It can be difficult to monitor and measure a growing business. With added growth, your reports can become more complex, making it even more important that you avoid certain mistakes. Below, we discuss some accounting mistakes you can avoid to keep your finger on the pulse of your business.
Skipping Routine Accounting Tasks
More often than not, a business owner has just been too busy to take care of their accounting needs and has to call us for help. Nothing has been reconciled or even recorded for months on end, they’ve reached a tax deadline and they are in a panic. While we don’t mind taking on projects such as these, it’s much easier on our client’s stress levels if bookkeeping is done on a routine basis.
We understand that business owners are strapped for time. However, doing all of the bookkeeping in a rush can lead to errors that will take far more time to untangle later. Unreconciled bank accounts can be one of the issues that lead to these errors. There are many times when small costs or expenses simply don’t get recorded in accounting software. Reconciling your accounts with your bank allows you to catch these expenses, making sure that your software is accurate.
Lastly, we see clients who simply record deposits as they are received instead of applying payments to open receivables. This also leads to incomplete or incorrect software data and could lead you to send a past due statement to a client who has already paid their bill.
Assuming Profits Equals Cash Flow
Cash is king! Every business needs sufficient cash flow to continue operating on a daily basis. Unfortunately, many clients do a poor job forecasting expected cash flows. For example, a client closes a deal for $50,000. Expected expenses for this project are $20,000 leaving the client to believe they’ve just made a $30,000 profit. Sadly, this isn’t always the case. Could the project run over time? What if the client pays late? Maybe expenses are unexpectedly more than $20,000? Each of these factors will impact the amount of cash flow available to the client at any time.
Our company offers a regular cash flow report. The formula we use is:
(Current bank balances + anticipated Accounts Receivable) – (uncleared/unpaid expenses + payroll expenses + budgeted expenses) = Cash Flow
Most of our clients forecast their cash flow on a monthly basis, looking forward to the month ahead for anticipated expenses and income. This helps them properly prepare for the month ahead.
Not Saving Receipts
Having a perfect expense report is great. You feel good that you’ve recorded all of the little transactions into your software. Then, you are audited by the IRS; without receipts, your expenses reports are useless. Receipts are the proof that the IRS needs that you really did have a business meeting over dinner and that you didn’t just take your family to dinner on the company’s dime.
Not Backing Up Accounting Software
So far this year, I’ve helped three clients who needed to rebuild their company files. Why did they run into this issue? They made the mistake of backing up their software to an external hard drive or cloud solution. One system crash or error can be all it takes to wipe out your files and all of your company data.
I recommend that all of my clients schedule routine backups of their software. My recommendation is that it should be backed up each time it’s touched. If you or your staff is working on the software daily, back it up each night at 1 or 2 in the morning when nobody is working on the file. If you only touch it weekly, set it up for a weekly backup or to back up each time you close the file.
Backups need to be stored on an external drive, a server designated for the task, or to a cloud solution. Backing up these files to your computer that stores the accounting software is almost as dangerous as not backing up at all.
Doing Too Much Yourself
We get it. You’re a small business owner with limited revenue. Doing the bookkeeping in-house seems a great way to keep costs low. Sadly, this often ends up costing the company more money in the long run. A knowledgeable bookkeeper will be able to manage your software and data much faster than you can. Your job is to run your business. This means it is often worth it to spend a few bucks to make sure that your books are done correctly the first time rather than spending hours trying to figure out how to correct an error you made.
Not Planning for Inventory
If your company sells product, it must stay on top of its inventory. Businesses that don’t manage their inventory risk sales loss if product is not available. Therefore, companies with product must plan to have product on hand at the end of the month to fill customer needs the first few days of the following month. A simple formula for this is:
Beginning inventory + purchases – sales = ending inventory
If your company projects it will sell 200 widgets in February, your beginning inventory in on February 1 was 50 widgets, and the company wants 30 widgets in inventory at the end of February, the formula would be:
200 projected widget sales + 30 ending inventory – 50 beginning inventory = 180 purchased
This means that, in order to meet projected sales and to have 30 widgets on hand at the end of February, the company must purchase 180 widgets.
Mismanaged Debt
Companies can get money to operate their businesses in a few ways. You could sell shares of your company by issuing stock or borrow money and take on debt. If a company decides to take on debt and doesn’t monitor the amount of debt borrowed over time, they may run into difficulties repaying that debt.
To monitor this, we suggest a formula called the debt-to-equity ratio. This formula is:
Total debt / company equity
In many instances a typical ratio is 2 to 1, or $2 debt to every $1 of equity in the company. Firms with a ratio of 3-to-1 or 5-to-1 may see this as a red flag that their debt is becoming unmanageable.
Take a Deep Breath
If you find that you are making these mistakes with your company, relax. Sound Accounts is here to help you either get organized or by taking over your bookkeeping so you can do what you do best; run your business!
