Accounting mistakes that put your small business at risk
As a business owner, every decision you make has financial implications. It’s necessary to quickly understand the financial health of your business, but for someone without a financial background, it can be intimidating. Lacking financial understanding can hinder the growth of your business.
In the initial stage, small business owners often think of handling their books independently, rather than hiring an accountant. Regardless of the type or size of your business, it’s vital you gain understanding on maintaining a balance sheet, income and expenditure, profitability, managing cash flow and predictions about the future of your business.
Accounting mistakes are not uncommon, especially for new start-ups or young businesses. It’s especially important you handle your accounting procedures with accuracy to ensure you are not making these following accounting mistakes.
In this blog, we’ll discuss some of the most common accounting mistakes that can put your business at risk.
1. Confusing cash flow and profitability
Being able to understand a cash flow statement, its purpose, and the key difference between cash flow and profit is essential. Your business may be profitable and yet, still have a negative cash flow, hindering its ability to pay expenses or expand.
Profit is defined as your revenue minus your expenses. Whereas cash flow describes the inflows and outflows of cash for your business. To differentiate between the two, you must consider:
If you sell a product for €500 on the 1st of July and send the invoice, the business will post €500 in revenue straight away, despite the retailer not paying until the end of their credit period. In essence, revenue is noted immediately, despite the cash not being collected.
The product you sell may have cost you €400, which could have been paid in a previous month, or could be due before your sale revenue comes in. Therefore, you need to be able to pay your cash outflow of €400 before you receive the revenue from the sale.
The profit you have made on the sale is €100 (€500 – €400 = €100). However, to make this profit you need to be able to pay your expenses beforehand, which is why you must ensure you have cash at hand.
Cash flow and profit measure different things. While profit is the goal, and an indicator of financial health, cash flow keeps business operations running on a day-to-day basis. To grow your business, both cash flow and profit are important, but in the short-term, cash flow should be the main concern.
Getting carried away with gross profit numbers is a common mistake made by businesses. Make sure you understand the difference between cash flow and profit. A good way to stay on top of this is to review all your financial reports on a regular basis.
2. Not using software or cloud solutions
For new small business owners, spreadsheet can often be the default choice for maintaining accounting books. Using an outdated approach can take up a lot of time and slow down your productivity. It is important to know that you cannot check if human errors have occurred when using spreadsheets.
With the use of cloud accounting software, all your bookkeeping requirements can be automated. Automating your accounting process with Surf Accounts significantly reduces human error, saving you time for more important tasks, like focusing on running your business. The cloud-based accounting software employs double entry approach that weeds out errors and provides more accurate financial reports.
3. Mixing business accounts and personal finances
In the early days of your business, it might seem simpler to keep your personal and business banking together. However, this can quickly become complicated as your business grows. If you apply for a loan, it could be a problem in the loan review process, as lenders will want an accurate picture of your business finances.
It’s best practice when starting out to open a separate business bank account. Applying for a separate credit card for business transactions should also help you avoid paying for expenses out of your own pocket. If you are still using your personal credit card for business expenses, keep a record of those transactions for tax deductions and reimburse yourself.
By using a separate account, you can better track income and expenses, have a clearer picture of your business’ financial health while reducing the risk of accumulating personal debt.
4. Not staying on top of your receivables
This is one of the biggest mistakes made by business owners. If you don’t closely monitor your accounts receivable and ensure your customers pay you on time, you might see yourself facing cash flow problems. If you don’t keep records of incoming money, you might deal with bad debt, incur tax overpayments, and spend more time updating accounts receivables during tax season, potentially risking costly mistakes.
To avoid these problems, manage your accounts receivables using Surf Accounts, which automatically sends recurring invoices and helps you keep track of who paid and who still owes.
5. Not reconciling bank accounts
Once you’ve completed your monthly accounting transactions, it’s time to ensure the recorded balance listed on your books matches the actual balance of the bank. Occasionally, small transactions may fall through the cracks and go unrecorded.
Comparing two sets of records lets you accurately track your current financial standing without letting any transactions slip through. It will also help you prevent fraudulent activity in your business, as nothing will go undetected.
Surf Accounts integrates seamlessly with your bank account and reconciles all your accounts in a few clicks. Reconciling your accounts with Surf Accounts will help you track inaccurate records faster.
Never make a mistake again
Good accounting practices are the building blocks for managing your business’s financial stability. Prioritising your accounting and financial tasks can sometimes take a back seat when developing a new business. However, building up your knowledge and utilising the insights gained through keeping accurate accounts, can help you understand the greater impacts your actions have on your business’ financial health.
The best approach to minimising accounting mistakes is to invest in an accounting software, Surf Accounts, that makes your accounting tasks easier, error-free and helps you take better business decisions. Automate your accounting tasks with Surf Accounts and take your business to the next level.
Book a demo to learn more.
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