Is Your Business Making Any of These 6 Accounting Mistakes?
Make a mistake in a word processing document, and you can easily fix it. Format your spreadsheet cells improperly, and you can correct it. And if you’re not constantly updating your CRM solution, you can retrace your steps and consult with co-workers.
Accounting operations are a different story. Your financial records represent the very core of your business, and if they’re not maintained thoroughly and daily, your entire organization can feel the effects. Vendors not getting paid? Your credit and your business standing are in jeopardy. Invoices not going out? Your cash flow suffers. Employees and payroll taxes not getting paid with absolute precision? The worst case scenario is chilling.
If you’re just launching a business, you can avoid these problems from the start. But even companies that have been in existence for years can adopt new accounting practices midstream. See if any of these mistakes sound familiar.
Using the wrong tax structure. There are a number of both legal and financial ramifications of the business structure you chose when you first formed your company. Are you a sole proprietor when you really should be a Limited Liability Corporation (LLC), for example? The structure you opted for not only legislates what tax return(s) you file, but it also assigns liability. There may be a better option for you, which your financial advisor and attorney can explain to you.
Not having – or updating — a business plan. If you’re just selling products you’ve made on Etsy part-time, this probably isn’t necessary. But you need a business plan if you anticipate:
- Taking on partners and/or employees,
- Needing third-party financing,
- Reporting to outside individuals or organizations,
- Expanding into new product or service lines, or markets, or,
- Being a successful business that continues to grow.
Recording transactions improperly. Accounting software and websites can store contact and employee records, help you keep track of account activity, create multiple types of transactions, generate reports – basically automate what you’ve been doing on paper. They can drastically reduce data entry and make it more accurate, and they’re neatly organized so that you can find minor details in seconds.
Do you know when each of these transaction types would be used?
Accounting solutions are designed so that small businesspeople who don’t understand accounting can still use them, but they still require some knowledge of how the accounting process works. Improper recording of transactions can have a ripple effect, causing problems all the way down the line. This means that you either have to educate yourself, or you need to work closely with a financial advisor. Preferably both.
Neglecting to create critical financial reports. No matter what accounting method you’re using now, you probably have a way to keep track of your income and expenses, what you owe and what you’re owed, whether or not you actually create formal reports like Aged Payables and Unpaid Invoices. Small business accounting solutions can generate a wide variety of customizable reports in seconds.
If you’re not using software or a website (and even if you are), you’ll need to work with a financial advisor to run the advanced reports you need like Balance Sheet and Profit & Loss — and to help you analyze them. You need to understand them yourself, and you must have them if you need to demonstrate your company’s health to an outside organization.
Choosing the wrong accounting software or website. Small businesses do this all the time. They buy too much functionality or too little, both of which can make them hopelessly unusable. You should find a good fit that has room to grow, either through integrated add-ons or step-up versions.
Letting an unqualified individual handle your financial books. You may have been able to handle your own accounting in the early days, but when your company grows and there are more demands on your time, bring someone in. Depending on the size of your business and your budget, you may even need a full-time employee – and if you do, spend the money to acquire a skilled accounting professional.
That option, though, is out of the reach of many small businesses. Outsourcing some or all of your accounting tasks to a reputable financial services firm will ensure that you don’t make these six mistakes. It will help you make better business decisions based on credible interpretation of your finances, and it’ll let you get back to the business of making your business grow.