Accounting is a significant part of any business endeavor and is not as easy as adding and subtracting. Small businesses often think of handling their own accounting to save money—but this may not be the best idea.
Accounting errors can cost a company to a great extent. You don’t want to mess up your numbers, as this can impede the growth of your business. Small business owners often make mistakes in their early years due to the lack of proper accounting procedures.
Here are six common mistakes that every small business owner must try to avoid.
1. Trying to manage everything on your own
Entrepreneurs, being passionate about their business, have the tendency to want to do everything on their own. When you first started out, you may have been the only person handling everything. The problem arises when you try to manage your accounting on your own, as you may find the quality of services actually deteriorates. Maintaining accounts is important for your business as it grows, but the work required here is time-consuming.
Let’s face it: You cannot handle everything on your own. Learn how to delegate some of your responsibilities to others.
Tip: As a business owner, your time is valuable, and your business needs your attention in order to grow. It makes sense to hire an accounting professional to handle all the accounts.
2. Going for the cheapest methods
Always seeking out for the cheapest methods to save business expenses can end up costing you more money in the long run. For example, you hire an accountant with the cheapest rate, which may at first seems like the least expensive and therefore best option to go with. But what if they make frequent mistakes in your payroll taxes, and you are not able to submit the application on time?
The old saying: “You get what you pay for” often holds true.
Tip: Spend a little extra to get quality work done. If you are always looking for cheap solution, you can often count on getting a poorer result.
3. Not knowing the difference between cash flow and profit
Yes, they are different.
To explain in layman’s terms:
Cash flow is the money which flows in and out of the company from financial activities, investment and other operations. Profit, on the other hand, is what remains from sales revenue after the company’s expenses are subtracted.
In theory, even a profitable company can go broke. Let’s see how: Suppose you bought an item for $100 and sell it for $200. Here you made $100 profit. But, what if the buyer is unable to give money on time? In this case, your business will show the profit—but what about the bills you need to pay meantime? You may not have the cash despite the profit you just earned.
If such mistakes are repeated frequently, you may even go bankrupt.
Tip: Keep track of things you are spending versus the selling. It is recommended to review all your financial statements monthly to get a clear sense of the exact situation your business is in.
4. Mixing business with personal finances
This is a quick and easy way to mess up your business’s finances. The first step when you open a business is to open a bank account immediately. It is advisable to run all income and expenditures through this business bank account.
You may still be paying for many expenditures out of own pocket however, so keeping a record for such expenses is essential. These are valuable tax deductions. If there is no record, you cannot deduct it—which will cost you dollars in lost tax deductions.
Tip: Keep your personal and business accounts separate for more concise and pain-free record keeping.