7 Common Accounting Mistakes Small Business Owners Make

01/06/2021 Image
One of the essential parts of keeping your small business healthy is keeping good financial records. Unfortunately, the majority of small business owners these days prefer to handle their own accounting needs due to their limited budget.
 
Although it’s okay if you know what you’re doing or you have a background in accounting, it’s sometimes wiser to work with professionals to get competent accountancy services suited for your business. This way, you’ll be able to avoid the following common small business accounting mistakes that most owners make:
 
    1. Taking Bookkeeping Lightly
 
Recording everything is the key to effective accounting. From huge payments to small transactions from clients and customers, it’s crucial to ensure that everything’s recorded and categorised properly in your accounts.
 
Regardless of how small your business might be, never take accounting lightly. If you want to get a reliable and accurate picture of the financial status of your small business, you must take your accounting seriously.
 
From categorising various kinds of liabilities and assets properly to performing a monthly check of your accounts and books, establishing serious accounting and bookkeeping systems for your business is the key to keep your small business financially organised.
 
    2. Not Having Clear Budgets For Projects
 
When you proceed into a business project without any clue of how much it might cost you, you’ll easily end up spending more than you intended. For instance, if you want to build your business on social media, you must know the cost involved in detail. The reason behind it is that improper budgeting can make it hard for you to rein in projects that have cost your small business more than it should have.
 
This may cause your business to spend its funds on projects that won’t generate a return on investment. Therefore, it’s best to be aware of how much a project needs to continue operating, which will also make it easier for you to set budgets for bigger projects more accurately.
 
    3. Intertwining Personal And Business Finances
 
When it comes to running a small business, don’t combine work with pleasure. Mixing personal and business finances might give you a hard time differentiating your expenses. Other than that, the Internal Revenue Service (IRS) may consider it as a major red flag. So, whether you’re running a business at home or you have a small brick-and-mortar store, keeping everything separate can make a huge difference in your small business accounting.
 
    4. Managing Your Accounting In-House
 
Are you handling all your accounting and bookkeeping in-house? Well, this is common in small businesses with limited revenues. However, although taking care of the accounting aspect on your own may seem cost-effective, it may actually cost you more in the long run. If you worry about the extra expenses of hiring accountants, just think that managing your accounts on your own won’t really save you money.
 
From the challenging errors to tax deductions that you probably know very little about, handling your accounting in-house may cause you to miss on potential business savings, especially on taxes. If you don’t have technical knowledge in accounting, you can outsource accounting services or just get help from experienced business accountants.
 
    5. Forgetting To Take Note Of Small Transactions
 
Small transactions are easy to forget, especially if you think of them as unimportant, but it’s crucial that your business has records of every cent spent, regardless of how insignificant. These small amounts, when they accumulate, will become significant costs too. This is particularly important in a retail business, where there are countless cash-based transactions. 
 
If you record your small transactions, tallying your accounting sheets will be easier, and you won’t be wondering where this and that amount went to.
 
    6. Not Knowing The Difference Between Cash Flow And Profit
 
What remains from your sales revenue after all your expenses are deducted is called profit. On the other hand, cash flow refers to the money flowing in and out of your business from investments, transactions, and other operational costs. Unfortunately, most small business owners make the mistake of not knowing the difference between the two.
 
You have to bear in mind that any profitable business can run out of cash, especially when cash flow and profit aren’t balanced. This also poses problems because you might not have enough sales to pay for your operational expenses regularly.
 
    7. Utilising The Wrong Accounting Techniques
 
There are several types of accounting methods and these include accrual and cash. Many small businesses, particularly when they’re getting started, tend to use the cash method where cash is recorded as it goes out or comes into your bank account. Typically, this simple method is ideal for simpler small businesses that don’t have inventory and are under a sole proprietorship.
 
As your business grows, this method must be changed to accrual accounting. It’s where expenses and income are recorded as they happen, no matter the amount. Using this method will let owners match revenues to expenses accurately in a certain period. It’ll also make financial information more meaningful and provide a clear image of the financial performance of your business.
 
Conclusion
 
Running a small business is a rewarding and exciting endeavour. However, if you want to achieve success, you should stay on top of your finances by keeping your accounting responsibilities in order. Keep in mind that accounting is a crucial part of any business, but if you know how to avoid the above common mistakes, you can be assured that your business will be financially organised, which is a must in managing businesses.
 

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