake #6: Not automating invoices
One of the biggest challenges small businesses face is managing invoices. From sending them out in a timely manner to following up when a client fails to pay, there’s a lot to keep up on.
According to Entrepreneur, small businesses in the U.S. have an average of $84,000 in unpaid invoices. That’s a lot of money to be waiting on, especially in the formative years of your business. Not only does that equate to a lot of missing funds that can be used to grow your business, but it can lead to poor cash flow management.
To avoid missing invoices or falling behind on payment collections, consider automating invoices. With modern accounting software, you can automatically generate invoices when an order is made, schedule follow-up emails, and close out paid invoices. Automating invoices can help increase payment collection and help you keep incoming cash more consistent.
Improve your accounting processes, strengthen your financial stability
Good accounting practices are a cornerstone of financial stability. By reevaluating and cleaning up your business’s accounting processes, you can improve the financial health of your company. While it might take a bit of effort, you can rest assured it will pay off in the long run. The ideal first step is investing in high-quality financial software that allows you to automate most of your accounting tasks. Then, you’ll be in a much better place to make financial decisions, prepare for tax season, and take your business to the next level.
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