Most of us who run businesses aren’t accountants or tax professionals. As a business owner, there’s almost nothing scarier than hearing: “You’ve made a mistake with your books.”
The prospect of messing up taxes or payroll or any number of business-related accounting can be quite distressing – and also have enormous ramifications for your business. Whether you’re risking cash flow issues, tax penalties or numerous other consequences, ignorance won’t be an adequate defense.
As a business owner, you should understand your accounting systems enough to ensure you’re not making one of these nine common accounting mistakes.
Source: Pixabay
1. Reconciling Your Receivables Late
It’s important to remember that there are three steps to properly accounting for a transaction in your business: 1) issue the invoice, which can prompt the creation of a receivable, 2) receive the payment from your customer, and 3) record that payment against the receivable.
If you’re not reconciling your payments in a timely fashion, you might be left with information in your revenue account that doesn’t match your receivables report. If you’re waiting until a hard deadline like tax day to go through and reconcile your receivables, you’re wasting a lot of time and potentially risking costly mistakes due to inaccurate ledgers.
As accounting software company Intuit Quickbooks writes on their blog, “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.”
How to prevent this: Always reconcile your receivables on-time. The best method would be to do it right at the point of payment, but if that’s not possible, build in a weekly or monthly reconciliation process. Better yet, use an accounting software where you can apply payments directly to receivables automatically.
2. Not Recording Cash Expenses
We’re all so digital these days that sometimes it’s hard to remember everything that isn’t automatically recorded for us.
Take your business expenses, for instance. If you’re always relying on your credit card or automatic billing to prompt your accounting software to record an expense for you, you’re probably forgetting a few things.
What if you took a client out for coffee and paid with the spare bills in your pocket? What if you bought a new desk for your office in cash from a secondhand shop?
Those cash expenses need to be recorded as well, or you won’t have an accurate picture of your business expenses and might end up overpaying in taxes.
How to prevent this: The first step is to minimise how often you use cash for business expenses. Whenever possible, default to a card or account connected to your business, even for tiny expenses like coffee for clients.
If you must use cash, develop an easy system for instantly recording that expense. Some accounting softwares have mobile phone apps where you can record a transaction in a few seconds, or you could set up a weekly reminder to ask yourself, “Did I use cash for anything business-related this week? Check your receipts!”
3. Never Looking at Business Reports (or the Wrong Ones)
If you’re asking that question, chances are you’re making the mistake of not knowing enough about your business’ financial health. Not understanding the micro and macro trends of your finances can lead to disaster multiple ways. You’ll have no idea what you can spend or what your growth potential is, and you may be woefully unprepared for economic downturns or the loss of a big client.
A sample cash flow statement, a type of business report business owners should be reviewing. Source: Accounting Basics
At a minimum, you should be looking at cashflow reports, accounts receivable and payable, your balance sheet, and income statement. (For more info on these reports, check out this article’s bonus resource.)
How to prevent this: The best way to fix this issue is simply to start generating and looking at reports. You can start small, with just using built-in dashboards inside your accounting software or asking your accountant to produce a simple weekly report.
Eventually, you should work with a professional to determine the most important metrics for your business and look at the reports that give you those crucial financial factors.
These can be done on a regular schedule, such as weekly or monthly, as well as annually. They should be designed to help you get insight into how your business fares at the moment, as well as help you project into the future.
4. Relying on Armchair Accountants and Not Professionals
While you may have a lot of well-meaning friends or remarkable Google-fu, accounting isn’t an area you should entrust to the opinions of friends strangers on the Internet, no matter how knowledgeable they may seem.
There’s no one-size-fits-all generic advice that’s safe to follow to the letter – it’s simply too much of a risk to your business.
How to prevent this: If you’ve already been making accounting decisions based on things you read or heard, get to a professional ASAP. You may have managed to set things up correctly or get started on your own, but an accounting professional will be able to set you up for when things get more complex down the road.
This doesn’t mean you have to hire a full-time accountant – a partnership with a financial professional combined with accounting software can work just fine for your needs. Just ensure you’re doing the right thing for your business.
