If you recently started a business, you may find yourself easily overwhelmed by your current pile of accounting work. While learning some of the fundamentals of accounting may be manageable, it is still usually incredibly easy for you to make a mistake.
The problem with making accounting mistakes is that these errors tend to compound over time and ultimately affect your entire workbook. Forgetting to enter an expense, for example, can cause you to misstate your net income, your profit margins, and various other important business metrics. It is easy to see how one simple accounting mistake can proliferate into multiple others.
The best way to become an accurate accountant is to gain as much practice as you possibly can. However, most new business owners do not have the luxury of time. While they could outsource their accounting needs to a specialized accounting firm, they may also be looking for a crash course that can help them avoid common accounting mistakes.
Common small business accounting mistakes
In this article, we will discuss five of the most common accounting mistakes that are frequently made by new business owners. By making an effort to understand these mistakes—and to recognize why they need to be avoided—you can significantly improve your business’ current bookkeeping practices.
Mistake #1: Failure to develop a project-specific budget
One of the most common causes of early financial distress for new businesses is irresponsible budget keeping. Without a reliable set of budget keeping practices, your business will eventually spend more than it is capable of earning and may even be well on its way to bankruptcy.
In order to avoid future financial problems, strive to create a business budget that accurately and conservatively details a price for each specific project. While over-estimating expenses will merely result in your business having excess funds at the end of the year, under-estimating your expenses will usually result in liquidity issues.
Instead of vaguely declaring a portion of your funds should be spent on “Marketing,” for example, it’s useful to describe exactly where each marketing dollar will be spent. In order to create the most accurate estimates possible, look at past accounting data and account for inflation.
Mistakes #2: Not separating accounts receivable from liquid revenue
Recording sales transactions is an important component of the accounting process. However, many businesses fail to recognize that not all sales should be treated as liquid revenue streams. Overcharging issues, transfer delays, personal bankruptcies, and even fraud can all create situations where a revenue appears to have been earned, yet is not actually accessible.
Though doing so is certainly painful, allowing a portion of your accounts receivable to be written off as “bad debts” will make it much easier for your books to become fully reconciled. Assuming that all outstanding accounts owed to you will eventually be paid can create a variety of problems once tax season rolls around (such as overstated revenue). Because the ratio of “bad debts” varies tremendously by industry, it will be useful to research what your specific business can expect to lose.
Mistake #3: Forgetting to set aside money for taxes
No matter your business structure—sole proprietorship, partnership, S-Corporation, or any other—you will eventually need to surrender a portion of revenue in the form of taxes. When taxes are due, however, will often vary from business to business.
Technically, all business owners should actively set aside a portion of their revenues for taxes as they accrue throughout the year. However, there are many instances where businesses will “borrow” from the money that is already owed to the government in order to pay for more immediate expenses.
If your business is still able to pay its taxes in full and on time, doing this may not always be a problem. Unfortunately, many businesses are overzealous with their future projections and may find themselves in a situation where taxes are due, but there is no money to pay them. Due to the fees, fines, and legal penalties that can be imposed on business owners, forgetting to set aside money for taxes is undoubtedly a major mistake.
Mistake #4: Overlooking minor transactions
Even in the early stages of running a business, you may find yourself engaging in multiple financial transactions in a single day. But while the $100,000 loan you just received from a credit union may certainly be quite memorable, the $10 in gas you spent getting there can be very easy to overlook.
While $2, $5, and $10 transactions may not seem like a big deal on a day-to-day basis, they can have a profound effect on the general health of your books. Not only will $10 daily transactions add up to $3,650 over the course of a year, but failing to account for these transactions will also make your books much less useful. Where can you cut costs? Where is your business operating most efficiently? Though it may be tedious, accounting for each transaction in some way will help your business achieve its goals.
Mistake #5: Assuming you can handle all accounting tasks on your own
As a new business owner, you are likely looking to cut as many costs as possible. However, while many people consider using an outsourced accountant to be a “luxury,” keeping all accounting processes in-house can be both inefficient and costly in the long-run.
If you are familiar with accounting processes and legal requirements, you may be able to manage your books on your own. If you are unfamiliar, then it will be worth your time to find help from an outside expert. There are many services available that can help you with taxes, with general bookkeeping, and with assuring that your business is legally compliant.
The accounting process is incredibly detailed, and mistakes seem to come all too easily. By being aware of these mistakes, and paying attention to the most important details, your business can leverage its accounting systems as a direct source of value.
Vinnie Fisher left a successful law practice in 2007 to pursue a career as an entrepreneur. After a few successful businesses in the digital space, he discovered a much needed service for business owners. In 2014, he opened Fully Accountable, an outsourced accounting firm for digital and eCommerce businesses. Their data analysts and accountants do the work and provide the proactive, forward thinking feedback you need to make the right decisions to increase your growth and double your profit margin.
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