As a small business owner, you’re probably already aware how much damage accounting mistakes can make. Even small mistakes could cause a huge impact to the success of your business. The reality is minor accounting errors and failures are especially common in newly founded businesses.
We’re going to look at five of the most common accounting mistakes in small businesses like yours. We’ve looked into data from some of the most well-known and respected accounting organisations as a foundation to this research. Hopefully these hints will help you avoid these common accounting errors.
Throwing away receipts for expenses
Throwing away your expenditure receipts is a huge mistake, and it’s one you need to avoid. So many business people throw away receipts for business purchases when they really need to be keeping them all. This can cause problems down the line for things like tax, general accountancy and even your cash-flow.
If you’ve found yourself checking bank statements in the past without really knowing exactly what certain expenditure was for or where certain payments went – this problem might be one that’s already affected you. Businesses need to make regular purchases on things like supplies, stationary, materials, equipment and even personal expenses. While some of these will be clear and obvious – many won’t. Especially small one-off payments for minor items that are hard to remember. No matter how small a payment was, you need to keep the receipt to keep everything in order.
If you don’t keep your actual receipts, you can make easy mistakes when it comes time to file your tax returns. This could lead to a higher tax bill than expected or even a penalty, so it’s obviously something you want to avoid.
You should start by simply keeping every receipt for every purchase. If you need some additional receipt-keeping tips, try one of these:
- Only use your business credit card for business purchases (not for personal items).
- Use different colour envelopes to collect receipts and vouchers and always keep them handy. Make sure every purchase receipt goes straight into the envelope rather than being put into different drawers or elsewhere for a while. Make this a habit.
- On a specific day of the week, go through all your receipts in the envelope and register them into your tax system or save them to the cloud for use with your accountancy software.
- Use Xero to add your receipts automatically as and when you get them. This makes the process streamlined, fast and effective.
Forgetting to register cash expenses
As we’ve already looked at – it’s crucially important for business owners like yourself to keep up to date with all their expenses. This makes it easier for total expenses to be subtracted from revenues when you do your accounts. In turn, this will actually help give you a clearer view of your actual profit margins. However, there’s one small issue with this.
Transactions that take place with debit cards, credit cards or checks are normally directly linked to your bank account and are easily automated with Xero into your business accounts. However, what about payments that have been made with cash? These can sometimes be easy to forget. In many cases, multiple cash payments are completely forgotten about when your accounts are put together. This could mean you are falsely over-estimating your income and not getting the right tax benefit from your expenses.
To avoid this obvious mistake, you need to find a way to record all your cash payments. Remember to ask for receipts even for cash purchases, and immediately link them to Xero.
Losing track of your receivables
While you’re probably really happy to get paid – it’s not all fun and games. When you get paid, you should always keep track of receivables. Failure to do so can cause a number of problems to small business owners like you.
A receivable is normally produced every time you make an invoice. In other words – it defines a certain amount of money to be paid by one of your customers. Every time you receive one of these payments, you should automatically register the associated invoice as “paid”. While this seems reasonably straightforward, you’d be surprised how many businesses forget to do it. One result of such a failure is that customer deposits and payments are reconciled much later than they should be – especially if your accounts are already behind due to a busy schedule.
Letting things pile up like this can cause huge problems when you get close to tax filing time.
Instead of having a simple list of receivables that correspond to the right deposits, your accounts team could be confronted by an amount in a revenue account that simply doesn’t match up with recorded receivables.
This could sometimes mean days of work, registering receivables and going through all your paperwork simply to make sure things add up – when it should have been a much simpler process if you kept things in order from the start. Mistakes here could even lead to your business overpaying taxes. Keeping on top of your receivables and making clear records as and when payments are processed should save you a lot of time, money and effort in the long-run. You should register your payments regularly to make things run smoothly at the end of the financial year.
If you find this process somewhat boring and would rather keep your mind on other aspects of your day-to-day business – you’re not alone. That’s why more and more small business owners like yourself are turning to virtual bookkeeping service providers to do this work. Many have also began requesting clients to pay online. When you do this the whole payment, invoicing and receivable process will be automated for you – speeding up everything and reducing your workload.
Not using a professional accountant
Many small businesses often think it’s a good idea to try saving money by doing their own tax affairs. It often isn’t as good an idea as you might think. A fully-qualified and skilled accountant can normally save you even more money, even though they might cost you a bit more to hire in the first place. Proper accountants will often be able to spot ways to help you save that you might not have found for yourself, like not noticing all possible deductions. You could also miss things that lead to you underpaying your tax bill and even incurring fines.
With a highly skilled accountant, you’ll get continued guidance from someone who knows exactly what to do with your accounts and always knows what to implement best to help your finances. Qualified accountants will keep up-to-date on recent tax law changes and help you prepare for changes in tax rates.
You might also want to consider a virtual bookkeeper as well as an accountant. This will help with all the preparatory work, and an extra pair of hands can often help with additional duties. The success of your business could depend on how accurate your books are – so this isn’t an area that should be overlooked.
Communication errors with your accountant
If you’ve ever found yourself talking with your accountant without really understanding what he means, you’re not alone. Many accountants often use terms and talk in a way that those outside the industry don’t always understand. Struggling to work out what cash realisable value means? Don’t understand what some of the acronyms they use mean? This can often be a problem for business owners who don’t always have accountancy as their main priority.
One solution to this problem is to simply ask your accountant to break things down to you and speak in terms you understand. They aren’t trying to prove they know about their subject – but you might be too hesitant to simply ask them what something means. You shouldn’t be – after all, it’s your business. And you’re paying them.
You don’t really need to know what everything means anyway. They’re the accountant, that’s their job – and it’s one of the reasons you hired them. A good accountant should be able to explain things to you in terms you can understand, anyway.
Hopefully, these five errors and how to address them have been what you’ve been looking for. The practical advice in this article should be able to help you avoid these common accountancy errors, so your business can strive towards success.