Do you know the last thing that a businessman wants to hear? That there is a mistake in his books of accounts. Not every business owner is an accountant or a tax professional. This usually increases the risks of making mistakes while preparing books of accounts.
And in most cases, even a small mistake can have severe consequences for your business. But making mistakes isn’t something new, especially when it comes to young entrepreneurs.
A misprint in one of the digits in a payroll or tax files may lead to various problems. It is essential to be extremely careful while preparing your books of accounts. Otherwise, you may risk your cash flow, run into tax penalties, or face other legal issues.
Your aim should always be to understand the accounting system thoroughly to avoid some of the following mistakes.
1. You Delay Reconciling your Receivables
Accounting for a transaction is a three-fold process: First, you should issue the invoice that prompts the creation of a receivable. Second, receive payment from your customer. And lastly, record this payment in your receivable column.
Delaying to record these receivables timely may result in mismatching of the receivables report. Moreover, you increase the risks of making mistakes in your ledger books. Don’t wait for the deadline to record these transactions. It not only puts too much pressure at the last moment and you may miss some of the transactions also.
According to Intuit Quickbooks, the renowned accounting software company, not recording unpaid invoices eventually result in reduced profitability or negative balance. You can’t just record what you had spent in one month. You should also enter what you receive and the outstanding receivables. Most importantly, overlooking invoices may lead to issues with your suppliers also. If you don’t pay their amount on time, it would add to a bad credit rating for your business.
Max Funding Finance Expert, Shane Perry says,”It is best if you record any payment right after you receive it. If you can’t do that, at least record everything at the end of the week or the month. Alternatively, you can install accounting software that automatically enters your payments and receivables.”
2. You Do Not Record Cash Expenses
Apart from recording receivable, you should also spend some time tracking your cash expenses. This helps you to get the net profit of the year. You can subtract the expenses from your income to get the total profit before tax. Although it is easy to get statements for the expenses made from your credit and debit cards, recording cash expenses requires a lot of concentration.
Overlooking cash expenses will only overstate your income which would not match with your cash on hand and cash at the bank.
What’s the solution: Like recording receivables, you should practice tracking cash expenses on a daily, weekly, or monthly basis.
3. You Do Not Hire a Tax Professional
Do you think you can save a lot by doing your taxes alone? You are wrong. You may end up spending more if you make mistakes. From claiming the deductions to underpaying tax bills, there are plenty of mistakes that entrepreneurs make that lead to significant penalties.
If you don’t want to experience anything like that, you should hire someone who has enough experience in business taxes. They will not only keep your tax files updated but also familiarise themselves with the changing tax laws. This will help you plan your business if there is an oncoming tax hike.
What’s the solution: You should always hire a professional bookkeeper to manage your daily accounts. Additionally, you should hire another professional who knows how to file taxes and manage finances. Small businesses should invest in these areas to ensure quick growth.
4. You Fail to Understand your Accountant
Do accounting terms seem like Greek to you? Do you not follow what your accountant is saying? If yes, you should take a step back and learn a few things about accounting right away. That would eliminate the risks of wrong decision-making because of the miscommunication between you and your accountant.
Accounting may contain jargons that you don’t understand. But as the business owner, it’s your responsibility to learn those things as soon as possible.
What’s the solution: Has it ever happened that your accountant is talking about liquid assets and you thought about the hot tub in your bathroom? That’s accounting jargon right there.
If you don’t understand anything, ask the accountant to explain everything in layman terms. Or maybe he should use words or contexts that you can relate to from your business. This helps to understand your financial position better.
5. You Have Wrong Utilisation of the Accounting Software
It is high time you start making the most of your accounting software. But before that, you should know whether the software has appropriate features that suit your business or not. If it doesn’t, then you may have a risk of getting incorrect financial information. You should always use accounting software that meets the requirements of your business. It’s not that you always need high-end software. Just make sure that the software performs all the functions that you want to automate.
What’s the solution: First of all, you should choose your accounting software carefully. Don’t rush and buy the most expensive software available. You need to prioritise based on the features of the software. Also, think of the future. If you plan to expand your company, what features should the software have to manage the financial transactions later? Keep an eye on that also.
For example, you don’t have employees in your company right now. But you plan to hire a few next year. In that case, you would need the software to take care of payroll processing. Make sure you buy software that not only records receivables and expenses but also prepares payrolls for employees.
It is essential to find a good combination of an accountant and accounting software to keep your financial data safe and up-to-date. Once you find that combination, you can expect your company accounting books to be in safe hands.