As an entrepreneur, it’s important to be involved in all aspects of your business. That doesn’t mean, however, that you’re an expert at everything. Entrepreneurs can deal well with strategic issues and customer relations, but many face more difficulties when it comes to accounting.
The biggest problem is that financial mistakes can hinder growth, negatively affect results, stall cash flow, unnecessarily attract the attention of the tax authority, or damage reputations with suppliers, customers, and employees.
To avoid these situations, here are 10 accounting mistakes that business owners often make and why these mistakes — intentional or not — can be so harmful.
1. Accumulate entries and reconciliations
Time is definitely not on the side of small business owners, especially when it is often necessary to put out fires every day. Before you know it, the months go by and no ledger entries are made or reconciliations of checking account statements, credit card statements, sales tax bills, or other types of financial accounts. This means that financial reports and statements do not reflect current reality. And without up-to-date information, it’s difficult to make business decisions.
For example, expenses can result in a negative balance or reduced profitability if unpaid invoices go unnoticed. Failure to enter financial data can also result in problems with suppliers (for example, non-payment of invoices), leading to difficulties in purchasing materials or even a bad credit rating for the company.
2. Difficulty mastering financial software
In the rush to get their business organized, some business owners don’t take the time to properly learn their chosen financial software. By not knowing what financial software offers, you can easily make a mistake or not use some useful features. Misconfigured software can also lead to underused reporting capabilities and incomplete information, which results in poor business decisions.
3. Not seeing reports as tools
Accounting is not just a tool for entering financial data in order to meet tax regulations at the state and federal levels or to know how much money is in the bank. It is a powerful mechanism that provides answers to questions about the extent to which the entrepreneur’s strategic decisions are or are not generating results.
Therefore, it is a big mistake not to use the numerous business reports that can be created from financial data, including reports on payables and receivables by maturity and on company profitability. These reports can show you where the problems are and identify what customers are not paying for so you can maintain cash flow. Without these reports by maturity, the business owner does not know who is in arrears and may lose customers dissatisfied with the quality.
4. Mix business and personal finance
Keep the two clearly separated to have a more accurate history of what is actually used for the business and what is spent solely for personal purposes.
For example, although the IRS may understand that a certain number of meals over the course of a month were for business purposes, concert tickets or games on the credit card are clearly not business related. The business can also be affected if money is being spent on the owner’s personal life instead of being reinvested to develop the business.
So it’s best to keep separate accounts to see the business, mentally and physically, as a separate entity, not an ATM. In the long run, this will help the business grow and also generate significant income for the business owner.
5. Throw away receipts
Paper documents are still important, although they can also be digitized. However, receipts should be retained as they help to clarify accounting errors or discrepancies and, in many cases, provide more opportunities for deduction when filing taxes.
More than that, if the IRS requires it, the receipts serve as proof and validate the numbers in the financial statements. Without receipts, the IRS may consider entries to be invalid deductions, which could result in changes to tax amounts and the imposition of fines.
6. Errors in calculations
After a long day at work, updating accounting books in a hurry can easily lead to miscalculations, even with the help of automatic financial solutions. Calculation errors can also originate from postings made to the wrong account or even typing errors.
Combining this with accounting error #1 on this list can be a recipe for financial disaster, as miscalculations can go unnoticed for months if the data is not regularly checked for accuracy. Suddenly, a miscalculation results in a tangle of accounting errors, leading to bigger problems.
7. Focus only on the short term
In the face of the day-to-day problems of running a business, it’s easy to focus on the short term and completely forget about the future. However, accounting is not just about keeping track of present numbers. It also allows you to forecast future growth and identify financial risks arising from current financial decisions or results.
In addition to the need to project the future, it is necessary to consider many issues, including long-term accounting problems and opportunities for company growth. Also pay attention to related operational issues, such as the need to expand the accounting staff to handle the company’s expansion. For example, an entrepreneur can found a new subsidiary that manufactures different products or add locations in other countries.
8. Hiring the wrong person
Whether it’s a family member, an inexperienced temporary office assistant or even the business owner who assigns the accounting to himself, the wrong person can cause financial problems that go beyond making unsupported decisions. In fact, trying to save or help a loved one can lead to audits or fines. Hiring the wrong person can create problems that will haunt your company for years to come.
This can happen if the person hired doesn’t know how to classify expenses correctly or how to create accurate accounting entries. She may not be familiar with tax laws, such as what can be included in a company’s books and what must be posted separately. She also may not be familiar with the billing process or the exchange rate when accounting for business done in other countries.
9. Believing that technology is always the solution
Investing in technology does not guarantee that accounting errors will be avoided. After all, technology needs to be used correctly. Furthermore, not all technology was created equal or is relevant to certain companies.
For example, a small business owner does not need to invest in expensive financial systems. You can probably use a system that works well, provides simpler financial statements, and allows you to scale as your business grows. Therefore, it is important to choose the right technology for the company’s specific needs and applications. It is at this point that good planning, proper strategic thinking and efficient research are essential to ensure that technology does not become yet another accounting-related mistake.
10. Don’t delegate
As an entrepreneur, it’s hard to admit that you’re not Superman or Wonder Woman and that there are times when not getting professional help is a big mistake. It’s okay to acknowledge that accounting might not be your specialty.
Chances are you started the company with a good idea or solution that has nothing to do with accounting — and that’s what you should be focusing on. There are accounting professionals on the market who can handle invoicing or other accounting functions to allow you to focus on what you do best. As the company grows, instead of doing it all yourself, there will come a time when you need to delegate responsibilities to others, including an accounting professional.
The financial side of running a business can make or break your business. Learning when to enlist the help of tools or professionals in areas where you have difficulty can be one of the biggest challenges for entrepreneurs. For more tips on how to improve your accounting, see the article on the seven accounting formulas every business owner needs to know.