Having accurate accounting records is not optional when it comes to running a business. It is critical for keeping the business open and growing. Many small business owners don't realize how critical accurate accounting is. They make mistakes that could end up costing them a lot in the long run.
Avoid These Accounting Mistakes
Here are seven common accounting mistakes that you should avoid if you are a small business owner.
- Not reconciling bank accounts routinely. Bank reconciliation tells the business owner which checks have cleared, which ones are outstanding, and if all deposits and credits were done properly. If the business is not reconciling the accounts each month, a simple, undetected problem can snowball into a major mess.
- Failing to apply payments to open receivables. If a customer sends you a payment, you need to record it properly. This tells you what that customer still owes and allows you to track cash flowing into the business.
- Failing to back up data. What would happen if your accounting system completely crashed? If you do not have regular back-ups taken of your business data, you are vulnerable. Without your accounting data, you don't know who paid, who didn't pay, who you owe, and who you paid off. And that can end up sinking your business.
- Trying to do everything on your own. Many businesses start out as one-person operations, with the owner doing everything. That might work for the first few months, but at some point, the owner needs to bring in an accountant to help. Accounting is much more than simple addition and subtraction. It involves taxes, depreciation, and other advanced accounting concepts that most business owners are not qualified to handle.
- Going for the cheapest option at the expense of everything else. A cheap accountant may sound good for the profit margin. But, if the cheap accountant is not doing his or her job, how much of a bargain is it? You want an accountant with a good reputation and a solid list of long-term clients.
- Not knowing the difference between cash flow and profits. Cash flow is the amount of money that comes into and out of your business each month. But it is not the same as profits. Profits are the amount of money left over after all the expenses for the month are calculated and subtracted from the sales.
- Mixing business and personal finances. This can sink your business faster than just about anything. It is essential that the business have its own bank account. That account is where deposits of business income go and where business expenditures are paid. Even if you have to put an infusion of personal cash to float the business through a rough patch, the money should be put into that account for tracking purposes.
Don't make these common accounting mistakes if you are a business owner. Even one of these mistakes can end up costing you a lot in the long run.