The 8 Most Common Small Business Accounting Mistakes
- Taking care of bookkeeping and accounting by yourself
- Infrequently (or never) reconciling books and bank statements
- Not accounting for money taken out from the petty cash fund
- Covering small expenses out of pocket without recording
- Wrongly associating profits with immediate, steady cash flow
- Starting new projects and ideas without a clear budget
- Using the business’s accounts for personal transactions
- Not clearly recording income, expenses and other transactions
- Is your company’s accounting and bookkeeping up to par?
From time to time, every business owner makes mistakes. From losing a sale due to overconfidence to miscalculating a bad deal, business is about making mistakes and learning from them to fuel growth, improvement and innovation.
One of the most common areas in which small business owners slip up is accounting and bookkeeping. From mistakenly noting down transactions to calculation errors, a wide range of mistakes can cause your business to have inaccurate accounting.
Accounting mistakes can range from minor errors, such as forgetting to scan or save low-value receipts, to large mistakes that can affect your company’s cash flow or put it at risk of insolvency.
The best way to stop mistakes from occurring is to be aware of most common small business accounting mistakes. In this guide, we’ll share eight common bookkeeping and accounting errors for your business to be aware of.
Taking care of bookkeeping and accounting by yourself
Many small business owners believe that because they own and run their business, they know it better than anyone else. This might be true, but it doesn’t necessarily mean that they’re the most appropriate person to manage its books.
When you take care of your company’s bookkeeping and accounting by yourself, you increase several risks. One is the risk of you spending time on bookkeeping that’s far better spent on other aspects of the business, such as operations or growth.
The second risk is the chance of making an error that – because you’re the one and only person managing the company’s books – goes unnoticed. Having someone else manage your company’s books means a second set of eyes to notice any issues.
Infrequently (or never) reconciling books and bank statements
How often does your company reconcile its books and bank statements? When you reconcile your company’s records and its bank statements, you ensure that there are no discrepancies between your recorded transactions and your real transactions.
This is one of the most important parts of accurate bookkeeping, but it’s something that many business owners simply don’t have time for. Forgetting to reconcile your company’s books can lead to inaccurate, ineffective bookkeeping and accounting.
Not accounting for money taken out from the petty cash fund
Your company’s petty cash fund might seem like a useful tool for paying minor or inconsequential bills, but it’s actually an important source of cash that you should record, just as you would any other transaction.
If you frequently use your petty cash fund to pay bills, make sure you keep receipts and invoices of any significant transactions. This can help you account for spending and understand where all of your company’s cash goes.
Covering small expenses out of pocket without recording
Have you ever covered a business expense out of your own pocket? It’s common for business owners to cover their company’s costs out of pocket, especially for minor bills and insignificant expenses that can easily be paid for independently.
Doing this, however, has two issues. The first is that many people forget to record all of their out-of-pocket payments, leading to inaccurate financial records. The second is that paying out of pocket often can make your company seem healthier than it is.
If you frequently cover small expenses – or, more importantly, big ones – out of your own pocket, make sure you record them. This way, they’re fully accounted for in the books and you, as the business owner, can claim them back from your company.
Wrongly associating profits with immediate, steady cash flow
Your company has just closed a £20,000 deal that will produce £10,000 in profits for the next month. Great news, right? Not so fast – while this might seem like an instant profit for your business, it could take several months to earn.
Profits don’t always equal cash flow. Many business owners – particularly new ones – mistake a lucrative deal for instant cash. It could take months for your business to be paid by its new customers, resulting in slow and unsteady cash flow.
Sometimes, closing a deal can cost your business money in the short term, since you may need to supply a product or service before being paid. Record cash flow as and when it comes into your account, not as soon as you close a great deal on paper.
Starting new projects and ideas without a clear budget
It’s easy to launch a new project – often one with a seemingly lucrative opportunity to profit in the near future – without preparing a budget first. Doing so is a risky and often ineffective decision that can lead to lots of spending without many results.
Every business has successes and failures. The most profitable and effective small businesses manage their failures by preparing detailed budgets and cutting things off when it becomes clear a project isn’t moving towards its objectives.
Does your company spend too much money on projects that don’t always achieve their objectives? If so, a failure to budget effectively could be what’s preventing it from reigning in projects that fail to meet their conclusion.
Using the business’s accounts for personal transactions
Have you ever used your company’s account to pay for personal expenses? If you own the company, as many company directors do, using your director’s account to pay for occasional expenses isn’t a significant problem. However, frequent use of a director’s loan account to cover personal expenses can eventually create financial issues for your company. It’s extremely common for an insolvent company to have a significantly overdrawn director’s loan account.
If you’d like to use your director’s loan account for some personal expenses, talk to your accountant first to make sure it’s feasible. Overdependence on a director’s loan account can put your company in a tough – often insolvent – financial position.
Not clearly recording income, expenses and other transactions
The key to good accounting is effective, accurate recording. When your business can track every one of its expenses, from small bills to million-pound transactions, it has the information it needs to operate smoothly and effectively.
When certain transactions are a mystery, however, no amount of great leadership can point your business in the right direction. Make sure you clearly record all of your company’s transactions, no matter how insignificant they might seem.
Is your company’s accounting and bookkeeping up to par?
Most companies make small bookkeeping or accounting mistakes, the majority of which are noticed and corrected. However, a pattern of ineffective bookkeeping is often something that can lead your business towards serious financial issues.
Are your company’s accounting and bookkeeping practices up to par? If you often commit some of the mistakes listed above, consider changing your accounting and bookkeeping practices so that your company’s finances are better managed.