The Most Dangerous Accounting Mistakes For Your Small Business

Starting your own business is an amazing thing to do but it’s also notoriously risky. There’s a lot to think about when you first start out on your own and it can be tempting to put accounting tasks on the back burner, but that would be a huge mistake. Good accounting is crucial to the financial health of your business and mistakes can be devastating, especially in the early days. It’s important to know which mistakes to avoid to ensure that your small business is around for years to come.

1. Bad Bookkeeping

New business owners are often overwhelmed and tend to neglect bookkeeping. However, it’s essential that you keep the books up to date and record all of your income and expenses. Without this data, you won’t have a clear picture of how you’re doing financially, which can lead to a growing list of nasty problems.

Meticulous bookkeeping allows you to spot trends, understand your spending and examine which types of services generate the largest ROI. You can then leverage this data to improve the financial health of your business, maximize your profits and manage your cash flow. Staying on top of the books allows you to stay one step ahead and put out fires before they start.

2. Confusing Cash Flow and Income

"It's not now much money you make, but how much money you keep." - Robert Kiyosaki

$100,000 in revenue sounds great, but if you had to spend $60,000 on software, insurance and employees to make that money, you’re actually left with $40,000 profit. You’ll then have to pay tax on your net profit, so the amount available to you as the fir owner will be smaller again.

It’s vital to know not only how much money is coming into your business, but how much is going out. Getting carried away with your top line revenue number is a common mistake that many new business owners make, and it quickly lands them in hot water. It’s important to stay grounded in reality and know how much you’re really making (the net profit after taxes) so that you don’t overspend.

3. Using Outdated Practices

You’re a 21st century business and your accounting practices should reflect that. Online accounting and bookkeeping software is faster, easier and dramatically more efficient than paper ledgers and Excel spreadsheets.

Online accounting software is easy to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means that you’re much less likely to make mistakes on your tax return. It also reduces the risk of making the wrong financial decisions due to inaccurate information.

With this type of software, you won’t have to spend hours updating and organizing your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. While it may appear to be more expensive than the DIY approach initially, using online software will save you many man hours overall.

4. DIY Accounting

Accounting is complicated; there’s a reason it takes CPAs years to be licensed. Trying to manage your accounts all by yourself is a surefire way to waste time and stress yourself out. Besides, without extensive financial knowledge it’s unlikely that you’ll be able to save a significant amount of money on your taxes. Furthermore, you’ll be heavily penalized for making even a minor mistake on your return which could cause financial problems for your business.

Trying to manage on your own books and taxes is a drain on your resources. So the sooner you seek professional help, the better. Investing in the services of a qualified accountant is one of the best decisions you can make regarding the financial health of your small business.

Summary

It’s important to avoid the above accounting mistakes in order to set your business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it’s best not to take any risks. While it’s tempting to put accounting off until later, you need to make it a priority right from the very start. Good businesses and bad accounting just don’t go together.