Pitfalls in Small Business accounting can be avoided. See 5 most common mistakes small business owners do.
New and small businesses often require the owner and a few associates to wear many hats, including that of office manager and bookkeeper. Sometimes the intricacies of small business accounting can get lost in the bigger drive to grow a new business. If this sounds familiar to you, we have a few common pitfalls you can look out for in your business to be sure that your small business accounting efforts are on track.
Pitfall 1: Letting Receivables Get Behind
You issue the invoice, which creates a receivable in your system. When payment comes in, though, you don’t apply it toward the receivable. Before long, you have a pile of receivables that need matching up, and a receivables report that you can’t interpret. Bigger implications are that you will end up wasting hours trying to reconcile your receivables, and possibly pay too much in taxes and end up with high debts.
You have a lot of things to think about with your business, so receivables can easily get pushed aside. Take a couple of minutes each day to apply your received checks to the receivable and save headaches in your small business accounting.
Pitfall 2: Losing Expense Receipts
It’s happened to you before. You get your bank account statement, and you wonder where all the spending occurred. You decide to spend five minutes looking it over, but every couple of lines there is an expense you can’t identify.
Keeping receipts is cumbersome, but certainly not as cumbersome as attempting to trace every $100 or even $20 purchase recorded on your bank statement by checking with individual employees to see who spent the funds. Bigger problems include the incorrect reporting of tax expenses and a high tax bill, should you ever get audited.
To make it easier to track your expenses, choose one corporate card and use it for all purchases. Keep an envelope in a handy place where you can slip receipts immediately after making a purchase.
Pitfall 3: Forgetting to Record Cash Expenses
You are already in the habit of using one card to make all of your purchases, except those few instances where you need to use cash. Forgetting to log cash expenses can have a big impact on your tax bill, because you will overstate your income.
Always ask for a receipt when you make a cash purchase make sure you create a central place for the receipts and then a system for entering them into your bookkeeping system.
All of these mistakes are easy to make when you are juggling many different roles in addition to handling your small business accounting. One of the most common problems for small and new businesses is our not hiring a professional.
Pitfall 4: Putting things off for “later.”
Have you ever caught yourself saying, “Later—I’ll get to the books later”? Not sure I know anyone who hasn’t at least been tempted to do that. It is one thing, though, to say you’ll do it later and actually do it at some future point in time. But, it’s quite another to have “later” become next month, which rolls into next quarter, which bleeds into never. The resulting unbalanced books, outstanding invoices, misunderstood expenses, and overspent budgets can put you on a crash course to closure or debt. Especially if you operate on a small budget, you can’t afford not to keep up-to-date, accurate records of your receivables and payables.
Pitfall 5: Using manual accounting
Manual accounting is not a pitfall in itself, but it can lead to significant errors, especially if your company is growing. Moneypenny can assist in regulating your bookkeeping, ensuring more accurate books, and eventually, dependable financial reports. Using software to automate accounting can help your business in several ways:
- Automated systems track and update records of funds withdrawn; they also balance the remaining reserves, thus providing the correct measure of liquidity.
- Automation reduces dependency on human beings, therefore reducing opportunities for human error or fraud.
- Automation helps create updated reports and, more importantly, accounts that are tracked and contain recorded data. In contrast to manual bookkeeping, automation can generate reliable audit trails and ensure accurate financial data.
If you find yourself committing any of these mistakes, we understand. There are only so many hours in a day to cover all the aspects of your business that need your attention. Moneypenny is ready to provide a full range of small business accounting services to fit your needs.