While accounting is complex and time-consuming, it is critical to the financial health of your small business. Excellent accounting practices set your organization up for success, enabling you to operate more efficiently. On the other hand, bad accounting and bookkeeping practices result in legal and financial challenges, compromising the success and survival of your organization. According to a recent study, 82% of small businesses collapse due to poor management of cash flow. Read on for four small businesses’ accounting mistakes and how to avoid them to foster your business’s growth.
1. Mixing personal and business finances
When running a sole proprietorship or operating from home, it is easy to mix business and personal expenses. This makes it challenging to sort business and personal transactions, which leads to significant issues, especially during the tax period. You could easily miss costs that qualify as business expense deductions when you blur the line between personal and business finances.
Mixing business and personal finances can also make securing a line of credit or loan more challenging. Most lending companies require a clear, accurate, and complete record of your organization’s finances before your loan application. Be sure to open a business bank account and run all business expenditures and income from the account once you start a new business. This ensures pain-free, accurate, and concise record-keeping.
2. Failing to use software and cloud technology
Most business transactions are repetitive, tedious, and time-consuming. They include paying employee salaries, documenting utility expenses, and tracking and following up on payments, to mention a few. However, business owners prefer to manually handle these bookkeeping and accounting tasks, which is daunting.
Consider investing in small business accounting software to handle budgeting and payroll automatically. This will help you improve turnaround time, freeing your time to focus on other core business activities. Accounting software also reduces errors, fostering accounting accuracy.
3. Handling everything on your own
Managing every aspect of your business on your own can be effective when starting. However, as your business grows, hiring a professional to handle accounting and bookkeeping is best. Not only will this free up your time to focus on managing other aspects of your company.
Hiring a licensed accountant or bookkeeper minimizes potential errors in areas like running payroll, paying suppliers on time, tracking expenses, and balancing your business’ bank accounts. A professional can also help with tax planning. If you do not have enough funds to hire an in-house accountant or bookkeeper, you should consider outsourcing CFO services.
4. Failing to record small transactions
Most organizations do not consider petty cash transactions important, so they fail to record them. However, small transactions quickly pile up, so failing to track and record them could mean most potential expenses go unclaimed. For this reason, you should ensure you document all costs, no matter how insignificant. Below are ways to track petty cash and disbursements:
- Invest in a petty cash book
- Keep receipts for every disbursement
- Record each amount you withdraw from the petty cash fund and where you use it
Staying on top of accounting is critical to running a successful small business. Be sure to hire a professional and take your company’s accounting seriously to avoid the above mistakes and foster your company’s growth.
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Abhay is a Digital Marketing Guru and an accomplished entrepreneur with an experience of a decade working with various businesses varying from startups to established brands. He co-founded many companies like Logicsofts, PrintYo, CrazyRise and more. He is passionate about SEO and Online Data Analytics, which plays a vital role in any business to grow and mutate as per the data results.
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