The Top 5 Small Business Accounting Mistakes
Most small business owners have little or no accounting experience. They certainly don’t start their business for the sole purpose of accounting, and so it is really no surprise that the majority of small business owners rate accounting and taxes as the part they like least about their own business.
While you may not enjoy accounting, there are many reasons as to why your financial records need to be in order. An organized accounting system will reveal:
- The amount of cash that you have on hand
- The most profitable areas/aspects of your business
- Problematic expenses/spending
Cash flow transparency is particularly crucial to product designers and product-based businesses who must manage inventory, research and development and unique marketing expenses.
Common Accounting Mistakes and How to Avoid Them
1. Not reconciling bank and credit card statements
Do you monitor your business bank account online? That balance is not a reliable way to manage company cash. You should always use the account balance from your accounting software. Good accounting software will automatically download your bank and credit card transactions for easy recording. This means you only need to enter the checks you pay and any checks you have to deposit. Product designers and other niche ecommerce businesses often have online stores and/or process payments electronically, so there shouldn’t be many checks to record.
2. No system for filing receipts
Do you have paper receipts stuffed into a folder(s), digital receipts in your email inbox or no receipts at all? A paperless system is the easiest way to keep organized records. A virtual filing cabinet can exist in your accounting software or on some other network. Use the camera on your phone to take a picture of your receipts and email/upload them to your digital filing system. If needed, make notes on the receipts before you take a picture. For receipts received as emails, just download and save.
3. Not understanding the difference between cash flow and profit
Cash flow is the total amount of money that moves in and out of your bank account. Profit is the amount that remains from sales after all expenses have been subtracted.
Not all money moving in our out of a business affects profit. For example, a principal payment on a debt is not an expense. The interest payment on a debt is.
4. Mixing business and personal expenses
Your business is not a personal piggy bank. As a business owner you should be pay yourself an income out of profits. Separate your business and personal expenses in order to understand how profitable your business is.
5. Not learning how to use your accounting software
As we have already outlined, your accounting system is going to be the best indicator of business health. Accounting software may seem overwhelming if you aren’t tech savvy sure what to do, but it’s important that you know how to use it. If you do not have the time or desire to learn it, you need to hire someone who can help.
McSwain Hiott CPAs provides outsourced accounting services to product design companies and product based businesses who want to have a firmer grasp on their cash flow. We work closely with business owners to identify business strengths, weaknesses and opportunities for business growth. Outsourced accounting services are tailored to meet individual client needs, but packages are available for a flat monthly fee. And if you just need a little help getting started, we also provide accounting system setup (no ongoing maintenance fee required). Please email email@example.com to learn more.