By Russell Smith
Small businesses, especially in their earlier stages, can walk a knife edge between success and failure. Steps in the right direction can lead to untold riches and opportunities for development; steps down the wrong path can lead to collapse and financial ruin.
Good accounting practices are crucial to the financial stability of a small business. These four accounting mistakes can have disastrous consequences.
1. Failing to Update and Monitor the Books
Bookkeeping is an age old tradition, with the first modern accounting practices published by Venetians in the 15th century. The reason this ancient accounting strategy has stood the test of time is down to its effectiveness in providing accurate and useful information.
Keeping books regularly up-to-date, whereby you record any and all incoming and outgoing transactions, allows you to get a strong picture of how your business is doing financially. The benefit of this is to spot trends, dips in profitability and potential financial pitfalls like increasing operating costs or overpaying for goods and services.
If you don’t regularly update and monitor the books, you can’t benefit from it and see hazards coming, meaning by the time you spot pitfalls, it could be too late.
2. Using Outdated Accounting Practices
Gone are the days of recording the books in ledgers and storing everything is a rickety old filing cabinet and good riddance. Advances in software and financial management tools have not gained popularity simply because they are new technology, but because they are vastly superior methods of managing accounts.
Failing to utilize specialized online software for bookkeeping and maintaining financial records — such as storing invoices and receipts — can lead to difficulty locating and interpreting important information. Modern day accounting software allows you to locate entries quickly, cross reference the books with transaction records and more.
Using archaic practices can leave you scrambling to work out where errors occurred, or simply have them go unnoticed, leading to tax return mistakes and inaccurate information of your business’s financial health.
3. Mistaking Gross Profits for Net Income
It’s all too easy to see the cash flow into your business as the money you are making, but 50,000 taken isn’t 50,000 profit.
The issue here lies with the engagement business owners can have with earning money and a detachment in paying out money. Gross profits, however, are never net profits, as you have to pay not only taxes but operating costs, employees, insurances and more.
If you treat your cash flow as your net income, you’ll soon run into difficulties from overspending. It’s important to ground yourself in reality, to know that 50,000 taken is likely to represent a much lower figure earned. Don’t allow yourself to get caught up in the big figures and concentrate on the true numbers, or you’ll quickly get out of touch with your businesses finances and end up in a bad state.
4. Trying to Manage On Your Own
Accounting is a complicated practice, which is why it takes years to get the necessary qualifications and accreditations required to call yourself a professional accountant.
Unless you run an accounting business, the chances are that you aren’t an expert in finance, which means accounting can prove to be complex, time consuming and troublesome. If you are struggling to manage your accounts or displaying signs that you need an accountant, it is advisable to get professional help.
If you try to manage on your own, but can’t, you’ll either sink too much time, money and energy into building a strong accounting system, or you’ll neglect them. Both outcomes have serious consequences.