5 accounting mistakes that put your small business at risk
Smaller businesses naturally have fewer resources than their larger counterparts. This often means that the accounting gets pushed to the wayside until it can no longer be ignored. It may not seem like the most exciting part of running a business, but it is extremely important. In this article we’ll look at some of the most common accounting errors that occur in small businesses, and what you need to do to ensure they don’t put your business at risk.
Scott Brown ● May 16, 2018
1. Not differentiating cash flow and profits
At first, it might make sense to think that each business deal you close is as good as money in the bank. For example, you close a £40,000 deal that will take your business three months to complete. It’s going to cost you approximately £20,000 in resources to do the work, so you book in a profit of £20,000 before you’ve completed anything.
What happens if the deal runs into an issue that causes an additional two-month delay? Or any other unforeseen circumstance befalls your operation? Incidents can increase the cost estimate and decrease profit, meaning your books will be inaccurate if you’re not careful.
There’s a difference between cash flow and profits, and ensuring you differentiate them correctly in your books will make sure that you don’t create a distorted image of your business’ finances. Cash flow management needs to be done actively on a week to week basis so that you have an accurate picture of how your business is doing.
2. Inconsistent bank reconciliation
Bank reconciliation is the process of checking the account balance listed on your books and ensuring it matches the actual balance of your account with the bank. Occasionally, small costs and expenses that you might not think about at the time can go unrecorded. Reconciling your accounts lets you accurately track your financial situation without letting anything accidentally slip through.
Particularly with small businesses, it’s important that your transactions are all accurately recorded, and your books are reconciled at least on a monthly basis. Every little transaction adds up; those little transactions can end up making a huge difference if they’re left for too long.
3. Stalling
When you’ve got a business to run, bookkeeping tends to be somewhat low on the priority list until it becomes impossible to ignore. It’s essential that it is done regularly, without exception. Yearly financial statements and tax returns have a way of sneaking up on you, so to ensure you don’t run into any sort of trouble or penalties, stay on top of your books year-round.
Getting your books in order is more important now than ever with Making Tax Digital (MTD) around the corner. Now is the time to get your records sorted so that the transition into the MTD system is a smooth one.
4. No regular back-ups
Unfortunately, many SMEs and accountants fail to perform a vital task when it comes to accounting: Regularly backing up their data. Aside from things like computers crashing or being stolen, there are other extreme circumstances that are within the realm of possibility, such as fires, burst pipes, electric surges or natural disasters that can destroy all your data and records.
To avoid the disaster of having all your financial records lost without a trace, you should schedule routine back-ups of all records and financial data. Preferably you should use cloud-based solutions that can be accessed from any computer.
5. No financial planning
The purpose of accounting is not just to record everything, but also to be able to analyse this data and take away valuable lessons from it. If you have a good accountant, they’ll not only be able to balance your books, but they’ll analyse your data and then use that information intelligently. This includes equipping you with cash flow forecasts, key performance indicators and profitability of certain projects, as well as taking advantage of relevant tax allowances and reliefs.