Common Mistakes Small Businesses Make In Accounting
Accounting plays a vital role in business, allowing your business to save money, increase profits, and identify where budget cuts must be made and where resources need to be added. Although it may seem simple, tracking every penny of income, expenses, taxes, and vendor payments is difficult and time-consuming. Mistakes are easy to make, and you can lose tons of money if you don’t pay attention to them. Moreover, repeated blunders and bad accounting practices can lead your business to insolvency.
So, to help you prevent such financial errors, MEJ Business Solutions has put together a list of the most common mistakes small businesses make in accounting and how to avoid them.
1. Lack of organization
As a business owner, you need to hire accountants and bookkeepers with great organizational skills. Accountants need to record every transaction, review bank and credit card statements, track invoices and bills, calculate taxes, and more. Missing any one of these items or losing a receipt would be a problem and cause issues in the accounting process. Keep in mind that an organizational process is necessary for any credible accounting system.
2. Failing to reconcile accounts
During your review of your financial data, you must regularly check bank and credit card accounts to ensure that your financial information reflects the same balance. This process is called account reconciliation. It allows you to review how accurate you are with your finances. If there is a gap between your financials and bank accounts, you will be able to detect the differences and allow you to fix the mistakes.
If there are discrepancies between your accounts and you do not perform account reconciliations, errors can cause issues with cash flow and can wreak havoc on your business. These problems can easily be prevented by reviewing your accounts. Regularly reviewing your business accounts can help you catch fraudulent transactions and save money over time!
3. Not using an accounting software
Tracking all your transactions is key to a successful business. It is possible to do so in a number of ways, but we recommend using accounting software. Investing in the right accounting software will help business owners avoid making mistakes that could have easily been prevented. This will make managing the finances of your business easier. Most accounting software integrates with bank accounts, POS systems, and a wide array of apps and other software, leading to less manual work for individuals. Additionally, accounting software allows businesses to keep track of all finances in one centralized location and easy access to all historical information.
4. Overstating revenue
One of the most common accounting errors for companies that issue invoices to their customers is overstating revenue. Without a proper workflow, businesses can easily show nearly double their actual revenues on their financial statements. Overstating revenue can cost businesses thousands of dollars in taxes they don’t really owe. Additionally, overstating revenue can mislead owners about how their business is performing.
5. Failing to separate personal and business expenses
Maintaining personal and business expenses is vital for all business owners. Maintaining more than one bank account may seem more difficult than only maintaining one bank account, but in reality, it is not the case. Tax preparation is easier and simpler when all business finances are managed through one account. Additionally, when all business transactions are done with one bank and credit card account, it ensures that all expenses and revenues are accounted for. Business accounts should strictly be used to make business transactions only.
While it is tempting to use business accounts for emergencies, you should not do so. This indicates a misuse of funds, and all transactions will need to be verified by the accountant.
6. Poor communication with accountant
Whenever you plan to make a large financial decision, you should always keep your accountant informed. The biggest mistake is when businesses forget to notify accountants of transactions and to keep items to the last minute. Not communicating with your accountant makes the accountants work much harder at the end of the day by forcing them to catch up. Additionally, it will be more difficult for business owners because they will also need to spend more time reviewing old transactions that they might not remember anymore. Lastly, ignoring and not communicating with an accountant could cost more money. Before making financial decisions, accountants could offer more cost-effective alternatives.
To avoid these and other mistakes, reach out to the experts at MEJ Business Solutions. We are an Orlando, Florida-based accounting firm serving small to medium-sized businesses. Our goal is to provide our clients with financial clarity through high-value accounting and bookkeeping services, allowing you to focus on day-to-day operations.
We serve clients across Orlando, Clermont, Sanford, Kissimmee, Tampa, Miami, Florida, and all over the United States.