By Miranda Fraraccio , Contributor, US Chamber of Commerce
Here are some of the most common accounting errors small businesses make.
Lack of organization
Bookkeeping requires great organizational skills. You’ll have to record every transaction, store or digitize receipts for future reference, calculate taxes, and more. If you’re not properly tracking or storing information — including failing to separate your business and personal finances — you’ll likely miss an important transaction or lose a receipt, which could get you into trouble come tax season.
Not following a regular accounting schedule
It’s easy to overlook your accounting responsibilities without a regular accounting schedule and let financial records pile up. Li Han Tan, Co-Founder and Principal Consultant of W.L.P. Group, recommends implementing a structured expense and income tracking system.
“Neglecting regular bookkeeping and allowing records to accumulate unaddressed [leads] to disorganized financial data,” Tan said. “This can be avoided by scheduling dedicated time each week for bookkeeping tasks or by using automation tools to streamline data entry.”
Failing to reconcile accounts
While you’re recording cash flow and other financial data in your books, you want to regularly go back and ensure your bank account reflects that same balance. If there’s a gap between the two, there is likely an error that requires immediate attention to prevent the issue from worsening. Regularly reviewing your business bank accounts against your books can also help you catch any fraudulent transactions that may have occurred.
Not paying enough attention to cash flow
Small businesses that don’t accurately forecast and monitor their cash flow could face serious financial and operational trouble, warns Kathy Gilchrist, Founder and Chief Financial Officer at Cardinal Bookkeeping & Advisory.
“Many business owners don’t understand that revenue earned is not the same as cash in the bank,” Gilchrist stressed. “It is critical to know the timing of money coming in and money going out in order to maintain a successful business long-term.”
Taking a reactive approach to accounting
According to David Emmerman, Head of Enterprise Sales at Xero, small businesses often take a reactive approach to their accounting, which means they begin addressing financial tasks only when faced with tax returns, sales tax, or payroll obligations.
“This reactive approach is a large disadvantage for business owners, as they’re constantly playing catch up, leading to disorganization and lack of financial foresight for their business,” said Emmerman.
To avoid this pitfall, Emmerman recommended prioritizing consistent and proactive financial management from Day One. This will ensure you remain organized and well-informed about your finances throughout the year, so you can be prepared if you’re faced with a periodic (or unexpected) financial obligation.
If you’re keeping track of your business finances in an Excel spreadsheet or a paper ledger, you may want to consider upgrading to software.
Not backing up your data
Imagine if the device on which you stored your business’s financial information and customer data was lost, hacked, or stolen — and you didn’t have it backed up anywhere. These issues can arise at any time, and you need to be prepared to restore your books. Fortunately, there are many backup options available that will enable you to protect your business account.
Trying to handle bookkeeping on their own
Many small business owners attempt to save money by handling bookkeeping on their own. However, this approach can lead to costly financial errors.
“The biggest mistake I see is underestimating the value of professional bookkeeping and accounting services,” said Chris Rivera, Founder of The Ecommerce Accountants. “Avoiding this mistake means prioritizing the budget for a qualified bookkeeper or accountant, ensuring accurate financials and making tax season far less stressful.”
Not using an accounting software
If you’re keeping track of your business finances in an Excel spreadsheet or a paper ledger, you may want to consider upgrading to software. Investing in the right accounting software can help you avoid mistakes and ultimately make it easier to handle your finances.
Most accounting software integrates with your bank account, meaning less manual work for you. These programs also make it easy to back up your data in case of an emergency. Additionally, if you need to outsource your accounting in the future, having centralized software will ensure the accountant has all the historical data they need to manage your books, payroll, and taxes.
How to automate your accounting for accuracy
Though you may prefer the old-school approach, paper records can cause more harm than good when it comes to your accounting. Instead, Anna Cox, Owner of Cox Accounting and Analytics, LLC, suggests implementing an AI-powered accounting platform to ensure the job is correct.
“[Avoid] paper records as much as possible, including paper receipts,” Cox suggested. “There are many tools… that integrate directly with [your] bank accounts, negating the need for paper statements and tracking tools.”
These tools, Cox highlights, can streamline the payment process and negate the need for your business to accept physical payments by allowing ACH and credit card payments instead.
To find the right software for you, look for the following features:
- Intelligent AI solutions and insights: Opt for software with AI and machine-learning capabilities to automate bookkeeping tasks, streamline invoicing and payment processes, and deliver actionable accounting insights.
- System integration and mobile accessibility: Ensure the software seamlessly integrates with your core business tools, such as your point-of-sales system, inventory management software, and customer relationship management (CRM) platform. If on-the-go access is important to your business, ensure it has mobile accessibility, too.
- Built-in, customizable tools: Many systems offer customizable template options to help reduce manual input and automate processes like payroll and bookkeeping. Look for ones that provide tools that can streamline the tasks your business handles most.
- Comprehensive security: Accounting software stores sensitive financial information. Choose a system that protects your business’s data with secure features like multi-factor authentication and encryption.
With a combination of the right tools, professional help, and a proactive mindset about finances, your business can avoid many common mistakes that can lead to financial trouble.
Image by Firmbee from Pixabay