As a small business owner, it’s important to have an efficient and error-free accounting system. It gives you a clear view of how your business is performing, helps you plan strategically, and eases you through the busiest time of the year — tax season.
That being said, it’s not easy to process such a large volume of data and transactions every day without making any mistakes. That’s why you should be proactive and take precautions. The more aware you are of the most common accounting mistakes, and ways to avoid them, the more likely you’ll be able to prevent any major issues from occurring.
The following are the top five most common accounting mistakes that small businesses make and how to deal with them.
Operating without a budget
A budget is an essential tool to track when and how you earn or spend money. It helps you set realistic financial goals, trim costs to prevent overspending, and make more informed financial decisions. Without a budget, your business wouldn’t have a baseline to adjust financial activities accordingly, meaning you wouldn’t know if you’re overspending or underspending, and when to stop before getting into too much debt. Also, you wouldn’t be prepared for emergencies or unexpected expenses, likely leading to poor decisions.
In other words, a business budget offers you a path to meet your financial goals.
Not following a proper accounting procedure
Many small business owners, self-employed individuals, and freelancers assume that only big corporations need an accounting procedure. This is incorrect because despite having fewer transactions in a month, lacking an accounting procedure still increases your chances of making errors or miscalculations, costing time and money every time you need to fix them. It’s best to set up formal, documented, and detailed procedures for managing bookkeeping and accounting procedures. In addition, to enhance your accounting consistency and accuracy, you may want to create standardized forms and checklists for each activity. For example, below is a checklist of information you have to enter into your accounting software whenever you have a new vendor:
- Vendor’s name
- Vendor’s address
- Telephone number
- Employer Identification Number (EIN)
- Insurance certificates
- Letters of recommendation
- Signed contracts.
At first, you may think this is too complex, unnecessary, and takes up too much time. But in the long run, you will have a smooth and efficient accounting system with minimized accounting mistakes.
- 7 Steps of The Accounting Process for Small Business.
- 3 Accounting Tips for Successful Small Businesses.
Neglecting documentation procedures
You may end up losing a lot of money if you fail to document business expenses required for tax deductions. Without the right supporting documentation, the IRS can disqualify your tax write-offs or even penalize you. Here are a few tips to help you maintain a productive documentation system:
- Set up new policies: you can introduce regulations to encourage your employees to store receipts and relevant documents better. For example, your company can only agree to reimburse expense reports if receipts are attached.
- Go paperless: Paper documents, especially receipts, are easily lost or damaged. That’s why more and more businesses opt to use technology to convert all paper receipts into digital and have them stored securely in the cloud. Shoeboxed — one of the most popular choices on the market — can help you with that. With Shoeboxed, you can digitize every paper receipt in seconds and have your data automatically extracted and categorized. Switching to digital makes documentation procedures a breeze!
- Only pay when receiving a bill: it’s not that uncommon for a vendor to request payment before issuing an invoice. It is inadvisable to make payments prior to receiving documentation, however,, as it can always be used against you. More importantly, if a dispute arises, you’ll likely lose that money.
You might also be interested in:
- Best Ways to Store Your Receipts and Keep Them Organized.
- What Is A Tax Write-Off? 5 Most Common Write-Offs For Small Businesses.
Doing bank reconciliations infrequently
Another common accounting mistake is not doing bank reconciliations regularly. This mistake is often made by small businesses because they assume that only big companies with a large number of transactions need to do reconciliations.
Bank reconciliations are vital to every business’s success – it’s the process of comparing your accounting books to bank statements to ensure the data on both documents match and are accurate and correct. By performing bank reconciliations frequently, you can catch mistakes in a timely manner, big or small, and take immediate measures before they get out of hand. A few other benefits that bank reconciliations will bring to your business are:
- Prevent fraudulent activities
- Keep track of your cash flow
- Identify and report bank errors
- Detect payments that have bounced or failed to post.
Remember, the longer you go without doing bank reconciliation, the more difficult it will be to catch up, which ends up taking a lot of time, money, and resources.
You might also be interested in:
- Why Are Bank Receipts Important to Every Business?
- Top 7 Reasons to Keep a Separate Bank Account for Business Funds
Failing to back up your accounting data
What would happen if the device on which you kept your company’s financial data was lost, hacked, or stolen, and you didn’t have a backup? You would lose all of your confidential financial data.
This kind of problem can occur at any time, to anyone. That’s why you should be well prepared in advance by having a backup for your accounting data. It’s quite easy today as many small business accounting software programs allow you to set up an automatic backup of your data. It’s also a good idea to go through your backup files every now and then to ensure they are all working. That way you know you have everything you need to continue operating your business, even in an emergency situation.
Whether you do your own accounting or hire a professional, making accounting mistakes can result in serious problems for your company. It is better to address and avoid these issues before they escalate and cause far more damage.
Shoeboxed can help you with that.
Shoeboxed is a helpful receipt scanner software for freelancers, small business owners, and DIY accountants. It helps you clear your piles of documents and turn them digital with ease. Shoeboxed automatically extracts and categorizes important data from your receipts, which then gets manually checked and approved by a team of data experts.
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