The Most Common Financial and Accounting Mistakes Made by Small Businesses
Small businesses have a lot on their plates. Their resources are often limited, which means that the budget is lower than that of a bigger company. This can often lead to innovation, in face of the need 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:
Not planning ahead
Your cashflow and bottom line are undoubtedly important – but so is planning ahead. Some businesses don’t dedicate enough attention to the need to plan their budget ahead and set themselves targets.
When a business is only focused on the results it sees today and tomorrow, it will miss the big picture and the growth opportunities at hand. Planning for the long term is a must if you’re looking to grow your business. This means creating an annual budget, alongside annual and quarterly goals.
It’s also OK to create biannual goals or even a 3- and a 5-year plans. This way, you can strategise ahead and create a roadmap to achieving your growth goals. This can also help you plan your expenses, your hiring plans and your overhead costs, so you can have a stable and positive cash flow.
2. End-of-the-year “shopping sprees”
Your business costs can be deducted from your profits before tax, reducing the amount of tax you will owe. Some businesses let that affect their purchasing decisions, especially near the end of the year, when business are due to pay their corporation tax.
Business will often rush to buy equipment and supplies, without fully considering whether those are really needed at that point at time. But that’s a mistake. Alleviating your tax bill is great, but those expenses can weigh down on your business if you don’t have enough available funds to make those purchase or if you won’t end up using the equipment and supplies you bought. So plan ahead and don’t let the tax deductions lead you when making purchasing decisions.
3. Not having accounting procedures in place
Running a business requires adhering to many accounting reporting deadlines, such as tax reporting and payments, payroll, and others. Having proper procedures in place will guarantee that your business won’t miss any of those deadlines and that it will file accurate statements and make the correct payments on time. In addition, putting in place 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 reporting and payment deadlines you need to meet. This also means having detailed guidelines on reporting and keeping records required for the proper financial management of the company. You need to install practices for documenting your revenue and your expenses, as well as any relevant financial documents.
4. Not documenting the way you should
Creating accounting procedures alone isn’t enough, it’s also imperative to organise carefully all the records created as a result of those procedures. Why? Because successful accounting and bookkeeping practices rely on accurate documentation. This makes unorganised records a serious accounting misstep. 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 make easily available all the receipts and documentation you will need for tax reports, as well as any other accounting aspect of your business. It’s also wise to digitise your records, so they can have 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 a 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 opt for a different model, that 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 qualification and training.
6. Mixing Personal and Business Expenses
It can often be hard to keep track which expenses were made on behalf of the business and which served a personal purpose. Some business owners even use one bank account as their business and their private account. 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 on both.
In addition, mixing the two will prevent you from understand how your business is doing: are your overheads too high? 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 doing and allow you to plan ahead.