For those starting a small business, accounting is one of the significant challenges that must be faced. Not all entrepreneurs have the necessary knowledge to make sure that the ins-and-outs of their business finances help them maintain their success.
Sometimes, it even becomes the reason why they would need to close their venture. Accounting mistakes are inevitable. Some errors may be small, but over time, these little mistakes can become detrimental to your business.
Here are the common accounting mistakes small businesses commit and how they can be effectively avoided:
Profit = Cash Flow
One of the common mistakes that business owners commit is to assume that their profit can be considered cash flow.
Each deal must be regarded as part of the cash flow once the exchange is completed. When you write off each transaction as an income for your company when you haven’t started the project, you can give you a poor picture of your company’s status.
You may fail to prepare for the change in the pricing of raw materials and other factors. You can avoid this by only considering profit as part of the cash flow when the project is completed and delivered.
Failing at Bookkeeping
Some businesses would rather hire their accountant instead of doing the job themselves. Why? An effective accounting method means keeping a complete record of every transaction that your company enters into.
Business owners must ensure that they have listed and categorized everything accurately. If you are not up for this task, it would be best for you to hire a bookkeeper, at least.
Employees vs. Independent Contractors
Categorizing your workers is one mistake that you shouldn’t commit. You must classify your workers accordingly if you don’t want to deal with the IRS. The IRS can fine you if they find out that you are not giving your workers the proper benefits that they are entitled to.
Make sure to do a rundown of your workers to know whether they are your regular employees, or they are only independent contractors that have full control over their schedule and tasks.
Errors in Payroll
If you are not working with an accountant, managing payrolls can be a headache, and there will be instances where you would commit mistakes. When you need to pay, confusion can arise.
These incidents can also occur when one of your employees ask you to provide proof of income. Make check stubs and allow the software to generate pay stubs for your employees. This way, you lessen the chance of making mistakes that can put your business in hot water.
Miscommunication with Bookkeeper
Say, you’ve decided to work with a bookkeeper. You cannot only give them all the work and carry on with your day. You have to let your bookkeeper be aware of what is happening in your business.
They have to know what purchases you‘ve made and how much money went into the company for a given period. This way, it will be easier for your bookkeeper to reconcile your finances. The next time that you look at your records, you’ll have an accurate picture of your business’ financial health.
Not Updating Bank Accounts
Bank accounts must always be updated at all times. You must see whether your account balance written in your financial books is still accurate. This is particularly important if your company is making small purchases that aren’t recorded at all times.
Accounting is part and parcel of your business plan. It will help determine which of these mistakes your company is committing so that you can make the necessary adjustments.