Unless you're an accountant, chances are you didn't start your own business because you're in love with bookkeeping. Your mind is frequently on other facets of entrepreneurship, and rightfully so. Without your creativity and drive, you wouldn't have any finances to worry about. However, accounting is a crucial part of any business, and if you aren't taking it seriously, you're likely to run into problems.
Following are some accounting mistakes that business owners often make, but that should be avoided for the good of your company.
Frugality can be a good trait for a business owner, but when it comes to your books, it's important not to skimp. Whether it means outsourcing your accounting to a professional, hiring someone specifically for the job, and/or purchasing accounting solutions, go ahead and put some funds toward your needs in this department. If you try to save some money by doing it yourself, you may fall behind, miss important transactions, or sacrifice another component of your business because you're focusing on the books. Simply put, don't be cheap when it comes to accounting.
This goes directly with the point above. Don't skip software. Even if you have an employee in charge of your accounting, make sure they have good software to use. It helps with organization and data backup, and you may catch mistakes that come with human error. You may think you can do without it, but good accounting software can be a tremendous help. Do your research and find the right solutions for your needs.
Mixing Business and Personal Money
Mixing personal finances with business finances is a classic mistake that many business owners – especially "solopreneurs" – have made. Keep these funds separate to avoid complications on either side. Make sure you have separate accounts for personal checking and business checking, as well as separate personal and business credit cards. Allow for a reasonable salary and keep the rest of your earnings within the business. This will help you grow, while helping prevent a crisis during slow times.
Not Establishing Procedures
Your company should have accounting procedures in place that can be followed by anyone in charge of these matters. Whether you need to keep things up-to-date yourself or you hire someone to do it, there should be a strict set of rules that are clear to any relevant staff. If the employee in charge of accounting leaves the company, someone else should be able to step in relatively easily by following the procedures that have been set in place.
Confusing Profits with Cash Flow
Another mistake that business owners often make is confusing profits with cash flow, and this can be one of the most dangerous of all. If cash flow isn't where it needs to be, profits may not be as great as they seem. As Bplans puts it, "In theory, even a profitable company can go broke. Let’s see how: Suppose you bought an item for $100 and sell it for $200. Here you made $100 profit. But, what if the buyer is unable to give money on time? In this case, your business will show the profit—but what about the bills you need to pay meantime? You may not have the cash despite the profit you just earned."1
If cash flow does become problematic, a business line of credit may help smooth things over.
Not Recording Everything
Recording everything should be part of the aforementioned procedure. That means every single transaction, no matter how large or small. Omitting large transactions isn't something that you're likely to do, but small ones can add up, regardless of how trivial they may seem at the time. Not recording all of them is a big mistake that may come back to haunt you, especially at tax time.
Running a business is anything but simple, and your mind constantly needs to be on many different areas of operation, but accounting is the last place where you want to make mistakes. Take the time and make the effort to ensure things are running smoothly to avoid problems that will only make things more complicated.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.