Some of the accounting mistakes you will need to avoid as a small business owner include:
1. Not having a formal accounting system at the outset
Some people launch their small businesses initially without any form of accounting system in place. They only come to see the need to have an accounting system after the business has been in operation for quite a while. Unfortunately, by that time, a lot of damage may have taken place. Some important transactions that needed to be tracked may have gone un-tracked. The way to avoid this mistake is by seeing to it that you have some sort of formal accounting system right from the outset. The very first transactions you make for the business (including those that entail acquiring the business’ first assets/deploying the capital) need to be properly accounted for. All the transactions that follow thereafter need to be similarly properly accounted for: from the beginning of the small business’ life, right up to the very end of it. If you make the mistake of not having an accounting system at the outset, the task of setting up one later on may look too daunting. As a result, you may keep on postponing it until you finally just decide to forget about it and operate the business without a formal accounting system! And that would likely be the start of your business’ decline: for in the absence of a proper accounting system, it is impossible to know whether you are making a profit or operating at a loss. Furthermore, in the absence of a proper accounting system, it is impossible for you to know whether your business has a healthy cashflow or not. In fact, you may soon get to a point where — due to lack of a proper accounting system — you are even unable to keep track of the revenue coming into the business and the expenses being incurred in the business… You can see where that trail would lead to – namely, ultimate business failure. To avoid such complications, just ensure that you have some sort of accounting system right from the outset. Research to understand the basic accounts you need to have while launching a small business. Then ensure that you actually keep those accounts, consistently, to avoid difficult issues later on.
2. Not being thorough in your record keeping
This is where, for instance, you opt to be recording certain transactions, while ignoring others. More specifically, it could be where you opt to be only properly accounting for the ‘major’ transactions, while ignoring the ‘minor’ transactions. What you may not realize in this case is the fact that the small/minor transactions you fail to properly account for are likely to accumulate with time. And in any event, the way most small businesses operate is such that you end up with lots of small/minor transactions, and just a handful of big/major transactions. So if you opt to be only accounting properly for the big transactions (which are few and far apart) and ignoring the small transactions (which are more regular), you end up messing your accounting system completely. Whereas the idea of accounting for each and every transaction may look cumbersome, it unfortunately is one of the most critical ingredients for small business success. In days gone by, manually recording and storing details of each single sale you made may indeed have been impractical. Thankfully, nowadays, there are software solutions you can use to ensure that each and every smallest sale is properly accounted for – including through the use of barcode scanners at the points of sale… Whatever you do, just remember that your small business accounting will be a complete mess, unless you are thorough in your record keeping.
3. Not reconciling your various accounts
However thorough you may try to be, inadvertent mistakes are bound to creep into your accounting system. This is especially likely to be the case if you are in a business where you are undertaking numerous transactions on a day to day basis. The way to detect these mistakes is by reconciling your accounts. Thus, if you opt not to be reconciling your business accounts, such mistakes will in all probability go undetected, thus ruining your accounting system completely. Yet account reconciliation is not just about error detection. It is also about fraud detection: which means that if you neglect account reconciliation, you miss one of the easiest and most straightforward chances of detecting fraudulent activity in your small business.
4. Not knowing when to bring in an accounting professional
In the early stages of your small business’ life, it may be viable for you (as the business owner) to do most of the bookkeeping and accounting work. But as the business grows — and as the transactions grow (both in number and complexity) — you may soon get to a point where you have to bring in an accounting professional to help you. The most important thing is for you to be able to properly identify that moment when you need to bring in an accounting professional. And once you realized that you have reached the said point, you need to move with haste and get the necessary professional accounting help without delaying. Of course, hiring an accounting professional means that you have to spend extra money on the said professional’s salary. But then again, you need to bear in mind the fact that you stand to lose much more money, if you bungle up your accounting. Haven’t we heard of otherwise successful businesses that were brought down by accounting blunders? In most cases, you find that the extra amount of money you need to spend on an accounting professional’s salary is negligible. It is negligible when you compare it to what accounting failures would potentially cost you. In any event, if you insist on doing all the accounting work on your own as your business grows, it may soon get to a point where you would be spending all your time on accounting. That would mean having to neglect other important aspects of business management – including operations management and HR management. That could then cause the business to fail, as those other important areas are neglected. So the moment you start getting overwhelmed with your business’ accounting tasks, that is the point at which you should consider bringing in a professional. You can have someone doing the accounting work on a part-time basis (if you are unable to afford a full-time accountant yet). You also have the choice of outsourcing the accounting work, if you are unable to set up an in-house accounting department.