By Vinnie Fisher
As a small business owner, you have surely come to recognize the importance of establishing good accounting practices. With the right practices in place, your business can operate more efficiently, cleanly, and appeal to new investors. However, with the wrong system in place, you may find yourself quickly facing a variety of different financial, operational, and legal difficulties along the way.
Accounting is something that ought to be taken quite seriously and, ideally, will be a component of your business that will ultimately be mistake-free. In this article, we will briefly discuss some of the most common accounting mistakes that small businesses make and how these mistakes can be effectively avoided.
1. Waiting Too Long to Prepare Financial Information
Generally speaking, there are two times of the year in which accountants are the busiest: the end of the fiscal year (usually, but not always, the end of December) and during tax season. During these times of the year, businesses of all shapes and sizes actively work to make sure that their books are accurate and ready to go.
However, only paying close attention to your books twice a year can be a detrimental accounting mistake. In fact, if you were to make a mistake in May and completely ignore your financial records until December, the consequences of this mistake would likely continue to compound each month.
Furthermore, the longer you allow a mistake to stay on the books, the more difficult it will be to identify and correct it. There are many benefits of outsourcing financial and accounting services, including fewer errors, less stress, and ensuring finances are completed on time.
In order to make sure your books are as accurate and manageable as they can possibly be, you may want to consider updating them on a daily—or at least a weekly—basis. This way, once the busy times of the year inevitably roll around, you will not be too distracted from continuing your ordinary course of work.
2. Confusing Revenues, Profits, EBITDA, and NOPAT
Another common mistake that new business owners make is confusing revenues, profits, EBITDA, NOPAT, and other common metrics. Though these figures are indeed highly related to one another, you may find yourself unpleasantly surprised when you realize you have a lot less money than you initially assumed.
- Revenue comes from the cash generated from all goods, services, and assets that your business sold. Typically, this figure will be the highest.
- Net Profits are calculated by subtracting your expenses from your revenues.
- EBITDA stands for earnings before interest, taxes, depreciation, and amortization—once these factors are accounted for, your available capital might significantly decrease.
- NOPAT stands for net operating profit after taxes. Keeping track of the effect that taxes have on your wealth will make it much easier for you to make objective decisions.
If you are unsure how much capital you currently have available, it is almost always beneficial to be conservative and assume a lower amount.
3. Making Simple Math Mistakes
Because many business owners save their accounting responsibilities for the end of the day (or the end of the week) when they are ready to go home, they are especially likely to make simple math mistakes. But even a mistake as “simple” as forgetting to add a decimal point can have a tremendous impact on the financial well-being of your business over time.
In order to avoid these mistakes, it is important to double-check every entry that you make. You should also avoid making any entries by hand and, depending on the complication of your operations, even consider investing in some entry-checking accounting software.
4. Failing to Separate Business Accounts from Personal Accounts
When you are just starting out as a new business, you are likely looking for as much capital as you possibly can. If your business is a sole proprietorship, it can be especially tempting to treat your business accounts and your personal bank accounts as if they were the same thing.
However, failing to separate your business accounts from your personal accounts can have a wide array of financial—and even legal—consequences. In order to make sure these accounts remain distinct, you should declare your business as a legal entity, create a separate bank account, and record your business and personal expenses separately.
5. Thinking You Handle Your Books on Your Own
Accounting can often be incredibly complicated and, unless you’ve been formally trained as a CPA, there are likely many accounting challenges you will not be able to handle on your own. Because of this, many small businesses have realized that it makes more sense to hire outsourced accounting firms to handle their accounting who specialize in finance, taxes, data collection, and other related duties.
Contrary to popular belief, hiring someone to manage your accounts may be much more affordable than you might initially assume. The best accountants may be even able to save you enough in taxes to offset whatever fees they may charge. When comparing different accounting specialists, you should look for someone who has experience working with businesses similar to your own and who is also able to effectively answer any of the accounting questions that you may have.
These are just a few of the most common accounting mistakes made by new businesses, but failing to avoid them can be incredibly costly over time. Whether you like it or not, accounting will inevitably be an essential part of the business cycle. By being proactive and taking measures to avoid accounting errors, your business will be able to operate much more effectively in the long-run.