A Small Business Owner grapples with such recurring accounting tasks as paying bills, recording income and expenses, preparing customer invoices, issuing cheques to suppliers and employees, collecting past-due accounts, and handling employee and company taxes.
These are typical tasks for a Bookkeeper or an Accountant. But most Small Business Owners struggle to handle them on their own. They juggle the complex work of managing their books with the other chores of running their businesses.
While this approach diverts time and attention that the Small Business Owner can otherwise channel to other important areas of the business, it also hampers the ability of the business to grow, because the Small Business Owner will not have a firm grasp on the financial status of the business. He or she will be operating without a proper set up of the management and oversight of the finances of the business.
Here are five accounting mistakes a Small Business Owner must avoid, for the business to survive, and thrive:
1. Not Working With Accountant and/or Bookkeeper: The Small Business Owner is oftentimes not an expert in finance. Even where he or she is, it may not be the best use of time to personally manage the books of the business.
The hiring of finance professionals ensures that such key areas like tracking of expenses, payment of vendors, collection of receivables, balancing of bank statements and managing payroll are handled with expertise. Any slip in these areas may cost more money than the saving to be made by not using qualified hands.
If the business cannot afford to hire a full-time Bookkeeper or Accountant, it should engage either or both of them on a part-time basis. Or outsource its bookkeeping and accounting services to a firm that offers these services.
2. Not Recording Transactions Accurately: The business will be prone to mistakes if it does not perform its bookkeeping and accounting functions with accuracy. It can forget to settle important invoices or fail to record settled bills. It can find itself un-prepared for its tax returns.
Failure of the business to keep its books could lead to financial loss. It could also undermine its capacity to plan for growth. It is critical for the business to track its transactions, and enable the Small Business Owner to correctly gauge the health of the business.
Besides professionalising them, it is also important to automate the bookkeeping and accounting process with an integrated accounting software that connects all financial transactions of the business; like payment of bills, tracking of bank deposits and withdrawals, sending of invoices to clients, issuance of cheques, etc. The objective is to comprehensively capture inflows and outflows, and automatically indicate the status of the business in terms of growth and profit.
3. Not Separating Personal Finances and Business Accounts: One mistake Small Business Owners make is not telling the difference between their personal finances and the finances of their businesses, particularly during startup when the businesses are funded from the pockets of their founders.
Most Small Business Owners make personal and business purchases in single transactions. That’s bad for business. Mixed finances make it difficult to sort personal from business expenses. It’s hard to tell a business deductible expense when it is time to calculate personal and/or company tax. The problem surfaces when the business applies for a loan or line of credit. Lenders want to see an uncluttered snapshot of the finances of the business.
A Small Business Owner must separate accounts for personal finances and accounts for business finances. Both should neither meet nor mix.
4. Not Managing Invoicing and Billings Efficiently: Cash is the lifeblood of the business. Cash flow, which comes from settlement of bills and invoices regularly sent to customers, keeps the business humming from day to day. Failing to bill and invoice customers on a timely basis means cash will flow into the business in fits and starts. This can trigger cash flow problems and the business can run out of cash.
Because delays of invoices or bills mean that it will take longer for customers to pay, the business must get its invoices and bills to customers immediately it fulfils its obligations under the transaction.
5. Not Preparing and Planning for Tax Returns: It is untidy to start gathering receipts and documents a few weeks to the time that the business is required to file its tax returns. This amateurish response is avoidable if the finances of the business have been organised in the preceding months.
When the business fails to prepare for its tax returns, hurrying will impair its ability to file its taxes accurately. The business could end up paying more than it should normally pay if it was better prepared. The use of an integrated accounting system that tracks the expenses, payroll and other elements of the profit and loss statements of the business, in the hands of an Accountant with tax experience, will prepare and ready the business before it is tax time.
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