Accounting is complex. But good accounting practices are essential to the financial health of your organisation. Taking your accounting seriously is the best way to set your small business up for success. And it will allow you to operate much more efficiently in the future. Poor accounting practices may threaten the survival of your enterprise.
Here are the most common accounting mistakes made by small business owners. Mistakes compound over time. So it’s important to pay close attention to your accounts right from the very beginning.
A common mistake small business owners make is not preparing up-to-date financial information. When tax season is months away, it’s very tempting to put accounting off until later. But this is a dangerous misstep. The longer accounting mistakes go unnoticed, the more damage they will do.
To make sure your financial information is accurate, update your books regularly. This makes tax season more manageable. It also prevents you making mistakes that will take time and money to fix.
2. Misunderstanding Metrics
New business owners often confuse terms such as revenue, net profit, and cash flow. A common mistake is focusing on revenue rather than profit. This can lead to serious overspending.
Many business owners forget that there can be a significant difference between profit before and after-tax. As well as encouraging overspending, this can lead to significant financial problems when it’s time to file a tax return.
3. Mixing Personal and Business Banking
Sole traders often use their personal bank accounts for their business. But this is not the wisest course of action. You should separate business and personal bank accounts from the outset. This will help to avoid financial blunders.
Trying to remember which transactions were personal and which were business-related is a surefire way to give yourself a headache. It’s also a huge waste of valuable time that could be better spent growing your enterprise. Additionally, you may face an array of legal problems should your business be audited.
Simple mathematical mistakes are easy to make. But an innocent error can compound over time and damage the financial health of your business. It’s important to concentrate and double-check every entry. Accounting software can automate many calculations for you to ensure accuracy. A subscription may prove a worthy investment.
5. Trying to Do It All Yourself
Trying to handle your accounts by yourself is a costly and time-consuming mistake. Many small businesses attempt DIY accounting when they first start out to keep costs low. But this can actually slow down their growth and threaten their financial health.
Hiring a qualified accountant helps business owners to avoid expensive accounting mistakes. And it saves them a huge amount of time, allowing them to focus on growing their business. Accountants can save businesses significant money on their tax returns. Although hiring an accountant does involve extra costs, it should generate a very lucrative return on investment.
An experienced accountant will also have market knowledge which will help business owners present a strong case to potential investors. This will further accelerate the growth of the organisation.
Like it or not, accounting is part and parcel of running a business and it’s very important to do it correctly. By taking accounting seriously from the very beginning and hiring professional help, you can protect your business and focus on growth instead of putting out fires.