5. Relying on Bad Professionals
On the other side of no. 4, not all financial professionals are infallible. Horror stories abound of businesses who entrusted crooked CPAs as well. Finding the right accounting partner matters just as much as finding the right accounting software – your accountant could be a reliable partner to help you grow your business or they could be the reason your business fails, so it’s a crucial position.
How to prevent this: Rely heavily on referrals when selecting an accountant. If they have businesses you trust backing up their competence, chances are better that you’ve found a true professional. Do your due diligence on everyone you’re considering, just like you would with a potential hire.
You can also consider less-tangible things like personality fit, as you’ll be spending at least some time each month interacting personally with your accountant. Also ensure their services and fees line up with your needs before you spend too much time on intangibles.
6. You Have No Idea What Your Accountant is Saying
Your work as a business owner doesn’t end now that you’ve found your amazing accountant. More horror stories abound of businesses who trusted excellent accountants who simply made honest mistakes that the business owner didn’t catch or due to a misunderstanding.
Like many specialised professions, accounting is full of jargon. It’s your responsibility to make sure you know what your accountant is talking about.
How to prevent this: If they’ve mentioned you’re “not meeting the acid test due to low levels of liquid assets” and you’re wondering if they mean the company hot tub – then you need to ask for a jargon check.
You have a right to ask your financial professionals to explain things to you without the use of jargon, or to explain what a certain phrase or word means in the context of your business. Asking them to keep explanations specific to your situation can help you absorb the lesson more quickly and ask better follow-up questions.
7. Using the Wrong Accounting Software (or Misusing Your Current One)
Accounting softwares aren’t magical – they only work as well as we use them. If you’re using a software that doesn’t have the right feature set for your needs, you might be forced to create workarounds and put yourself at risk. If you’re using a software that’s too robust for your needs and you’re not using it correctly, you could be putting yourself at risk.
How to prevent this: Be methodical about how you choose the accounting software for your business. Prioritise the items you absolutely need, and be forward thinking when you make your choice. You might need more features in the future than you do now.
For instance, you may not currently have employees, but you may plan to hire in the near future. If your software doesn’t include payroll processing, you’ll have to switch or link together another service, risking mistakes in the process.
8. Your Business and Personal Finances Don’t Have Boundaries
It’s common to run into issues with blended business and personal finances, especially when you’re first starting out. Many business owners end up loaning money to the business or using a personal credit card to make a business-related purchase.
A situation where you’ve set up inadequate boundaries and record-keeping between personal and business accounts is rife for mistakes and potential fraud. It makes it much more likely for judges to be able to lift the corporate veil, exposing you to a lot more risk.
How to prevent this: The very first thing to do is make sure you actually have separate accounts. You need a business account separate from all your personal finances. Most other issues with personal and business finances blending will happen when you improperly record.
For instance, if you make a personal loan to your business, it needs to be handled as if someone else loaned you that money with the right paperwork, documentation and repayment plan. Or if you accidentally use your personal credit card for a business expense, you need to record that expense manually like you would a cash transaction, and keep the receipt.
9. Not Paying Attention to International Tax Rules
In the modern era of business, your customers could come from anywhere. If you have international customers, you must stay on top of international digital tax rules and do your accounting accordingly.
If you aren’t handling your taxes correctly, especially for international e-commerce businesses, you risk a whole host of violations in multiple countries, depending on how you’re set up.
How to prevent this: Some accounting softwares can help with this (Quaderno does, for instance), by automatically calculating and filing VAT or other taxes based on your customers’ countries of origin. If your software doesn’t do this and you process a high volume of foreign-based payments, consider switching to software that assists with this. At the very least, consult your accounting professional to ensure that you’ve done everything you’re supposed to do.
Source: Pixabay
Paying Attention as Business Owners
Running your business requires a lot of dedication. With so many responsibilities, it can be tempting to let your accounting go by the wayside or entrust it entirely to someone else.
Unfortunately, both options open up your business to enormous risks. As a business owner, you need to be paying attention to what’s going on with your accounting and finances.
Finding a capable accountant and the right accounting software can help keep you focused on the financial data that matters. And once that’s covered, you can even take it a step further — smart accounting can increase your tax returns each year! Read about our three tips to boost your business tax return.