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Accounting a complicated and vital component of the business machine — the core around which everything else operates. You cannot run a successful business without having a strong grasp of your finances. Accounting mistakes, however, are all too easily made.
Many small business owners undertake their own accounting, which can often prove to be problematic. Untrained in the complexities of accounting processes, many struggle with the day-to-day running of their finances. While there are many potential mistakes to make, most also have simple solutions. If you’re a business owner managing your own finances, be sure to keep reading, and discover some easily avoidable accounting mistakes which could potentially cost your business thousands
Data-Entry Inaccuracy Caused by Human Error
The problem: Unfortunately, it is human nature to be imperfect. We get distracted, we get tired, confused and we make mistakes. The most common accounting mistakes are caused by human error in data entry. Simply failing to record purchases, or calculating income incorrectly can lead to inaccurate books, books that will then be used to form reports and tax returns.
Running a company on an inaccurate financial report is a surefire way to run into trouble, and incorrect tax returns can incur penalties and fines that knock your business backwards.
The answer: Human error is hard to stamp out, but it can be reduced. Another eye can be invaluable, and having somebody simply check over the data previously entered into a system can help stop errors occurring. Data reconciliation is also a vital part of ensuring accuracy. Matching records to bank transactions is a simple, yet effective technique for maintaining error-free books.
Working from Basic, Unspecialised Software
The problem: In order to maintain an accurate understanding of your business’s financial situation, you must keep any and all fluctuating numbers under a strict and watchful eye. Yet, most small businesses run their complex accounting systems out of inadequate and basic software.
By doing your accounting out of generic software, you are likely to endure unnecessarily slow accounting processes and work from simplistic, poor quality financial reports.
The answer: Specialised accounting software offers a sophisticated and technologically advanced solution to the complex task of accounting. Automated features allow for quick and easy reports, updates, invoices and more, while specific recording options offer easy access to everything from supplier accounts to payroll data. By speeding up accounting processes — some of which can take hours or even days under inadequate systems — and improving the quality of the information you run your business from, you can save a small fortune.
Failing to Monitor Client Payments
The problem: A business which does not get paid is not profitable, and cannot survive. Yet, many misunderstand the difference between a promise of payment and actual payment. Small businesses are fragile things, and 30 days of no payment can be the difference between profitability and insolvency.
Whilst some businesses are simply too lenient with payment deadlines, others are too busy to keep track of every client that owes them money, and resort to trusting that debts will be paid. This can have severe and costly repercussions.
The answer: Treating clients and customers like cash cows is a quick way out of business, but so is allowing them to get away without proper payment. It is advisable to set strict deadlines for invoices and be rigorous with follow-ups if they are not met. Keep track of all clients and money owed — specialised accounting software is an easy way to monitor this — and never let an invoice go unpaid. Offering discounts for prompt payments almost always result in fewer late payments.
Mismanagement of Transaction Evidence
The problem: Keeping the evidence of your business transactions — invoices, receipts, bills, bank statements — is vital for everything from data reconciliation and bookkeeping, to tax returns and expense claims.
Without them, you cannot prove what transactions you have made. This is another cause of inaccurate data entry, beyond that of human error, but it also means that you cannot claim on expenses as there is no evidence to back them up — potentially incurring large and unnecessary costs on tax returns. Evidence is also required in the event of an audit. If you were to be called upon by the government, without proof of transaction, they will have to take your word for incomings and outgoings, which they are unlikely to do. This can cause a range of time-consuming issues but is so easily avoided.
The answer: Maintaining records of all transactions is the most effective way of ensuring you don’t ever have to deal with matters of inadequate transaction evidence. Save and backup all online transaction records, and keep all paper receipts, invoices and bills — be sure to request electronic evidence whenever possible, as this is easier to store.
You may also like: The Hidden Costs of Running a Home-Based Business
About the Author
Russell Smith, a chartered accountant from Leeds, is a small business owner and finance expert. Russell is passionate about using his knowledge of finance to help small business owners, and he regularly blogs about important updates, as well as on good accounting practice.
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[…] I’ve talked about some basic accounting mistakes that people often make and how to avoid them. However, there are plenty more issues to be covered. […]