An astounding 82 percent of all businesses fail as a result of negative cash flow. It’s an alarming statistic that points to the need for entrepreneurs to improve their bookkeeping skills.
Many business owners, particularly those who run small and medium enterprises, view bookkeeping as some intricate concept that’s almost impossible to master. In truth, however, bookkeeping simply comes down to setting up solid accounting practices within your business.
One of the biggest secrets of keeping your finances up to date every month is by steering clear of some common bookkeeping mistakes that have condemned many businesses to their graves. So what accounting blunders are these?
In this friendly bookkeeping guide, we explain seven top errors that you should avoid at all costs and tell you what to do instead.
1. Ignoring Accounting Procedures
How do you manage bookkeeping procedures in your business?
Even if you’re a freelancer, self-employed, or the owner of a startup, it’s imperative that you set up a formal, detailed, and documented procedure of doing things. It’s this procedure that shows how you manage your bookkeeping and accounting, as well as how you do other routine tasks.
So how do you develop procedures that work? You can start by creating standardized checklists and forms to make sure there’s accuracy and consistency in your records. For instance, you’ll want to document a process for creating new vendors.
You’re going to need the name of the vendor, their address and contacts, and Employer Identification Number. You’ll also need other documents like recommendation letters, insurance certificates, signed contracts, and so on. This information goes into your accounting software to enable you to process payments.
Failure to adhere to bookkeeping procedures can lead to confusion with time.
2. Operating without a Budget
Why is successful budgeting essential for business success?
Well, first of all, a well-planned budget acts as a baseline for you to judge your company’s operating results. Without it, it’s difficult to curb overspending and establish realistic financial objectives. As you create your business budget, be sure to ground it in reality.
A good bookkeeper uses a budget to set reasonable financial goals, whether that means reducing operating expenses or increasing revenues.
3. Committing Data Entry Mistakes
Certainly, data entry errors will occur from time to time. Even the most accomplished accountant cannot avert all data entry errors. However, it’s possible to create a policy that helps you perform various reconciliations in a timely way, ensuring that any mistakes are detected and corrected quickly.
How can you go about it?
One way is to perform bank reconciliations every month. During the same period, do your receivable and payable reconciliations. Also, run your budget-to-actual variances, taking note of possible errors in classifying expenses or revenues.
Periodically, run vendor payment reports or customer receipts to make sure that all disbursements and receipts seem credible. In case you notice any unusual transactions, review them to ensure that transactions are accurate and no data entry mistakes were committed.
4. Not Backing Up Accounting Software
In a world where businesses heavily depend on technology, issues can suddenly come up. If something happened to your data today, how ready are you to deal with the aftermath?
One of the smartest bookkeeping tips is to back up your accounting software and other records regularly. Most business accounting software solutions have a feature that allows the user to set up an automatic backup of the software program. Make use of it.
Periodically, make time to double-check essential backup files. Go as far as utilizing the backup file to see whether you can operate your business normally without it should something happen.
Keep in mind that sometimes, a file can corrupt. Other times, you do not back up all the data you need. Doing a quick check helps you take note of any problems with the backup process to make sure that you always have everything you need to keep your business running in case the unexpected happens.
5. Trying To Do Everything Yourself
How much do you do in your business?
Trying to take charge of every task in your business can have just the opposite effect of what you’re trying to accomplish. Try to outsource administrative tasks that do not add much value to your business.
A CPA, for instance, has a much better grasp of tax law than you do. Why not outsource tax planning and preparation to a professional? Outsourcing bookkeeping can lower your tax liability and increase your tax compliance, besides leaving you with more time to focus on profitable activities.
Other tasks you can delegate to professionals include IT and legal issues. In the end, letting professionals handle some of your tasks can reduce errors and increase profitability, as long as you invest your newfound time smartly.
6. Wrongly Categorizing Income and Expenses
Once you have more than just a handful of transactions every month, it’s time to ditch the shoebox method of bookkeeping. You need to assign income and expenses to their appropriate categories.
By staying on top of your accounting records, you seldom run into mistakes. You always need to know clients who were billed, how much they were charged, and whether or not they paid. Keeping good accounting records also makes it easier for you to make your year-end preparation.
7. Putting Off Bookkeeping for Too Long
Sure, you’re afraid of doing your accounting incorrectly, but what good is procrastinating doing your business? Ultimately, your company will suffer.
Many business owners learning their way around balance sheets have an overpowering fear of messing up their books. They keep putting off until it’s suddenly time to file tax returns, and they have no idea where to start. Reconciling records from months ago can be very confusing.
That’s why you need to get started right away.
Increase Your Business Chance of Success
Your business is a long-term project, and you need to start treating it that way. The perfect place to start is by making sure that you get your bookkeeping right.
Could there be accounting mistakes you are committing today that could be sabotaging your success as a business? This is the time to rectify them and begin the journey to success.
For accounting solutions that are perfectly tailored for your business, contact us now and get immediate assistance.