That moment when you look at your account books at the close of a fiscal period to see a balanced account can be one of the most fulfilling aspects of being an entrepreneur. Equally, seeing your accounting in disarray can be one of the most challenging and stressful periods for any businessperson. This underlines the indispensable nature of accounting as one of the fundamental aspects of running a small business.
That moment when you look at your account books at the close of a fiscal period to see a balanced account can be one of the most fulfilling aspects of being an entrepreneur. Equally, seeing your accounting in disarray can be one of the most challenging and stressful periods for any businessperson. This underlines the indispensable nature of accounting as one of the fundamental aspects of running a small business.
Yet, many small business owners struggle with day-to-day accounting tasks, such as bookkeeping, tax preparation, payroll, invoicing, and financial reporting. For many businesses, these struggles have little to do with negligence but more with a lack of technical know-how. Without accounting insight for guidance, these tasks can take up a lot of time and resources, or worse, result in record inconsistencies that can easily lead to serious problems for your business.
Here, we discuss the top five mistakes that small businesses make with accounting and how to avoid them.
Table of Contents
Mistake #1: Keeping Inaccurate Records
The most debilitating accounting mistake you can make as a small business owner is not keeping accurate and organised records of every transaction, expense, income, or asset your business owns. The consequence of such erroneous record-keeping is missing or duplicated entries that lead to calculation errors, report discrepancies, and difficulty tracking profitability.
To avoid this mistake, you can try employing reliable accounting software to automate and simplify accounting processes, such as:
- Transaction recording
- Receipt and invoice generation
- Inventory and assets tracking
- Payroll and tax management
- Create financial statements and reports.
Mistake #2: Not Separating Personal and Business Finances
Not separating your personal and business finances can seriously complicate your business’ growth and accountability. Especially when it comes to taxes, mixing your personal and business finances can lead to an increased risk of an audit by HM Revenue & Customs (HMRC) and legal liabilities when lawsuits or disputes arise.
To stay clear of this blunder, you should:
- Open separate bank accounts and credit cards for your personal and business use.
- Pay yourself a reasonable salary from your business account and report it as income on your personal tax return.
- Keep separate records for personal and business expenses
- Avoid using business funds for personal purposes.
Mistake #3: DYI Bookkeeping
Many small business owners try to handle their accounting tasks by themselves, and understandably, professional accounting fees can be costly. However, doing this can result in mistakes, inefficiencies, and missed opportunities. For example, you may not know how or when to optimise eligible tax deductions, prepare for an audit, or analyse your business’s financial performance.
The solution? Hire a professional accountant, or at least seek the expertise of someone who knows the bookkeeping needs of a small business. Yes, the fees can be a little on the high side, but the benefits outweigh the cost by far as a professional accountant or bookkeeper can help you save time and money in the long run by;
- Setting up and maintaining your business’s accounting system
- Preparing and filing tax returns
- Monitoring cash flow and profitability
- Advising you on the feasibility of business strategies
Mistake #4: Irregular Account Reconciliation
Reconciling accounts means comparing the records of transactions in the accounting system with actual bank statements, receipts, and invoices.
This is a crucial step in ensuring your accounting records are accurate, and are free of errors or discrepancies, and can help you detect any fraudulent transactions that may have occurred. Yet, many small businesses neglect to reconcile their accounts regularly or only do it at the year’s end.
To avoid this mistake, reconcile your accounts at least once a month or more frequently if you’ve recently had a high volume of transactions.
Mistake #5: Financial Reports Negligence
Financial reports include income and cash flow statements, balance sheets, and budgetary forecasts summarising your business’s financial activities and performance over time.
Even though these tools are essential in measuring a business’s financial health and growth, many small business entrepreneurs find little time to review their financial reports in-depth or only look at them superficially. Thus, not reviewing them can make you miss out on valuable insights and opportunities to improve your business operations, profitability, customer satisfaction, and competitive advantage.
The Take Home
Effective accounting practices are paramount for the success of any business, whether big or small. Therefore, avoiding the aforementioned mistakes will not only streamline operations but also prevent financial pitfalls that could undermine your business’ growth and stability. By recognising these pitfalls and implementing sound accounting principles, you can confidently navigate the complexities of financial management, enabling you to focus on innovation and achieving your business goals.
Do you need a professional accountant to help you streamline your accounts so you can focus on the “business” side of things? Sloane Winckless is are chartered accountants Epsom & Ewell entrepreneurs have relied on such services for over three decades with a consistent outcome- excellence.
