If you are the owner of a new business, you may be overwhelmed by your current pile of accounting work. While learning some of the fundamentals of accounting may be manageable, it’s incredibly easy for you to make a mistake.
The problem with making mistakes while accounting is that these mistakes tend to compound over time and ultimately affect your entire workbook. Forgetting to enter expenses, for example, can cause you to misstate your net income, profit margins, and other important metrics. It is easy to see how one simple accounting mistake can proliferate into multiple others.
The best way to become an accurate accountant is to gain as much practice as you possibly can. However, most new business owners do not have the luxury of time. While they could outsource their accounting needs to an experienced firm, they may also be looking for a crash course. This can help them avoid common accounting mistakes.
In this article, we will discuss five of the most common accounting mistakes that are frequently made by business owners. By making an effort to understand these mistakes—and to recognize why they need to be avoided—you can significantly improve your business’ current bookkeeping practices.
Failing to Develop a Project-Specific Budget
One of the most common causes of early financial distress for new businesses is irresponsible budget keeping. Without a reliable set of budget keeping practices, your business will eventually spend more than it is capable of. It may even be well on its way to bankruptcy.
In order to avoid future financial problems, your business should strive to create a budget that accurately and conservatively details a price for each specific project. While over-assuming expenses will merely result in your business having excess funds at the end of the year, under-assuming your expenses will usually result in liquidity issues.
Instead of vaguely declaring that a portion of your funds should be spent on “Marketing”, for example, it will be much more useful to describe exactly where each of these marketing dollars can be spent. In order to create the most accurate future estimates possible, your business should look at past accounting data. You should also account for inflation.
Not Separating Accounts Receivable from Liquid Revenue
Recording sales transactions is an important component of the accounting process. However, many businesses fail to recognize that not all sales should be treated as liquid revenue streams. Overcharge issues, transfer delays, personal bankruptcies, and even fraud can all create situations where a revenue appears to have been earned, yet is not actually accessible.
Though doing so is certainly painful, writing off a portion of your accounts receivable as “bad debts” make it much easier for your books to reconcile fully. Assuming all outstanding accounts owed will eventually be paid can create a variety of problems once tax season rolls around. For example, overstated revenue. Because the ratio of “bad debts” varies tremendously by industry, it’s useful to research what your business expects to lose.
Forgetting to Set Aside Money for Taxes
No matter what business structure you may currently use—sole proprietorship, partnership, S-Corporation, or any other—your business will eventually need to surrender a portion of its revenue in the form of taxes. When these taxes will specifically be due, however, will often vary from business to business.
Technically, all businesses or sole proprietors should be actively setting aside a portion of their revenues for taxes as they accrue throughout the year. However, there are many instances where businesses will “borrow” from the money that is already due to the government. They do this in order to pay for more immediate expenses.
If your business is still able to pay its taxes in full and on time, doing this may not always be a problem. Unfortunately, many businesses are overzealous with their future projections and may find themselves in a bad situation. where taxes are due, but there is no money to pay them. Forgetting to set aside money for taxes is undoubtedly a major mistake that many business owners make. Especially due to the fees, fines, and legal penalties that can be imposed on business owners.
Overlooking Minor Transactions
Even in the early stages of running a business, your business may be engaging in multiple financial transactions in a single day. But while the $100,000 loan you just received from a credit union may certainly be quite memorable… The $10 in gas you spent getting there can be very easy to overlook.
$2, $5, and $10 transactions may not seem like a very big deal on a day-to-day basis. When actually, they can have a profound effect on the general health of your books. Making $10 daily transactions adds up to $3,650 over the course of a year. Failing to account for these transactions will also make your books much less useful. Where can you cut costs? Where is your business operating most efficiently? Though it may be tedious, accounting for each transaction in some way will help your business achieve its goals.
Assuming you can handle all accounting tasks on your own
As a new business owner, you are likely looking to cut as many costs as you possibly can. However, while many people consider an outsourced accounting firm to be a “luxury”, keeping all accounting processes in-house can be both inefficient and costly in the long-run.
If you are familiar with accounting processes and legal requirements, you may be able to self-manage your books. If you are unfamiliar, then it will be worth your time to find help from an outside expert. There are many services available that can help you with taxes, bookkeeping, and assuring that your business is legally compliant.
The accounting process is incredibly meticulous and mistakes seem to come all too easily. By being aware of these mistakes and paying attention to important details, your business can leverage its accounting systems as a direct source of value.