The 10 Most Common Accounting Mistakes in Small Businesses
It has been made even more straightforward and easy to manage a small business, especially related to expenses or sales. Accounting software and tools have been built for small businesses from Quickbooks to our platform.
While it is easier for small businesses to manage finances, we cannot deny that it has also given rise to common accounting errors. For example, having the wrong classifications for your business expense to mistakes of mixing personal and business accounts.
A small mistake of a wrong business expense classification, might not cause severe harm but it will affect how much you can deduct or not deduct from your business's taxes. Other mistakes like forgetting to record sales or expenses could open your business up to a tax audit or cause legal issues down the road.
Here are ten accounting errors that can slow down your small business and some tips to avoid them.
Not tracking expenses or sales accurately.
This first mistake appears to be very common, and you know it. As it occurs frequently, your business must have a solution because it's not a new mistake that you have encountered.
These are mistakes entered into your accounting system that may involve:
Transactions recorded in the wrong category
Mistakenly adding a number or missing a number
Incorrect decimal place in your numbered data
Repeating and entering the same transaction
Miscategorized costs that wrongfully impact your profit
All of these mistakes can primarily result in you losing all your money. Whether you are on the verge of paying taxes and other bills, not tracking your finances accurately can break your business.
Remember to track every detail, expense, and transaction because your information reflects how healthy your small business is.
This mistake happens when you do not record all your data, resulting in missing data and a major headache. Even if it's just a small transaction, it is still essential that you record every transaction your business does.
For example, when it comes to transactions paid in cash, deliveries, paid invoices, and other company purchases must be documented and recorded.
It may look unimportant now, but the data is essential to your company, which helps you manage your accounts. Imagine how you can get used to recording the small things for your company; it’s even more important for the big ones. You will make your business grow.
Not separating your business and personal accounts.
This is one common mistake that you should try to avoid. Always draw the line between your private money from that of your small business.
For example, purchasing tablets or additional computers for your business and buying a personal computer at the same time, or buying supplies and then mixing them with your home supplies. It would be much better to make separate purchases for your business and personal needs.
Another example would be regarding your bank accounts. It is essential to create one for your business. If not, it makes your business look bad at accounting financially, especially when it's time to pay your taxes.
Filing your business taxes yourself.
Yes, it will cost you more money to hire someone to do your accounting for you or file taxes for you, but if you want to account for your business's finances correctly, you need to consider it.
Although you may have experienced filing taxes yourself, doing it for your business is still different. Don't be careless, especially since you’re handling the records of the business that took you months and years to build and grow.
The easiest way to avoid mistakes and miscalculations is to make sure that you have a reliable database to store documents about your business's spending, wages, and other data for your financial statements.
Not paying your workers’ deductions according to their status.
You should be able to differentiate between your employees and contractors, and it is essential to know what you have to account for. If not, you might miss required payroll deductions, like social security, unemployment insurance, and health care taxes. If employee deductions are not appropriately administered, your company may be liable.
To avoid this, you must be able to differentiate your employees from your contractors. If someone in your business works eight hours a day, five days a week, and is given benefits, they are full-time employees. If they are paid per project, they are probably your contractors and are not given your business's benefits.
Not managing your business's cash flow.
Continuous cash flow is vital as it helps your business operate daily. Your business must be able to have a strict budget for all expenses. If you forget an expense or overlook a bill, you could create a cash flow limitation.
Mismanaging your expenses could impact business credit, cause credibility issues, and delayed payments. You should issue invoices for clients on clear net terms, offering small discounts when paid early. For contractors, you could negotiate longer net terms to allow for better cash flow management if an unexpected expense does pop up.
Miscommunication with your bookkeeper.
This mistake most commonly happens between you and your bookkeeper.
It is important that your bookkeeper is aware of everything happening in your business. It is your job to keep your bookkeeper updated about every financial expense and transaction you do because it makes it easier to budget and reconcile the accounts.
Your bookkeeper can help categorize expenses, run more detailed finance audits, and help budget for your business. Leaving out expenses, and not telling them about large upcoming expenses could create issues for you and your business.
Not having a backup or copies of receipts.
Although most documents and accounting are online, there are still hard copies of receipts or invoices. We often forget to keep a backup of these physical documents, which could open you up to tax issues or accounting problems if there is a mistake.
Ensure you have a backup prepared of any receipts, invoices, or other financial documents. It could be either digital and/or a physical backup.
Not budgeting properly.
This is another common mistake made by many small businesses. When you have a budget, any unexpected expense could mean making money or losing money in the month. It is essential to keep track of expected items, and expected sales, and update it on a regular basis throughout the month.
Encountering a mistake in a budget could mean losses. We all know how even a small deviation in a personal budget could mean the difference between putting more on a credit card or having enough to save.
Sticking to a budget and regularly updating the budget will help keep your business profitable and healthy.
Running a small business requires a lot of effort and discipline, which isn’t much different in large organizations.
These items show how easy it is to make a financial mistake, which could adversely affect your business.
At PROFIT Bank, we offer free banking and bookkeeping for small businesses. We know how hard it is to keep all your records up to date and keep detailed expense reports. PROFIT Bank can keep your financial statements up to date, collect and match your receipts, and reconcile your transactions with our free banking and bookkeeping services. PROFIT also offers employee cards that can be assigned to different budgets, preventing them from overspending and making your business more profitable.