Running your business is not a small act in which managing accounts is an art that requires skill, focus, and attention. From time to time, every business owner tends to make mistakes. From losing a sale to making a wrong turn, learning from mistakes fuels growth, improvement, and innovation.
The most sensitive part of the business where mistakes usually happen is the account and bookkeeping section. Mistakes like calculation errors or wrongly noting transactions can cause companies to have inaccurate accounting.
Entrepreneurs and business owners often neglect the impact and threat these mistakes pose in the long-term. Over time, poor accounting practices can disrupt fiscal health, and repeated mistakes might cause insolvency.
Accounting mistakes include basic calculation errors, incorrect entries, or document filing issues. Some of the most common accounting mistakes include:
Mixing Personal and Business Finances
One of the biggest accounting mistakes that entrepreneurs make is mixing personal and business finances. Keeping these two entities separate is of utmost importance, or else determining the usage becomes difficult.
The correct estimation of finances and calculation of profit generated for investment capital becomes difficult. For instance, using a company credit card for a personal vacation later presents a burden on the company’s income.
Similarly, purchasing inventory items from a personal account will debt your private expenses. Ensure that you separate these two accounts to have a smooth transaction for business and personal usage.
Handling Accounts By Yourself
Many business owners believe that owning and running their business makes them better than everyone else. That factor might be true to some extent but does not mean you can manage the accounts effectively.
Your risk level increases if you try to manage bookkeeping and accounts by yourself. You have other operational areas to focus on that you might neglect in favor of account management. Employers are determining the potential capabilities of candidates who are upgrading their practices to grow in the field.
One such example would be enrolling in a bachelor’s or masters in accounting online program. Hiring them as internees and later on as permanent employees would be a smart move. Because this way, you will have a complete picture of the candidate’s strength.
Assuming Accounts Mean Cash Flows
Another common mistake that entrepreneurs make is assuming profits as cash flows. For instance, you closed a deal of $50,000 that will take three months to fulfill. You receive $20,000 as a start of the project.
You book the remaining $30,000 as a profit before you even deliver anything. This assumption is a huge mistake on your part. Suppose the deal goes awry or takes more months, significantly costing you more. You might feel tempted to write everything down and make your business seem healthier.
In reality, you will give a disoriented figure of your business condition rather than the actual picture. Never assume that a potential profit figure in account means you have generated cash flow.
Not Taking Organization Seriously
In business account handling, the organization is a critical point. It means keeping records of expenses, using business credit cards, updating books, noting petty cash, etc.
The organization is to record all these activities incurred and not mix personal or business finances. As an entrepreneur, you might feel tempted to complete your errands while you seek supplies. However, you have to get separate receipts for every inventory item and keep them in individual files.
It is suitable to always get a receipt for every expense, so auditors have less chance to challenge them.
Lack of Documentation
Your business can lose valuable tax deductions if you lack certain business documents. Without any supporting document, taxation authorities do not consider expense items as valid. To ensure proper documentation, you have to instill strict policies and encourage everyone to follow them.
Do not entertain reimbursements or expense reports without any receipts attached. Invest in accounting software to record every transaction and document it effectively. Using software not only makes accounting more manageable but also allows you to go paperless.
Encourage your vendors to present their bill or invoice before demanding payments for a service.
Managing accounts and bookkeeping is easy to put off when your business grows or indulges in other activities. Procrastination usually happens during the end of year closing when owners look for ways to manage them.
Procrastinating causes a pile of receipts to gather, making it hard for anyone to work on its posting. It creates a waste of time, effort, and resources to manage and causes the reoccurrence of errors. To avoid procrastination, schedule book-working time and do it piece by piece.
Hire a professional accountant to help you manage your account effectively.
Making Data Entry Errors
Data entry errors may occur from time to time, and you cannot avoid all of them. However, you have to follow a strict rule and perform reconciliations promptly to ensure the identification of the wrong entry and its correction.
You have to run monthly reconciliation on bank transactions along with accounts payable and receivables. Run regular vendor or customer payment reports to ensure that all receipts and disbursements seem reasonable. Review any unusual transaction to ensure no data entry mistake remains and transactions remain accurate.
Neglecting Small Transaction Record
Managing small business transactions and their records is also essential for a business. Petty cash transactions may seem unimportant, but you need to keep a record of its spending, nevertheless. The type of record-keeping is crucial for businesses where transactions are cash-based.
You need to record every detail, no matter how insignificant it looks. Staying on top of small transactions helps you manage larger ones easily.
Keeping information about your business transactions is of utmost importance. It is even more important to communicate with your bookkeeper or accountant properly and keep them well informed.
Mistakes happen when small purchases, especially those with recurring costs, are not communicated to the bookkeeper. Not reporting every transaction creates serious problems later with lots of extra work to manage.
Besides communication, try to keep a record on paper or digitize it for monitoring and review later.
Starting Projects Without a well-defined Budget
It is easy to launch a project with potential profit opportunities but without a clear budget in mind. The decision is quite risky and the one that can lead to excessive spending without any result. Every business has its share of success and downfall that you can manage with effective project budgeting.
Suppose your business spends too much money on a project without fulfilling objectives. In that case, it fails to establish a budget before initiation.
Business account mistakes can lead a business to its doom. You need to hand bookkeeping and accounting activities to a professional and closely monitor every transaction. Record every expenditure and receiving to ensure timely entry.
Smooth business operations rely heavily on accurate and organized finance affairs.