Small and medium-sized enterprises need to work harder than established firms to become more financially sustainable. However, plans of profitability and sustainability can only prosper if you manage your finances well. Having a good grasp over business finances can help expand the business. And accurate accounting plays a crucial role in managing business finance.
Accounting may seem simple and easy to execute. However, underestimating the actual worth of accounting processes can be a significant drawback for small business owners. Moreover, ineffective accounting mistakes can adversely affect a firm’s overall performance and financial management. Such errors can even lead to business closure. Thus, any small business cannot afford accounting mistakes- that too frequently.
If you run a small business and wish to stay afloat, here are five accounting mistakes you should avoid at all costs.
1- Not hiring an experienced accountant
One mistake newbie business owners make is doing everything by themselves. In their opinion, hiring an accounting expert is costly and unnecessary during the business’s initial stages. They want to handle the finances themselves and hardly pay much attention to hiring the right person. Some business owners might be good at managing finances, while others may not. Either way, hiring a professional accountant can prove beneficial in streamlining routine processes and decision-making early on.
So, consider onboarding someone with an accounting master’s degree to set the course for better accounting processes and financial management straight. If you do not have the budget to afford a full-time accountant, hire a freelancer and let them manage your accounts till you can afford to hire a full-time resource.
2- Not separating personal finances from business finances
Small business owners often fail to differentiate between their personal and business finances. It is fine as long as the company is at the birth stage. However, prolonged delays in keeping separate business and personal accounts can become a hurdle in the future.
Using a single account for personal and professional reasons can misrepresent financial information. You can overstate your running costs and underestimate income. Moreover, you’ll face trouble with the IRS when filing your taxes. Au contraire, keeping separate books helps you maintain your credit score, which is essential for securing business loans or line-of-credit. You’ll also benefit from tax returns and avoid heavy losses on personal savings. So separate your personal and company accounts at the earliest.
3- Not having any backup for financial records
Small business owners are often neglectful of this aspect because of the limited scale of their operations. But natural disasters don’t come with a warning. And nor do cybercriminals come knocking on the front door. Without a proper back of your accounting and financial data, you could land in a pickle. It will affect your business operations and also your business’s reputational capital in the market. Hence back your data up.
Going paperless is good, but there is always a need to save some paperwork for future use. For instance, once you go through an audit, you have to hand over specific financial records of your business to the auditor. Also, keeping financial records helps in future evaluations. The general approach here is to save the following documents for a minimum of seven years:
- Payroll tax information
- Information regarding your employees
- Accounting records
- Tax returns of your business
- Business authentication and ownership records
- Business operations information
There are many ways you can back up your data. The simplest is buying cloud storage space so that you can access our information from anywhere, anytime.
4- Not choosing professionals over family members
Another common accounting mistake is relying on family members to do bookkeeping for you. Sometimes, having blind trust in family members can bring your business to a halt. Rather than employing them at a lower cost, hire professionals who know their job. There is no point in jeopardizing your business to please your family members.
Also, working with family members can get frustrating and cause friction. They might have a non-serious attitude or develop a personal rivalry with you. Therefore, avoid the mistake of choosing family members over professional employees. They might seem like an affordable accounting fix, but you must think beyond that to run a successful business.
5- Not allocating proper financial budgets to different projects
Every entrepreneur has short and long-term business plans. These plans help in running business operations smoothly. However, not allocating proper financial budgets to these plans is an unwise thing to do.
Financial budgeting is as crucial as hiring a professional accountant for your business. Without effective budgeting, you cannot analyze how much a project will cost you. Your business expenses will increase, and you will overspend on a particular project. Through proper budgeting, you get to know which project will reap favorable results for the business and whether to continue it or not.
The Bottom Line
You can achieve business growth by avoiding the accounting mistakes mentioned above. Keeping detailed accounting records is imperative to surpass the introduction stage and beat your competition. So do the needful and focus more towards effective financial management of your business. You have complete control over business finances and steer your company in the right direction.