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Top 3 Accounting Mistakes Made by Small Businesses

Posted by Donna Ataman on June 7, 2016 at 4:18 PM

There is a very large range of accounting applications available for small businesses to manage their books. It is now easier than ever to keep accurate records of your business’ finances and know where your money is going.

Accounting software that has automatic imports of sales, bank feeds, and payroll has reduced common manual data input errors, but there are still areas that small business owners continue to make mistakes in.  These can sometimes be forgotten when the tedious task of manual import has been taken away from your bookkeeper or you, the business owner.

Some accounting mistakes are minor, insignificant, and — when they’re inevitably noticed by someone within your business — easy to correct. But others are more serious and could have a significant effect on your business’ financial health.

Over time, poor accounting practices can distort the reality of your company’s fiscal health. In severe cases, repeated accounting mistakes and bad accounting practices can lead your business toward insolvency or administration.

Here are 3 of the most common small business accounting errors, and how they can create issues, both small and significant, for your business.

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1. Assuming Profits Always Mean Cash Flow

You just closed a $50,000 deal that will take your company three months to fulfill. It’s going to cost your business $20,000 to fund the project, so you book a $30,000 profit on the deal before you’ve delivered anything.

Big mistake. What happens if the deal, rather than taking three months, runs into an issue that causes an additional three months of delay? What is your cost increase? This makes the $20,000 cost estimate inaccurate.

It’s tempting to think of each deal as income in the bank when it happens — after all, it’s new income for your business. But doing so can make your company seem healthier than it really is, and it gives you a distorted picture of your company’s real condition.

RELATED: How to Stop Cash Flow Problems

2. Failing to Reconcile Books With Bank Accounts

It’s important that you reconcile your business' accounts frequently. Bank Reconciliation is the process of checking an account balance — as listed on your books — is accurate and correct, ensuring that it matches the real balance of your bank account.

From time to time, small costs and expenses that you might not think about at the time could go unrecorded. Reconciling your accounts — from your business’ bank cash to its payable accounts — lets you accurately track your financial situation.

Small businesses should always reconcile their books every month to ensure all of their transactions are accurately recorded, which prevents their books from becoming out of sync with the real status of their accounts.

RELATED: What is Bank Reconcilliation?

3. Forgetting to Record Small Transactions

How does your business manage its small transactions? It’s very easy to think of petty cash transactions as irrelevant, but it’s essential that your business has a record of all of its spending, no matter how insignificant.

This is especially important in retail environments, where many transactions are cash-based. It’s also important to record small transactions like paying for a postal delivery, even if the cost is insignificant.

Stay on top of the small transactions, and it'll become far easier to manage the bigger ones. By keeping a record of small transactions, you’ll be able to easily manage your books as your company grows in size and its number of transactions increases.

RELATED: What Is Expense Recognition and Why Is It Important?

Topics: Accounting Basics