Unless you’re a CPA, chances are that having the opportunity to work with numbers and ledgers isn’t the reason you started your own small business. But, it’s vital you stay in the know about every aspect of the business, especially its finances. If you don’t have the capital to hire an accountant, you’re probably the one balancing the books. If so, watch out for these common accounting mistakes:
1. Reporting Transactions in a Prior Period
When your fiscal year ends, your balance sheet for that period should be set in stone. But with some accounting software, it isn’t possible to actually lock that sheet. As such, it can be easy to accidentally record transactions for the current year as happening in the previous year. Print out the finished balance sheet so you always have a hard copy of it, in case you accidentally record transactions incorrectly.
2. Misclassifying Expenses
A vital aspect of running your small business is knowing where your money is being spent. If you misclassify your expenses, it could cause a major headache. Not only could you not get a full picture of where your money is going, but you could also run into an issue with the IRS for trying to deduct inappropriate expenses. Make sure your expense reports are being reviewed periodically either by you or a trusted employee for misclassifications.
3. Not Backing Up Your Data
This mistake applies to nearly every aspect of your business, but is especially important for your financials. You should have your data stored in at least three secure places. This could include your local computer hard drive, in the cloud, on a thumb drive or external hard drive, and/or on an internal server. That way, the chances of losing it all is nearly eliminated. Be sure to schedule backups for your data at least once a week.
4. Treating Net Profit and Cash Flow the Same
Though net profit and cash flow are important for running your business, how they measure money is vastly different. Net profit is more of a big-picture measure. It’s how much money you should have after paying expenses. Cash flow, on the other hand, measures the liquidity of your money, and can be looked at in a more day-to- day fashion. Mixing these up could cause major issues when you try to spend money that is recorded as net profit, but isn’t readily available to
5. Using the Wrong Accounting Software
There are a wide array of accounting software available for your small business. However, they are not all equal. If you choose one that offers more features than you need, or is too complex to use efficiently, you may find yourself overpaying for a service that will take hours or even days to figure out. Do your homework and find the right software for your needs. Regardless of how “smart” the program is, you will need to know a thing or two about accounting to maximize
There’s no doubt that balancing the books is one of the most tedious aspects of running a small business. But if you can avoid these and other common mistakes, you can significantly reduce the amount of time you spend wearing the accountant hat.