The Most Common Financial and Accounting Mistakes Made by Small Businesses
Small businesses have a lot on their plates. And their resources are often limited, since they have lower budgets than bigger companies. This can often lead to innovation, as they seek to grow a business with fewer resources, but also to understandable mistakes. Here are the most common financial and accounting mistakes we’ve observed, and how you can prevent them:
1. Not planning ahead
Your cashflow and bottom line are undoubtedly important – but so is planning ahead. Some businesses don’t dedicate enough attention to planning their budget and setting themselves targets.
When a business is only focused on the results it sees today and tomorrow, it misses the big picture and the growth opportunities. Planning for the long-term means creating an annual budget, alongside yearly and quarterly goals.
Two-yearly, or even 3- and 5-year plans, are fine. This way, you can strategise and create a roadmap to achieving your growth goals. This can also help you plan your expenses, hiring plans and overhead costs to ensure a stable and positive cash flow.
2. End-of-the-year “shopping sprees”
Your business costs are a tax-deductible expense and reduce the amount of tax you will owe. Some businesses let that affect their purchasing decisions, especially near the end of the year when they are due to pay their corporation tax.
Businesses will often rush to buy equipment and supplies, without fully considering whether they are really needed at that point at time. But that’s a mistake because while cutting your tax bill is great, those expenses can weigh on your business if you don’t have the money available or if you don’t end up using the equipment and supplies you bought. So plan ahead, and don’t let tax deductions lead you in your purchasing decisions.
3. Not having accounting procedures in place
Running a business requires adhering to many accounting deadlines, such as tax reporting and payments, payroll, and others. Having proper procedures in place will guarantee that your business doesn’t miss any of those deadlines and that you file accurate statements and make the correct payments on time. Proper accounting practices will help your business run smoothly and focus on growth, rather than on collecting receipts and bureaucracy.
This means, among other things, keeping an updated accounting calendar, with all the necessary reporting and payment deadlines. Have detailed guidelines on reporting and keeping records required for the proper financial management of your company, and implement practices for documenting revenues and expenses, as well as any relevant financial documents.
4. Not documenting the right way
Creating accounting procedures alone isn’t enough, you must carefully organise all the records created as a result of those procedures. Successful accounting and bookkeeping practices rely on accurate documentation. If you’re not keeping your books in order, this can have a negative impact on your ability to manage your business and its finances.
It’s essential to keep track and document every business expense, transaction, receipt and other relevant documents. This will ensure all the receipts and documentation you will need for tax reports, as well as any other accounting aspect of your business, are easily available. It’s also a good idea to digitise your records, so there is an online backup and are easier to find and catalogue.
5. Not hiring a professional to do accounting and bookkeeping
Your resources may be limited, but that doesn’t mean you should hire an unqualified person to do your accounting or bookkeeping. Whether you have an in-house accountant, or have hired an accountancy firm, only qualified personnel should have access and responsibility over your accounts and books.
It goes without saying, but employees without proper training in accounting, tax management or bookkeeping can make mistakes that will potentially damage your business and its finances. A trained accountant, on the other hand, can help a business owner make important decisions on expenses and budget and plan ahead.
You can outsource some accounting, tax and bookkeeping services, while maintaining others in-house, or whichever model fits your business best. Whatever you do, remember that accounting is one of the most important aspects of any business, and it should be entrusted to a professional with proper qualifications and training.
6. Mixing Personal and Business Expenses
It can often be hard to keep track of which expenses are business and which are personal. Some business owners even use a single bank account for both their business and their private money. But this is a serious mistake that can result in a penalty for your company. So it’s essential to separate your personal finances from your business ones and keep accurate records of both.
In addition, mixing the two will prevent you from understanding how your business is doing: such as are your overheads too high, and are your profit margins allowing you to grow? Having clear financial records for your business will give a clear overview of how your business is progressing and allow you to plan ahead.