Accounting Tips

Common Small Business Accounting Errors

It’s easy to make accounting errors and it actually fairly common in small businesses.  There are some steps you can take to avoid making mistakes in your books.  Here are five common accounting errors that you can avoid with just a small amount of effort.

  1. Skipping small expenses in your records.

It is important to note every business transaction – even the small ones.  If you don’t record all general business expenses, your books will be off.  Inaccurate accounting records causes problems for measuring profitability and filing taxes.  Be sure you keep receipts and organize them into the appropriate accounts. 

Some companies like to keep a petty cash fund for small purchases.  At the end of the month, those receipts are reconciled in the books and petty cash is reimbursed back to its original dollar amount.  There are also free apps for your smart phone that can help you track receipts.  I use Smart Receipts because it tracks both my business receipts and my mileage.  It’s a great little app if you have employees who submit expense reports for reimbursement.

  1. Treating net profit and cash flow the same.

Some business owners think their cash flow is their net profit, or what’s left over after all the expenses, and payroll, are paid.  This is a common misconception.  Yes, net profit and cash flow are both related to income and expense.  However, they measure (or more accurately report) two different things. 
Net profit measures a specific period of time, for instance one month, or one quarter (Jan – Mar).  Cash flow measures the rate that money flows through your business.  Cash flow shows how much money comes in and out of your business and where it comes from.  By projecting your cash flow, you can see the liquidity of your funds. 
Why is this important?  Well, if you invoice a customer in January, you’ve earned that money and it will show on your P&L, but if they don’t pay the invoice until February, you don’t really have that money.  Even though you’ve earned a profit, you may not have the funds because the cash hasn’t yet ‘flowed’ into your business.

  1. Failing to reconcile your bank statement and your books.

You need to reconcile your books with your bank account on a regular basis.  This gives you the opportunity to check for accuracy and to make sure your records and the bank records match. 
Reconciling your accounts helps you catch mistakes (like those missing transactions listed in #1) early.  Imagine for a moment that you enter a transaction, but you enter a “7” instead of a “9”.  If you reconcile your books monthly, you’ll notice that the bank balance is two dollars different than your records.  At this point, the error is easy to fix and takes just a moment.  Now imagine that you didn’t reconcile your records, and your six months down the road and preparing to file your taxes.  You’ll have to sort through six months or more of records and bank statements to find the discrepancy.  Regularly reconciling your bank statements can save you time in the long run.

  1. Not creating a budget.

When it comes down to it, a budget is just a plan.  I understand that small business have limited funds.  However, no matter how much your business is earning, you can plan for the income and expenses with a business budget.
A budget helps keep your finances on track and takes some of the guesswork out of financial planning.  Start with past accounting records to project future income and expenses.  Then, after you decide on your budget, stick to it.  If you’ve budget out the expenses you’ll have for the month or year, you have a better idea of what income you need in order to meet them.  If you buy materials for customer or projects, you want to budget each project to be sure you’ve estimated and invoiced each customer correctly.  Communicate to customers about those costs and budgets before beginning each project.  They’ll not only appreciate it, they expect it.

  1. Spending too much time on accounting tasks.

Many small business owners feel the need to do it all, and you might too.  But managing your books can be time consuming.  If you’re like most small business owners, that’s not why you started you own business.  You need an effective way to handle your accounting so that you can get back to running your business. 
There are several accounting software programs on the market to streamline your books.  A simple software program will automate your account balances.  You can handle the day-to-day recordkeeping and then outsource some of the more difficult financial tasks.  You may not need an accountant full time, but there may be times to consider working with a financial expert.  An accountant can help you when you’re ready to file your taxes or expand your business.  Accountants understand the details about your books and can advise you on important business decisions.
To manage your accounting wisely, use automated software and know when to hire an accountant.  If you need recommendations on what software is right for you, and what financial tasks are best outsourced for your company, we can help.  Give us a call.