Adhering to fundamental accounting principles is vital in helping small businesses achieve success and profitability. With proper accounting, you can gain essential data regarding profits, losses, assets, and liabilities, which is critical in evaluating your overall financial performance and growth capacity. Unfortunately, 60% of small business owners are not confident with accounting and finance skills, increasing the likelihood of monetary losses and reputational damage.
Accounting is a complex process that involves monitoring every penny of revenues, costs, vendor payments, and taxes. Therefore, mistakes can quickly happen. Knowing these vanilla pitfalls will guide small businesses to avoid accounting problems and prepare to minimize consequences should they bring an adverse impact to your bottom line. With that, here are the biggest accounting mistakes of every small business owner and tips on preventing them.
1. Failing to Hire an Accounting Professional
Recent statistics reveal that only 30% of small businesses work with accounting professionals. A significant reason contributing to this eye-popping statistic is the overhead that comes with hiring an accountant. Often, small business owners take the burden of managing cash flow and balancing the books in the hopes of saving financial resources.
However, doing so can put your business at risk of failing to keep up with evolving tax laws and losing significant money in the process. Hiring a professional will help you reduce potential errors in crucial areas such as payroll management, cost tracking, and vendor payments. An accounting professional can also evaluate your current financial status and provide you with small business accounting ideas to expand your reach and simultaneously increase your profits.
2. Infrequent Bookkeeping
Infrequent bookkeeping is a norm for small businesses. Small business owners often can’t reconcile their bank accounts with books due to their busy schedules, resulting in unrecorded minor transactions. While this may not seem like a big deal, failing to record these small transactions makes it harder for businesses to understand their current financial status and allocate budget correctly for growth opportunities.
An excellent way to prevent this is to reconcile balance sheet accounts like credit cards and bank statements monthly. This helps you know how much credit you have available and ensure there was no fraudulent activity in your statements. Reconciliation also helps you determine small business accounting challenges before they get out of hand to ensure that they won’t affect your overall operations.
3. Lack of Accounting Software
Data entry errors occasionally occur as your business starts to grow and deals with a massive amount of paperwork. While you cannot avoid it altogether, there are several examples of accounting software you can take a look at to help minimize data entry issues in future transactions. Dynamic accounting software provides robust automation capabilities that enable you to systematize mundane and repetitive tasks to increase efficiency and productivity.
Using accounting solutions will speed up and ensure accuracy in your data entry. It can also reduce overall costs and provide you with accurate financial reports, which you can use to improve company operations. By keeping a robust accounting platform, small business owners can ensure that simple data entry errors won’t hold them back from staying competitive and thriving in their respective industries.
4. Lack of Budget for Starting New Projects
Perhaps one of the most significant accounting mistakes to avoid is starting new projects and ideas without setting a comprehensive budget. Small business owners often get overly-excited with the prospect of their ideas that they dive headfirst into new projects without knowing why they should care about accounting and performing in-depth assessments on their current financial status. This recklessness, resulting in financial problems is often lethal for small businesses.
This increases the likelihood for small business leaders to quit the project amid the process, wasting time and effort. One way to curb this issue is to utilize an accounting solution to keep track of cash flow and determine whether your project ideas are within the organization’s financial capability. By considering the company’s cash flow in every initiative, you can manage project failures and avoid taking the brunt should things go the opposite direction.
5. Using Business Accounts to Pay Personal Transactions
Most small business owners begin funding their operations using personal savings, so it is not uncommon for them to continue with this strategy moving forward. Although setting up a separate account is not legally required unless you are a corporation, doing so helps you monitor transactions quickly. This makes it easier to keep your bookkeeping accurate and avoid the jarring task of scanning through years of receipts and statements come tax time.
Weaving up bank accounts also increases the likelihood of missing business expenses that you can list as a tax deduction. By separating your financial accounts, you can provide an all-encompassing and precise picture of your business finances should you get audited. Using a business account to send and receive payments also increases business credibility and fosters trust among your clients.
Avoiding Simple Accounting Mistakes
Accounting mistakes are inevitable. Now and then, business owners, whether big or small, are bound to make one. However, you can reduce the likelihood of errors by using financial tools to automate repetitive processes and streamline accounting. One of the leading financial software toolkits that can help ensure centralized accounting is Kernel Tools.
Kernel Tools is a powerful financial toolkit designed to help small business owners create invoices and manage finances. Subsequently, it’s designed to help small businesses avoid accounting mistakes. It is brimming with high-end analytics features that make it easier to understand your raw data and collect insights to make smart business decisions. If you want to check it out, you can try it out for free.