5 Common Small Business Accounting Mistakes to Avoid
In the midst of the whirlwind of a business launch, accounting concerns may take a backseat to daily managerial priorities. Yet, the problem with just doing enough to get by with basic bookkeeping is that at some point you'll need to circle back, correct mistakes, and account for every transaction. To save time and professional accounting fees, be aware of common accounting mistakes and invest time to set up an accounting system correctly from day one.
Mistake #1: Commingling Personal and Business Funds
A new bank account should be established beginning with the initial investment in a new company. This business account ensures that all company-specific transactions will be accounted for separately. Bank statements and check registers provide support for account reconciliations which can point out small mistakes before they turn into bigger ones. Company-related cash flows can also be tracked through checking account activity. Additionally, separate business and personal bank accounts make year-end tax preparation much easier.
Mistake #2: Failing to Record Revenue and Expense Data
Once the business accounts have been created, businesses should record every transaction in their accounting system. Decide what level of detail is required for financial analysis and account for data at that level. In cases where customer level data is needed for invoicing and revenue analysis, choose an accounting system capable of capturing individual information. On the expense side, small purchase receipts can easily be set aside and left to pile up, unrecorded. Business owners may not wish to spend time collecting expense receipts and entering them into a database, but this task is necessary in order to produce a complete financial picture at year-end.
Mistake #3: Not Reading (Or Understanding) Terms of Credit Agreements
Rather than striving to make monthly payments on time, businesses should set a goal to optimize their credit position. Carefully read and understand all credit agreements before accepting funds. This includes credit card agreements, with their related interest and fees, lines of credit issued by banks, and other commercial loans.
In today's market, a wide array of financial products are available for small businesses, from crowd funding to venture capital and small business loans. Taking the time to compare the financial ramifications of the different types of loans available can yield large savings in interest and fees. Also, from an accounting perspective, small businesses need to stay in compliance with credit agreements, and should record all required information properly in their financials.
Mistake #4: Avoiding Automation
Early in the startup phase, when relatively few transactions are recorded, accounting records can be maintained by hand, or by using a quick spreadsheet. But, as a company grows and the number of transactions increases, a manual accounting process becomes time consuming and inefficient. Investing the time to set up an automated system in the early stages of a business will allow for growth on the back-end. Online cloud based accounting systems easily accommodate increased customers and transactions. These online systems also help avoid potential computational errors associated with manual systems. Cloud accounting ensures proper backup and data storage, an added layer of protection over in-house accounting processes. And as a company grows, additional users can be added to the cloud system, which accepts continuous updates from multiple sources.
Mistake #5: Waiting too Long to Consult a Professional
Although a professional accountant may not need to assist with early stage day-to-day accounting, a CPA can provide high level expert advice to startups. Many CPA firms will gladly sit down with entrepreneurs and share small business tips and other thoughts on current accounting issues. Accountants and lawyers can also advise companies on selecting a structure and discuss potential tax planning issues. Future accounting mistakes can be avoided by working with a professional accountant to properly setup a new business.
To avoid the early pitfalls of small business accounting, management should aim to build a financial management framework that can handle future expansion and growth. An online accounting system tailored to small business management is one of the best ways to ensure future success and accurate reporting.