Accounting is key to business success simply because it makes you aware of the status of your business. As a business owner monitoring your accounting is also a very important task and this includes seeing to it that all data are recorded accordingly. Despite all efforts however, we found out that there are common accounting mistakes that business owners commit. These mistakes should be avoided as much as possible.
1. Failing to make entries in your books of accounts
This is perhaps one of the most common accounting mistakes that a business owner commits. Sometimes you are complacent that you can record transactions very easily and that you will do it the next day and before you know it days, weeks and months have already passed.
Failing to make entries in your books of accounts will also make it difficult for you to file and pay taxes and to determine whether your business is making a profit or not. Be sure to make daily accounting entries in your books of accounts, sales journal and general journal. It is better to make this a habit rather than be sorry later.
2. Ignoring and not monitoring accounting data
The purpose of recording transactions is not only for accounting purposes nor for regulatory requirements. Some might be forgetting that accounting is more than that. All of the data that will be entered in your accounting books should be collated and arranged into a sensible and accurate report such as income statement, cash flow, daily sales summary, and more. These data are important in order to make relevant business decisions. These data will be the basis of how you decide on your day to day operations.
If you are using QuickBooks for example as your accounting software, you should always look at the reports section so that you will know how much people owe you and how much you owe to other people. Never ignore accounting data and financial metrics. There are also accounting systems which uses business intelligence which could help you a lot in key business decisions.
3. Micromanaging too much
There is nothing wrong with micromanagement. However this prevents you from focusing on the more important aspects of your business. You should admit that you cannot do anything just by your own. This is the most common mistake of new entrepreneurs, their passion is so high that they just want to oversee and do everything.
Focus on the more important aspect of your business like business plan, marketing and sales generation. Hire an accounting professional and use reliable computerized accounting software so that you can avoid one of the many common accounting mistakes.
4. Not investing properly in your accounting system
Perhaps you would say that accounting is just a minor part of your business but the fact is, it is not. You might fall into the trap of getting the cheapest and readily available accounting software or even hire someone who just know little about accounting. If you want to generate good results and have an accurate and reliable accounting system that produces meaningful results then invest in the quality of your accounting system. If you are not sure what accounting system to use, you can contact us and we will help you.
5. Not understanding profit vs cash flow
Getting cash from your business endeavor does not usually mean that your business is going strong. Also, having tons of sales is not also an indication of business growth.
In simple terms, cash flow is the money which flows in and out of the company from financial activities, investments and other operations. Meanwhile, profit is what remains from sales revenue after the company’s expenses are subtracted.
Not understanding cash flow and profit properly might mean bankruptcy for your business. You can have tons of sales and clients but what if your expenses are larger? What if most of the sales you have are on credit and you cannot collect them? Be sure to always make your business fluid, properly monitor your cash flow and you will be fine.
6. Committing entry errors
If you are using a computerized system this would be a lot easier to track but what if you are using a manual system? An error in recording is very dangerous to your business. It might mean that you are deciding based on wrong reports generated by wrong data.
Be sure to double check your accounting entry at all times. It will save you a lot of time and headache in the future.
7. Using the wrong accounting system
Another of those common accounting mistakes is using an accounting system or software that is not fitted for your business. Be sure to consult an expert when it comes to deciding which accounting system that best suits you. It might be suited for the US for example but not here in the Philippines.
Those engage in retail will have different needs that those who are engaged in manufacturing for example or those who run a service firm. Choose your accounting software properly and it will work wonders for you. If you are in the retail business, you can perhaps consider MYOB Retail Manager for example.
8. Treating business as an extension of your personal finance
We have learned about many common accounting mistakes but this is perhaps the most common especially for single proprietors. Sometimes you have the tendency to use business money for your personal needs and necessities and this is not right. Establish a view that your personal life and business are different and that money derived and use for them should always be different as well. This way you can have a better view of your business and also help yourself to grow your business. This will also allow you to avoid scrutiny of the BIR since personal expenses are not allowed to be charged to your business,
9. Throwing receipts
Receipts are very important for your business. As must as possible keep receipts for as long as you can specially those for large items. They will also be your savior when it comes to BIR scrutiny of your business and the taxes you pay. Receipts are also your way to ensure that you can get those legal deductions provided by tax laws.
10. Failing to reconcile accounts
Do not ever forget to reconcile your accounts so that they reflect the most accurate real time amounts. Remove receivables that can no longer be collected, properly depreciate your equipment, and always reconcile your bank accounts with your records. It is mandatory to reconcile your accounts at least once a month so that your financial data reflects your real business standing.
I hope that the forgoing common accounting mistakes that business owners should avoid helps you understand accounting better. These tips will help you grow your business further. Remember to share this article to others so that they can also learn more.