Provided by Carole-Anne Brook, Managing Director
Key Administration Solutions Bookkeeping Service*
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For small business owners, earning money in a pandemic can be difficult. While operational, marketing, and logistical challenges are enough to make life hard, business owners also have issues in the back offices that must be addressed. Bookkeeping can be a tough cookie to crack and calls for professional help. Poor accounting practices can cause a variety of financial problems for the unwary business owner. The following includes the ten most common bookkeeping mistakes made by small businesses, and some recommendations on how to avoid them.
1. Careless Treatment of Small Expenses
Businesses have all kinds of expenses, and keeping a record of every transaction is a must. Business owners may feel less obliged to log in petty expenditures right away. However, at the end of the year, small expenses can add up to a significant amount. Business owners want to be sure not to treat small business expenses as personal expenses, and to make sure they are recorded the same day. It will save the business money and many headaches later on.
2. Not Reconciling Statements Every Month
Reconciliation of bank accounts and accounting books is a vital task. It is recommended that bank statements are reconciled every month, and that any errors are fixed right away. If statements are only reconciled once every several months, this will eventually adversely effect the business and likely lead to financial losses.
3. Owner Doing the Bookkeeping
Bookkeeping is a full-time job. Business owners should hire a professional bookkeeper to take care of the books. It may appear to be a good idea for the owner to maintain the books to cut costs. However, bookkeeping is a job for a dedicated and trained person. Owners already have to juggle many tasks, and adding bookkeeping to the list does not help. It only takes their concentration away from managing and growing their business.
4. Cash Flow Problems
Numerous factors can cause cash-flow problems, e.g., high-cost loans, too many receivables, inaccurate sales predictions, and ignoring financial statements. Bookkeepers can quickly identify these issues and start to work on solutions. However, if an unqualified person maintains the books, they may miss these issues and opportunities. Sufficient cash flow is critical for small business success, and its absence can lead to the company's failure within a short period of time.
5. Mishandling of Sales Taxes
Most products and services have a sales tax attached to them. The sales tax must be collected and remitted to the authorities. However, if there have been issues in collection and payment, this can result in a serious problem. The tax authorities may slap the business with fines. Even if there are no penalties, the company may end up paying at least some of the pending sales tax out of its own coffers. Mishandling sales taxes can lead to cuts in profits and even losses.
6. Classification of Employees
The classification of employees determines how they are treated for tax purposes. Consultants, part-time and full-time employees all have different treatments. Some companies purposefully misclassify some employees for tax benefits. However, even if this is done by mistake and discovered by the tax authorities, it can lead to heavy fines. Business owners must be careful that all employees are classified correctly.
7. Under or over reliance on Accounting Software
There are numerous types of software available to help in all kinds of office work, including bookkeeping. However, relying too much or too little on technology can have harmful effects on the business. If accounting software is not used, it could mean more time and effort required to get the job done. If accounting software is over-relied on, any mistakes made will be hard to track. If there is an error in a software program, it will take a long time to figure out and correct any resulting damage to the business records. A professional bookkeeper can help provide the right mix of software use and professional expertise.
8. No Backups
Most businesses are using software that stores the details in the cloud. This is understandable, but there should be a backup if the server goes down or if any other issues occur. Backups can be in the form of soft copies such as CDs or hard form such as print. Either way, backups are a must and may save the business from a lot of trouble later on. Backups must be stored at a different location.
9. Mixing Business and Personal Accounts
Mixing up the owner's money with business money in a bank account is the worst possible idea. Separate accounts should be used to avoid a variety of problems. When the owner withdraws profit from the business, it should be moved to their personal bank account. Reserve funds should be kept in the business account. If the two accounts are mixed together, it will be difficult to reconcile the books and bank accounts. The business owner may end up spending business money in a personal emergency. This will surely lead the business into trouble at some point in time.
10. Incorrect Treatment of Expenses
Incorrect treatment of expenses can lead to losses. A purchase consumed within a few days, such as office supplies, is an ordinary expense. However, if a purchase is useful beyond the current fiscal year, it will need to be treated differently. An office refrigerator may have a five-year life. It should be recorded as an asset and depreciated over the next five fiscal years.
The Bottom Line
Small businesses need to be careful when it comes to bookkeeping. Many businesses lose money as a result of small mistakes committed by part-timers who lack expertise. Most of these mistakes can be avoided by regularly maintaining the books as they should be.
To avoid the problems described above, consider hiring a professional to get your accounts in order, even if it's on a part-time basis. Hiring a professional bookkeeper may seem like an extra expense that can be avoided, but accurate and reliable bookkeeping pays off in the long run.
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* For information on Key Administration Solutions Bookkeeping Service see https://www.keyadmin.com.au/
Related summaries:
Chow, C. W., K. M. Haddad, and J. E. Williamson. 1997. Applying the balanced scorecard to small companies. Management Accounting (August): 21-27. (Summary).
Kettering, R. C. 2001. Accounting for quality with nonfinancial measures: A simple no-cost program for the small company. Management Accounting Quarterly (Spring): 14-19. (Summary).
Martin, J. R. Not dated. What is a business valuation? Management And Accounting Web. BusinessValuation.htm
Williams, J. J. 2018. Help small businesses choose the right employee retirement plans. Journal of Accountancy (February): 14-19. (Summary).