Most Common Accounting Mistakes Business Owners Make
By Nicholas Au, Last updated: 2021-09-23 (originally published on 2020-08-26)
Accounting is an essential part of a business. Many business owners may recognise this fact, but still fail to properly invest in it. During the initial stages of a business’ growth, it’s common to see business owners take accounting responsibilities on themselves. However, as many business owners do not come from an accounting background, they often make mistakes. They are often errors that could be easily avoided if they were familiar with basic accounting principles.
In this article, we provide insight on the most common accounting mistakes that business owners make. This way you’ll be able to better avoid them yourself.
Assuming that Profits = Cashflow
Profits are not the same as cash flow. A business can be profitable but also experience negative cash flow. It is in these instances that a business runs the risk of bankruptcy/ insolvency. This is a concept that many business owners fail to understand.
A business owner should go through their accounting records to understand how their company is doing. They should try to understand their cash flow and what is affecting it. Being able to identify the key drivers of a business’ cash flow can allow business owners to stay on top of their invoicing and better manage their business costs.
Not Doing Bookkeeping Properly
One of the most common accounting mistakes business owners make is not having a proper bookkeeping system. Bookkeeping is the act of recording financial transactions and is vital to a business’ accounting process. Regardless of the type of financial transaction or its size, it is important for a business to ensure that everything is recorded and properly categorised.
Accurate bookkeeping will help provide business owners with a reliable picture of their business’ health and will provide an understanding of how well (or poorly) a business has performed in a given period. Bookkeeping records will also be used as a reference by auditors. This is for the production of audited financial statements. Thus, proper bookkeeping will increase your chances of compliance.
For business owners to make sure that their financial records are accurate, they should get into the habit of utilizing formal bookkeeping systems which can automate the recording of transactions as they occur. This eliminates the possibility of manual errors being made, and also reduces the time it takes to complete these tasks.
Waiting Till the Last Minute to Perform Reconciliations
Reconciliations is the accounting process that ensures that the money a business actually spends matches what is stated on their internal financial records. Performing reconciliations is a vital task that will help not only business owners, but also auditors in identifying any unusual transactions that may be the result of fraudulent or accounting errors.
Don’t wait until the last minute to perform reconciliations. A business is running the risk of letting errors go undetected for extended periods of time. Errors that are not identified early can snowball, leaving businesses with cash shortfalls.
Reconciliations can also help a business owner verify their cash flows. Small business owners typically work with smaller amounts of capital as compared to what larger companies have available to them. As such, conducting regular bank reconciliations is essentially important for business owners to understand their exact cash position.
Lack of Documentation Procedures
A business will eventually need to conduct an audit. This is statutorily required in most countries. During an audit, auditors will scrutinise a company’s financial information to determine whether the financial statements present a true, fair and complete picture of the company.
To facilitate auditors in their tasks, businesses will need to be able to provide documentary evidence to support the financial statements. If a company does not have a process to accurately record and file documents, then they risk non-compliance in the event of an audit.
Proper documentation procedures are incredibly important for Hong Kong businesses in particular. Hong Kong requires all Hong Kong incorporated businesses to maintain records of their transactions for at least seven years from the date the transactions are conducted. A business could be requested to produce a document supporting a transaction. If they are unable to, they can face possible fines and penalties.
Paper-based documentation systems can be awkward and time-consuming, especially when one has to manually assess and sort each document. Utilising tools like Xero can make this process easier as it possesses data capture tools whereby important document information, such as invoice date and amount, can be automatically recorded and categorised.
Not Using Accounting Software
During the initial stages of a business, business owners will generally like to minimise their expenses. This means using what resources they have on hand. In regards to accounting related tasks, this means that many business owners will record their finances on an excel spreadsheet or on a paper ledger. Manual based accounting methods often cause accounting mistakes as these methods are inefficient and prone to errors.
One of the simplest ways to avoid making accounting errors is to utilise the right tools. Cloud accounting software can help avoid mistakes and ultimately, make it easier for business owners to handle their finances.
The best cloud accounting software’s all have extensive functionality that can allow it to generate reports, key metrics and other financial snapshots to constantly provide updated information on a company’s health. As many cloud accounting software’s can sync up with third-party applications, users can customise their platform to relay information from all the third-party apps used. By consolidating all the financial information of a company from multiple sources, business owners will be better able to manage their accounts payable, accounts receivable and reduce the chance of incurring bad debt.
Not Seeking Professional Help
Many business owners would prefer to perform their accounting tasks in-house to minimise costs. This is especially true when a company is first founded. While this may work initially, this method loses effectiveness as a business grows.
During the growth stage of a business, their accounting needs will grow in proportion. This could end up being costly for a company who does not want to out-source their accounting tasks. Businesses who wish to go down this path will find that the infrastructure required to help accountants perform their job functions could be more effectively used to engage an outside service provider.
To identify a service provider who can assist with your accounting needs, business owners should look for a firm that:
- Is licensed under the local accounting regulatory body, to provide accounting work
- Understands how to utilise the latest cloud accounting solutions
- Has experience serving companies of similar industries and sizes as your business
In the End
Accounting is a very necessary part of all businesses and its importance is often underestimated by business owners. Even the most common accounting mistakes can be incredibly costly, especially when they result in non-compliance, business owners should take steps to make sure they are maximising their accounting resources and are preparing well in advance. When all else fails, don’t forget that you can always engage a professional service provider to assist.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.