Small business owners have a lot on their plates. While accounting may not be the primary function of the business owner, mistakes made in accounting have costly consequences that impact the whole business. Taking just a few steps to avoid common accounting errors is good for the business’ financial health. Owners and managers are more productive when time is spent on moving the company forward instead of cleaning up messes. Consider the following four mistakes:
1. Mismanaging receipts
Maintaining receipts is challenging for everyone, but the IRS requires proof of business expenditures. Many people think that keeping credit card statements is enough; unfortunately, it’s not. Businesses need a process to keep receipts all in one place so they don’t get lost.
Receipts printed on thermal paper (think gas station receipts and many more) will fade within a year or two. The bad news is the IRS could audit several years back, requiring documentation of expenses. Correct this possible scenario by scanning receipts or taking a clear picture of them with a smartphone.
Better yet, use an accounting system and/or document management application to upload the receipt and attach it to the transaction in the accounting system. American Express has a feature called Receipt Match which actually connects the expenditure to an uploaded image of the receipt. Paper is now irrelevant and accounting never has to ask for a missing receipt again.
2. Ignoring the accounting reports
There are gold nuggets in accounting reports, but some business owners don’t take the time to review them, or are uncertain about how to interpret them. Some of the ways that reports help owners improve profitability include:
- Identifying the highest selling services or products
- Projecting cash flow to avoid a shortage and having to scramble
- Understanding top customer trends or the demographic of top customers
- Evaluating/connecting marketing or business development expenses related to sales
- Pointing out trends compared to prior years, budget, or seasonality effects
- Evaluating profit margins per product or service to validate or adjust prices
- Managing aging receivables or speeding up collections
- Measuring employee profitability by department or job type
Being proactive with accounting reports helps owners and/or managers spot actionable opportunities in the business. Reports also bring problems to light [hopefully] before they manifest into trouble.
3. Mixing business and pleasure
Avoid mixing business and pleasure with bank accounts and credit cards whenever possible. All businesses should have a separate bank account, and all business transactions should go through there. If a business deposit gets credited to a personal account, reversing the error takes valuable time and may create unnecessary issues both operationally and ethically.
Taking out a separate credit card and putting all business transactions on it saves a lot of time for the person who handles bookkeeping. The credit card doesn’t have to be a business credit card. It can just be a personal credit card that’s solely used for business. If there are employees who use a company credit card for business charges, sometimes a separate card for them may help control fraud.
The hardest area in which to separate business from pleasure is cash transactions. Set up a petty cash account or a reimbursement process so that cash expenditures are accountable to the business.
4. Not making timely entries
Business gets busy and the day gets away from the person responsible for entering invoices or reconciling the bank account. But un-entered invoices give a false impression of the receivable/payable ratio – an important barometer of business health. At best, a business owner may think that more cash is available for spending than is actually true. At worst, the business owner commits money that shouldn’t be spent, and/or invoice payment falls behind and negatively affects credit-worthiness.
Stay on top of tasks such as invoice entry, expense reimbursements, and bank reconciliations to have a true picture of financial reporting for business decisions.
Sad to say, but there are dozens of accounting mistakes that can take down a business. The most important point is to set up systems to help do the work, and pay attention to the numbers to keep business running smoothly.