Avoid These Costly Accounting Mistakes

Accounting mistakesA Canadian bank recently surveyed over 500 small business owners about what they love and hate most about owning their own business.

Unsurprisingly, flexibility and feeling in control ranked first in the “love” category. Meanwhile, almost 60% said bookkeeping was hands-down their most hated task.

Most business owners understand that effective financial management is key to their success. But lack of knowledge, frustration, and even avoidance can add up to accounting mistakes that derail future growth. In fact, some mistakes are of such a drastic nature, the only way to dig their way out, is for owners to sell up and move on.

Protect your business and reduce your stress by avoiding these costly accounting errors.

1. Mixing business and personal finances

From day one, business owners should have a separate bank account that they use specifically for customers to pay into and for all bills to be paid out of.  If needed a separate business debit or credit card should be used.

So why do we think it is important to keep it separate from all your trips to buy groceries, or kids swim lessons, or trips to the gym – because those personal transactions are not required to be reported for your business.

Separating them out removes the headache of having to do it manually.  The business bank account is business transactions – plain and simple.

2. Letting debtors rule the roost

It is bloody easy to lose track of which customers have paid you and which clients are late. Implement a strict policy and schedule for tracking accounts receivable and pursuing unpaid invoices (and have the balls to stick to it).

  • ask customers to pay at the point of purchase or no more than 14 days later;
  • contact clients to confirm they have received your invoice and to agree on a payment date;
  • follow up immediately when payment dates are missed – do not delay; and
  • keep accurate, up-to-date records of each client’s payment history.
  • you do not need bad paying clients as future clients – stop work when money is owed

Xero makes AR a breeze by automating your monthly invoicing and contacting late payers with automatic reminder emails.

3. Not using tech to track your expenses

Tired of chasing down missing receipts and struggling to justify claims come tax time? There’s an app for that! Choose from options such as Receipt Bank or Hubdoc.

Keeping receipts in a shoebox or plastic pocket or bin (yes we have seen people store receipts in a big bin) is simply no way to understand what has or hasn’t been paid, and what the heck the receipt is for.

And if you are ever audited (touch wood it is not any time soon) the ATO can ask to see the proof of purchase for your expense claims, and bank statements are not enough evidence to prove what items were purchased.  So those pesky receipts are damn important.  Receipt Bank and Hubdoc can be used on your phone or on your computer to take photos or upload receipts in a flash.

4. Neglecting to plan for business growth

One of the biggest accounting mistakes is not having cash flow in alignment with provisions for future growth. Accounting software solutions offer an easy way to track your financials, and they also generate reports and provide analytic tools business owners can use for future forecasting.

“Business growth is not free.  Wanting to open a retail space, wanting to import a new product, wanting to hire staff – all of these things require up front investment.  So how do you know you can afford it if you don’t plan for it?”

So work out what reports your accounting software can generate to track long-term trends, identify and mitigate risk, and discover new ways to increase profitability. Talk to your accountant or BAS agent about which reports and metrics are most important for your particular business.  And if you run reports and they simply look like they are written in Chinese – get your accountant or BAS agent to explain them.  Get them to show you exactly what is important.  Learning that now could potentially save you from a costly mistake down the track.

Small business owners are rarely trained accountants. Don’t try to manage your company’s finances all by yourself as it could lead to costly accounting mistakes.

Collaborate with a trusted professional, invest in quality cloud accounting software, and spend some time familiarising yourself with relevant tools you have at your fingertips. You will feel empowered, which is the first step to forging a more love-filled relationship with small business accounting!

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