The 6 Worst Accounting Mistakes Small Businesses Make and How to Avoid ThemWritten by Bernard on October 31, 2016
There is essentially a limitless amount of accounting mistakes that small business owners make in their day to day lives.
The types of mistakes that can get you some major eye-roll (or worse) from your accountant, if you had one, and if you would want to talk to him or her without a bodyguard to keep you from their evil glare.
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Believe it or not, business owners have a lot of responsibilities. It’s one of the main things we mention here in this blog—the ups and downs of responsibility, and how this can lead to burnout.
The fact is that with great autonomy comes a hell of a lot of stress and you might go bald because you keep having to change all those different hats you’re wearing.
One of those hats is, most importantly, as a business manager. But then you’re also a consultant, a human resources person, customer service representative, sales and marketing manager, web developer, product specialist, and last but not least, sometimes your own accountant.
Today we’ll help you with one of those roles you have to play on a daily basis. Let’s look at how to avoid these 6 common small business accounting mistakes so that you can make your business a success.
Mistake #1: Using your business account for personal purchases
This is quite possibly one of the worst accounting mistakes you can make. But it’s also one of the easiest.
You see, when you’re a small business owner without a separate banking card or account, it’s impossible for you to be making this specific mistake because, well, you just don’t even have a business account.
That’s a horrible business mistake. We’ve said it before: you need to separate your business and personal finances.
But when you do have those separate cards, sometimes you can forget to use your business bank card for your business purchases and vice versa.
Nonetheless, it’s bad. It makes it a very messy and difficult time for you (or your accountant) when tax season rolls around.
Mistake #2: Throwing away receipts
This is also a very basic mistake. Because they’re such tiny slips of paper, you tend to lose them. You put them one place, and they end up getting somewhere else.
By throwing away we don’t mean literally throwing them away—it also includes losing them, which is a big possibility when you don’t keep accurate records.
When it comes to storing receipts, you can go the shoebox route. However, there are lots of programs now that allow you to save your receipts. For example, at InvoiceBerry, when you add a new expense in the expense tracking section of our service, you’ll see an option to add a receipt. This can be a picture or scanned copy of a receipt.
Mistake #3: Not managing payments received
In the accounting lingo, these receivables are crucial for accurate bookkeeping. And it is one of the bad accounting mistakes that can get you in trouble.
It’s the major lifeblood for your business’s cash flow and crucial for determining whether you’re making a profit or loss.
When you send out an invoice, think of it as a debt that’s been set against the customer. It’s your responsibility to close this debt. So when your client finally pays you, you need to record this payment.
This is quite easy to do with InvoiceBerry, as you can record your payment as soon as you receive it, right on the invoices page. This is crucial documentation for the all-important tax time, and if you want to make your accounting life easier, add payments to your invoices sent as soon as you receive them.
Mistake #4: Overdue accounts
This is a problem that plagues many small businesses and freelancers. In fact, over three in five small businesses had to suspended work and services to fight late payments in the UK, and the average freelancer & small business waits 72 days for payment.
Although one of the more common and unavoidable accounting mistakes, it is also something that you can at least lessen. One of the best tips is to set a shorter due date for your invoices.
Instead of the standard 30 days, set your payment due date for 14 days. That is two weeks in which a customer should be able to pay for services or products already received, and there should be no real problem in that.
Beyond that, if you don’t get your payment in that time frame, there are some steps you can take. We’ve already discussed this before, so head over to our blog post on invoicing tips to get more in-depth information.
Mistake #5: Not accurately recording cash
When you’re receiving payments by credit, debit, or bank transfer, it’s relatively easy to record payments received. However, it can be a bit more work to do that when you receive some or all of your payments in cash.
As we said, receivables are crucial for your cash flow, and recording them is mandatory for accurate record keeping. However, there’s also the issue of cash expenditures, which is extremely difficult to do as you can’t log into your bank account quickly and check an expense.
That’s where accurate record keeping and recording is important. (You are tracking your expenses in general, right? Right?)
It’s easy to lose track of that, especially when you have seemingly minuscule expenses, but it’s a good habit to get into. And one that will help save you a whole heap of stress and troubles. Luckily, InvoiceBerry’s online invoicing software also makes it easy to track expenses quickly, simply, and effectively.
Mistake #6: Wearing too many hats
This last one may be the root of all your accounting mistakes. You just can’t do everything, simple and plain.
For example, I’m fine working with my hands—I can fix a light bulb, spare tire, broken odds and ends around the house. But if my fridge breaks down or my engine starts spewing purple and orange demon-smoke, I’m probably not going to tackle that myself.
I will get the help of a professional (and a priest).
Wearing a lot of hats as a small business owner can be tempting in the mythical I-can-do-it-all-by-myself ideology that sweeps over many entrepreneurs, but that’s just not true.
Remember, the second half of the “A jack of all trades” saying is “And a master of none.”
You don’t want to be a jack of all trades, because you’ll be focusing so much on everything that you’ll end up doing nothing. Focus on your business and marketing, but know that accounting is a whole heap of expletives that’s just too hard for a newbie to handle. When it comes time to do your taxes, send it out to a professional.
You can hire your own, or just hire them when you need them during tax time. There are even subscription accounting services popping up, such as this one in the UK. For £19.50 per month you can get your own dedicated accountant and a whole heap of services. Less than the price of a cup of coffee.
Ok, more than the price of a normal cup of coffee. Less than the price of a very large, premium cup of coffee. Anyways, it’s not too bad.
No more accounting mistakes
There’s one way to avoid these accounting mistakes. That is educating yourself on parts of your business that you have limited knowledge in. There’s no shame in that.
And you’ve already taken the first steps by reading this article. You’re trying to help yourself and your business by becoming the most informed many-hat-wearer, so that when the time is right and your finances are in order, you can delegate and hand off your hats to others.
So congratulations on that, and good job! I know many small businesses don’t hear that quite often enough.
If you have any other great tips on how to avoid accounting mistakes, please let us know in the comments below! We’d love to hear from you.