Common Accounting Mistakes

Many SMBs find accounting and bookkeeping impenetrable. While it’s at the core of every business, that doesn’t necessarily mean that every business owner is well-versed in the principles of accounting. Consequently, there are many common mistakes that can crop up.

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Falling Behind on Your Bookkeeping

Once your bookkeeping has fallen behind, it’s very difficult to catch up. Your transactions should be entered in on a daily or weekly basis, to ensure that you have accurate cash flow reports. When your bookkeeping falls behind, you lose track of how well your business is doing. It also makes it difficult to do things like complete your taxes on time, or complete financial statements for investors or to procure loans.

Calculating Your Payroll Taxes Incorrectly

Payroll is one of the most complicated tasks for a business owner. Not only are there a number of different payroll rates to keep track of (federal, state, and local), but there are additional issues such as individual employee withholding, wage garnishments, and PTO. When your payroll taxes are calculated incorrectly, you can find yourself facing some significant fines and penalties.

Confusing Revenues, Profits, NOPAT, and EBITDA

How much money is your business actually making? That’s a complicated question, for a few reasons. There are different methods of tracking how your business performs:

  • Revenue. This is the raw amount of money your business makes. Your business’s raw sales are considered to be its revenue, but this isn’t always the most accurate depiction of how well your company is doing. If your revenue is going up but your expenses are going up too, you may not be making more money.
  • Profit. Your company’s profit is the amount of money your business makes less any of its expenses. This is a more reliable predictor of how well your company is doing, because it factors in the expenses as well. Many companies operate with revenue but without actual profit.
  • Net Operating Profit After Taxes. Taxes can be a substantial expense for a company. Many businesses want to see how much profit they’re making even after the taxes that they need to pay on that profit, because that’s the real amount of wealth that they’re going to be seeing.
  • Earnings Before Tax, Depreciation, and Amortization. This is one of the truest pictures of earnings, because it removes the expenses, taxes, depreciation, and more: it’s a very accurate accounting of the worth of the business.

All of these types of reports are valuable, and most businesses should consider all of these numbers. However, these numbers need to be understood to be different, and shouldn’t be confused with one another.

Not Reconciling Your Books Properly

Your books should be reconciled monthly. If your transactions are entered but your books aren’t reconciled, you have no way of knowing whether they’re actually accurate. Reconciling your books checks off each transaction in turn, to make sure that all the transactions have been accounted for. An account that hasn’t been properly reconciled can easily be over-drafted, as you may not realize that you’ve already spent the money in the account. Reconciling a business bank account is much like balancing a checkbook.

Dismissing Small Bookkeeping Mistakes

As you reconcile your books, you might find small mistakes, such as being out of balance by a single dollar. Many may be inclined to simply adjust the balance by a dollar and move forward. But a mistake of a single dollar could actually be the difference between a $1,000 deposit and a $999 check for completely different things.

Even a small bookkeeping mistake should be researched, because it’s impossible to know whether what’s causing that mistake could be of greater value than the mistake itself.

Mixing Business Finances and Personal Finances

By far, the most common mistake small business owners will make is mixing their business finances and their personal finances. Mixing business finances and personal finances makes the entire process of sorting through your financial statements extremely complex. It also makes it difficult to complete your taxes, as all of the transactions need to be separated out to determine your business expenses.

Mingling your business finances and your personal finances can also cause issues for you in the future. If your company experiences financial problems, it can be difficult to determine where your finances and your company’s finances are separated.

Using the Wrong Accounting Type

Books can be kept under either a “cash” model or an “accrual” model. A cash model is most common, because it’s the easiest to track. When cash comes in, you book it. When checks go out, you book it. It’s direct and simple, but it’s actually not the right accounting type for many businesses.

The accrual model tracks income when invoices are written and expenses when bills come in, rather than when the invoices or bills are actually paid. This allows the business to track income and expenses as the money is actually agreed to, rather than physically brought in.

A business that takes subscription payments, for instance, may not be able to track its upcoming cash under a cash model: it will need an accrual model, instead.

Failing to Produce Regular Financial Statements

Profit and loss statements, general ledger statements, and income and expense statements should be printed out every month — along with balance sheets and any other needed financial analysis reports. Regular financial statements give a business owner a better picture of how the company is performing, which is critical for making decisions.

Not Hiring a Bookkeeper or a CPA

Many of the mistakes on this list can be avoided by hiring a professional bookkeeper or CPA. Yet for a small business owner, it’s often difficult to determine when you’ve outgrown keeping your own books. As your revenue generation grows, it becomes more important to hire professional, qualified individuals. A good bookkeeper or tax preparation expert will ultimately save your company money.

If you’re concerned that you’re making these common mistakes in your accounting, it may be time to contact a professional. A professional can review your books and make suggestions regarding needed changes.