Accounting errors can be costly and jeopardize your business integrity. As a business owner, you can greatly benefit in bookkeeping outsourcing and avoid accounting pitfalls that can have an impact on your company’s bottom line. Here are ten major accounting mistakes to watch out for.
1. Entering Erroneous Data
Maintaining accurate and complete business transaction records is a must. Entering erroneous data creates an inaccurate status of your financial health. Inaccurate information on required government forms could lead to hefty penalties.
Always verify financial information and use a consistent method for entering data. Get in the habit of checking your accounting books for balancing debits and credits. Correct errors before they become huge problems. Check the supporting documents including invoices, receipts, and purchase orders to make sure you have the accurate amounts.
2. Omitting Transaction Records
Omitting important business transaction results in accounting mistakes. You need to properly record every business transaction you make, no matter how small. Failing to document your transactions may cause inaccuracies. It’s possible to miss out on tax deductions when some business expenses are not properly recorded.
Make sure all business transactions even smaller ones are entered in your financial records. To avoid omission errors, always include the transactions made with your petty cash fund.
3. Trashing Official Receipts
Don’t throw away your official receipts. You might need proof of transactions later. Receipts help show consistency in your accounting books that you need to prepare for an audit. The more business records you have that reflect the same financial information, the better.
Keep your business receipts for at least three years, or for as long as the government can audit your records. When you file your income tax, an auditor may review your records to check for uniformity on your tax return. Use business receipts to convince the auditor you’ve reported the correct amounts. You may also store digital receipts online to secure them.
4. Mixing Personal and Business Funds
If you thought using one account for all your finances can simplify things, think again. Mixing your personal and business transactions can bring horrors and mess up your finances.
Identifying later whether the transactions belong to you or to your business can be cumbersome. It can make your financial reports and tax forms challenging. Always separate your business income from your personal funds.
5. Treating Profits as Cash Flows
To better manage your finances, treat net profit and cash flow differently. Although they’re both involved with your income and expenses, they measure money differently. If you get confused about them, you might presume you have more money than you actually do.
Net profit looks at how much you’ve earned after paying or subtracting expenses from sales during a specific time period. To increase it, you’ll need to increase sales revenue, reduce cost of goods, and reduce labor and operations costs. In contrast, cash flow indicates your incoming and outgoing money. Maintaining a positive cash flow is important to properly time your expenses, anticipate income, and invest in your business.
6. Failing to Reconcile Business Books with Bank Statements
Always check and recheck the accuracy of your book entries. Failure to reconcile your business books could lead to serious financial setbacks if left unnoticed. The longer you ignore the financial errors, the harder it would be to correct them. You’ll need to regularly check the Bank Statement reconciliation to help you know the mistakes early.
7. Ignoring to Create a Budget
Planning ahead is an important but sometimes overlooked aspect of running a business. Creating a budget helps you plan your next moves. A budget focuses your goals, shows where your money is coming from and going to. It indirectly increases profits, makes adapting to change easier, and helps you make fast and smart decisions. Ignoring it can cause you to miss out on opportunities for growth.
8. Neglecting to Measure Progress
Measuring the business performance helps you identify strong and weak points in your operations. You’ll need to measure your financial progress, review key performance indicators, and improve daily operations. It’s important to organize your business performance metrics, verify accounting data, organize the data into reports, and compare them over time.
9. Wasting Time on Ancillary Operations
The accounting process is time-consuming and wastes hours that could otherwise be spent generating revenue. As a small business owner, it would be wise not to spend all of your time completing your financial books. Focusing on the aspects of your business that bring in money should be your main priority. Don’t waste your energy computing taxes, creating reports, or generating invoices. Delegate ancillary operations to finance and accounting experts.
10. Dismissing Signs for Help
You’re not a superhero. You need to be able to delegate financial tasks to key people as your business grows. Being busy doing the accounting on your own will never directly earn you money, no matter how much time you put into it. Know when it’s time to pass on some bookkeeping responsibilities so that you can focus on long-term success. Don’t miss out and hesitate to ask for help when you realize you need expert accounting assistance.
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