Accounting is notoriously complex but as a small business owner, good accounting practices are essential to the financial health of your organisation. Taking your accounting seriously from the start is the best way to set your small business up for success and it will allow you to operate much more efficiently in the future. Bad accounting, on the other hand, can lead to financial and legal difficulties that may seriously threaten the survival and success of your enterprise.
Here are the most common accounting mistakes made by small business owners so that you can avoid them. Mistakes compound over time, so it’s important to pay close attention to your accounts right from the very beginning.
One of the most common accounting mistakes that small business owners make is waiting too long to prepare their financial information. When tax season is months away, it’s very tempting to put accounting off until later but this is a dangerous misstep. The longer accounting mistakes go unnoticed, the more damage they are likely to do to your business.
In order to make sure that your financial information is as accurate as possible, update your books on at least a weekly basis. This makes tax season far more manageable and prevents you from making mistakes that will require a lot of time and money to fix.
2. Misunderstanding Metrics
New business owners in particular often confuse terms such as revenue, net profit and cash flow. A common financial mistake that small businesses make is focusing solely on revenue without subtracting expenses to calculate their net profit. This can lead to serious overspending.
Furthermore, many new business owners get carried away and forget that there may be a significant difference between their net profit and their NOPAT (net profit after tax). As well as encouraging overspending, this can lead to significant financial problems when it’s time to file a tax return.
3. Mixing Personal and Business Banking
Sole traders are legally permitted to use their personal bank accounts for their business, but this is not the wisest course of action. It’s best to separate your business and personal bank accounts as soon as possible in order to avoid financial blunders.
For one thing, going back over your bank accountants and trying to remember which transactions were personal and which were business-related is a surefire way to give yourself a headache. It’s also a huge waste of valuable time that could be better spent growing your enterprise. Additionally, you may face an array of legal problems should your business be audited.
Simple mathematical mistakes are all too easy to make, but an innocent error can compound over time and damage the financial health of your business. It’s important to concentrate fully and double-check every entry. Accounting software can automate many calculations for you to ensure accuracy, so a subscription may prove a worthy investment.
5. Trying to Do It All Yourself
Trying to handle your accounts by yourself is a costly and time-consuming mistake. Many small businesses attempt DIY accounting when they first start out in order to keep costs low, but this can actually slow down their growth and threaten their financial health.
At a basic level, hiring a qualified and chartered account helps business owners to avoid expensive accounting mistakes and saves them a huge amount of time, allowing them to focus on growing their business. Furthermore, accountants can save businesses a significant sum of money on their tax returns, thanks to their up-to-date knowledge and financial expertise. Although hiring an accountant does present an extra cost, it generates a very lucrative ROI.
A good quality accountant will also bring market knowledge to the table and can help business owners to present a strong case to potential investors, further accelerating the growth of the organisation.
Like it or not, accounting is part and parcel of running a business and it’s very important to do it correctly. By taking accounting seriously from the very beginning and hiring professional help, you can protect your business against the above accounting mistakes and focus on growth instead of putting out fires.