Small businesses often face unique challenges when managing their finances. With limited resources, a hands-on small business owner doesn’t have access to a finance department in their day-to-day operations.
Many small business owners are often stretched as they juggle many facets of their business simultaneously.
This can result in accounting errors, poor recordkeeping, transposition errors, and missed deductions.
In this blog, we’ll explore the 7 most common accounting errors that occur among small business owners.
From failing to separate business and personal finances to overlooking important tax deadlines, common errors can result in significant consequences.
#1. Mixing Personal and Business Finances
One of the main areas where small business owners fall over when it comes to their small business bookkeeping is mixing their personal and business money.
Commingling your finances and not maintaining separate bank accounts for your small business can quickly lead to a tangled web of transactions across multiple bank statements.
It can make it difficult to track your business purchases and assess your business’s financial health and cash flow.
This lack of clarity can make it a real challenge to identify mistakes or incorrect transactions and nearly impossible to maintain compliance when it comes to tax preparation and payroll.
Failing to keep personal and business finances separate can create significant challenges if your business ever requires an audit or you need to seek a business loan or external financing.
To avoid these problems, small business owners should maintain a separate bank account, credit cards, and accounting processes for business.
Keeping all your business financial records in one place, completely separate from any personal accounts and transactions, will lay a strong foundation for effective financial management for your small business.
#2. Inaccurate Financial Records
Small business owners must keep accurate financial records and avoid common mistakes such as:
Neglecting to update records and transactions as they happen
The best option for small business owners is to update records and transactions as they happen. This way, you won’t miss anything and you can be sure that your financial statements are correct.
However, in reality, it’s very easy for small business owners to get caught up in the daily operations of running their businesses. This can mean expenses aren’t recorded correctly, transactions are missed and your financial data is not up-to-date.
Data entry errors
Manual data entry errors, such as transposition errors, are common and can happen to anyone. However, busy small business owners may be more prone to these types of errors if they are trying to balance multiple priorities and are not solely focused on their accounting tasks.
If you are managing your accounts by yourself, ensure you have processes in place to check the accuracy of your records from time to time. Because if you don’t have accurate records, it’s impossible to accurately assess your business’s financial health.
Failing to review your records and reports regularly
Small business owners should review financial reports at least monthly. This will enable you to catch any accounting errors early and identify any trends you need to be aware of.
It will also provide you with valuable financial information so you can make informed decisions in your business.
#3. Inadequate Late Payments Collection
Late customer payments and inadequate invoice management can severely impact a small business’s cash flow. This can disrupt your financial stability and make it difficult to meet your own expenses and financial obligations.
Late payments also take precious time and resources to follow up. This diverts business owners like you away from their core business activities.
It’s important to act quickly when it comes to late payments. Don’t delay and follow up on overdue invoices swiftly.
The sooner you act, the sooner you will get paid. Having systems in place can help. For example, with accounting software, you can set automatic follow-ups and reminders to late-paying customers.
#4. Incorrectly Classifying Expenses
Properly classifying business expenses is essential if you want to create informative financial reports necessary to assess your company’s financial health. Tracking your expenses and having an accurate picture of any trends within your business is important as a small business owner.
Small businesses should use a standardised chart of accounts and ensure consistency when it comes to classifying expenses. For example, if you categorise your small business telephone expenses as ‘utilities’ in one month, ensure you don’t then categorise it as ‘administration’ in the next month.
Most accounting software options offer a chart of accounts that will be suitable for small business accounting records so you don’t need to come up with this on your own.
Regular reviews of your accounting records can help to identify any miscategorised expenses.
#5. Not Meeting Important Tax Deadlines
Compliance with all relevant Australian tax laws and deadlines is so important for small businesses. That means lodging all of your business activity statements and tax returns on time.
Failure to comply with tax deadlines can have serious consequences. This can include severe financial penalties, fines, additional interest charges, as well as legal consequences.
If your books aren’t up to date, a tax audit can be a nightmare. It is much more efficient to have your business’s finances in order from the outset so you aren’t scrambling for information at tax time.
#6. Using an Inefficient Accounting System or Outdated Accounting Software
Using simple spreadsheets or outdated software that no longer supports modern-day accounting can create challenges in your small business when it comes to bookkeeping.
Ensure you use an accounting software tool that suits the size of your business and the number of financial transactions you need to manage.
Having a fully functional accounting system which enables proper record keeping will help you reduce any unintentional mistakes and improve the accuracy of your financial statements.
This means you can use these financial reports to better manage your finances, track income and cash flow, and make informed decisions.
#7. Making Bookkeeping Your Last Priority
Let’s be honest – many small business owners make bookkeeping their last priority. Tracking expenses and entering transaction data isn’t exactly the most existing part of running your own business.
Some small business owners don’t have the time to dedicate to managing their accounts or they don’t feel equipped to do so, given they aren’t accounting experts.
Avoid Costly Unintentional Mistakes and Engage a Professional Bookkeeper
Ultimately you may decide to engage a professional to help you. With an experienced bookkeeper in your corner, dedicated to your accounts, you will have peace of mind that your accounts are in good shape.
First Class Accounts has a team of more than 140 franchise locations who can help you with your small business bookkeeping. Whether you need basic bookkeeping help or more complex financial matters, our team is sure to have a bookkeeper near you.
Contact First Class Accounts today and have peace of mind that your books will be taken care of by an experienced professional.
