Starting a business often means having to learn a lot of new skills quickly, including human resources, accounting processes, and technical skills. This can be quite overwhelming and can generate an enormous amount of pressure, which can lead to mistakes. Accounting mistakes are very easy to make when starting a new business and can be equally difficult to rectify. If these accounting mistakes are not checked in time, they can snowball and have a significant impact on the business and its finances.
However, a little preparation can help you avoid making these 5 common accounting mistakes made by new business owners:
1. Not Organizing The Books Properly
Being organized is the key to a sound and effective accounting process. It means itemizing and storing the receipts of all business expenses, big or small, to keep a track of each penny spent and cut unnecessary future expenditures.
Properly organizing your books will also ensure that there is no overlap between your business and personal expenses. You might shop online or order groceries online, and get the products delivered to the office. Some of these goods could be for personal use and some for business. If you keep the bills, it will be easier to identify the business expenses and ensure that personal expenses are not taken into account.
A proper documentation and bookkeeping procedure will come in handy during internal and external audits. Moreover, if there are any insurance claims or legal disputes in the future, it will be easy to reference any related expenditures.
2. Not Following Proper Accounting Procedures
Simple organization is not enough. You also need to follow proper accounting procedures to ensure that all business income and expenses are recorded properly. Even one wrong entry, if not noticed, can cause a ripple effect and show an incorrect picture of your business finances. If this becomes a regular occurrence, it could lead to serious financial hardship. Hence, it is important to ensure that assets and liabilities are categorized correctly by reviewing the accounts regularly.
For instance, let’s say Andy is hired at a rate of $10,000 for a project and his estimated cost was $6,000. He noted a profit of $4,000 before starting the project. But the pandemic delayed the project and the cost increased to $8,000 by the time he completed it. His books of accounts show an incorrect amount and date, giving a false impression of the business’s cash on hand.
3. Failing to Notice Small Data Entry Mistakes
Mistakes are common, but it is important to identify and fix them quickly. One incorrect digit can create a large error, for instance, if an account receivable of $1,000 is recorded as $4,000, this can create a large discrepancy.
While there is no way to avoid these mistakes, you can and should always work to rectify them. The best way to do this is to reconcile your bank statements with accounts payable and accounts receivable on a regular basis to catch any mismatch. A monthly reconciliation of accounts can prevent small data entry errors from becoming large problems.
While reconciling accounts, cross-check large amounts with their supporting documents to ensure there is no fraud. You can add a layer of security to the process by comparing actual expenses with your business’s budget. That will help you highlight any unusual transactions or budgeting mistakes.
4. Updating Books Manually Instead of Using Accounting Software
Several business owners prefer to update their books manually to save the cost of investing in accounting software, but this often creates more problems than it solves. Trying to manage and reconcile accounts manually in a spreadsheet or other process is extremely time-consuming and increases the chances of errors. As your business grows, keeping track of the transactions manually will become next to impossible.
Investing in accounting software is a better option as it vastly simplifies the accounting process. Using accounting software will not only make record-keeping easy and hassle-free but also catch errors that might get overlooked by a human eye. In order to stay updated and on top of your game, accounting software will be handy. Software often also makes it easier to share data with your accountant. Most accountants are able to work with several major software brands, making it simple to share files and communicate changes.
But accounting software has its own limitations. It can be prone to bugs or data loss. Hence, it is imperative you keep a backup of your accounting software and related data.
5. Not Seeking Expert/Professional Help
When you start your business you might be handling the accounts yourself. But as operations pick up you might find yourself having less and less time to devote to accounting. As your business grows, hiring a professional, whose core competency is accounting, will save you time and expense in the long run. A professional’s expansive knowledge and experience will ensure your bookkeeping is well-managed and they can also catch discrepancies and identify cost and tax-savings opportunities.
Don’t let these small accounting mistakes create a butterfly effect. Putting your bookkeeping and accounting in the hands of a professional will allow you to put your time to better use in growing your business.
Contact Sloan Partners LLP in Toronto for Accounting Advice for Business Owners
At Sloan Partners LLP, our accounting professionals advise businesses on accounting strategy and financial planning. If you would like to discuss how you can refine your internal accounting procedures to benefit your organization, contact us to schedule a consultation. Please reach out to us online, or by phone at 416-665-7735.