As a small business owner, even if you are selling a great product or providing an in-demand service, your business is only as strong as your ability to keep it profitable and running efficiently.
This is where accounting and bookkeeping systems play an important role. By having them in place, you will know how your business is doing financially and you’ll be able to plan for its successful future, which is closely tied to your own.
Success partly depends on efficient accounting systems and the prospect of setting these up can be daunting, especially if you are not financially inclined to begin with. To make life a little simpler, we have put together a list of seven common accounting errors that small businesses make to help you steer your company in the right direction.
Common accounting errors small businesses make
1. Try to do everything in-house
As the owner of the business, you want to understand exactly what is happening in it financially and may feel you are the best person to set up the financial reporting procedures.
The reality is that your skills are probably better utilised elsewhere in the business. The best practice would be to hire a professional accountant or experienced bookkeeper to set up your reporting systems and outline the procedures for your accounts going forward.
If you can afford one , find yourself a suitable accountant (ideally from the start) as when it comes to tax and reporting to revenue authorities, you may get audited if they discover you prepare your own tax submissions.
2. Mix business and personal expenses
While this may pass when you are working as a sole proprietor or independent contractor, it is not good practice to mix your company and personal expenses once you are running a legitimate business.
Open up a business bank account to run your work-related income and expenditure through, and keep it separate from your private account. This will save you hours of painstaking reconciliations at the end of the tax year when you need to submit your returns and will also reduce the chances of the revenue services auditing you.
3. Keep insufficient supporting paperwork
If your business is paying for certain expenses that are still in your own name, keep all the (digital) paperwork to back up your tax claim. If you don’t have the corresponding paperwork, it’s likely it will be refuted.
4. Assume profits equate to cash flow
Often people assume that upon securing a contract, the difference between the contract value and calculated cost price can be considered as profit.
Unfortunately, this is not always the case. Projects run into snags or take longer to deliver and what was originally budgeted for cost is no longer enough. Keep some of your projected profit aside and accessible, and wait until the completion of the contract to determine profit margins.
5. Choose the wrong accounting software
The software you use in your business should be easy to use, efficient and help the company to function better. In terms of the accounting software for small businesses, it is not simply a case of buying the most cost-effective option on the market. You need to assess your accounting requirements and then choose the correct software to match them.
Consider whether you need to run an inventory module and check if the software includes it. Or you may want to add in a payroll module in addition to your set of business accounts. Are the accessibility and storage options suitable for employees who work remotely? It’s worth checking this too.
6. Forget to set up a cash flow/budget
Some small businesses don’t set up a cash flow for the month. A cash flow helps you to better identify how much income is needed in the business to cover the expenditure. It allows you to quickly notice overspending and highlights areas where reductions need to be made in order to break even.
7. Don’t reconcile accounts often enough
Bank reconciliations are a good way to ensure your accounts are (mostly) up to date. As soon as you complete this, you can pick up any accounting entries that have been missed and still need to be processed.
It will also save you time in the long run as reconciling accounts on a regular basis will help you to identify entries that are missing before you have weeks worth of statements to sift through.