Data from the United States Small Business Administration show that about 50% of every new small business in the United States will fail within the first 5 years. So why do small businesses fail? Bad financial management.
Good financial management begins with knowing some key rules of bookkeeping. From small businesses to big corporations, bookkeeping is a vital part of any business effort. Although it’s typically not the best job, your business needs bookkeeping services to succeed. After all, errors can cost your business significantly.
Small businesses often make bookkeeping errors in their first years of operation, due to the lack of knowledge concerning correct accounting procedures. If you don’t have the money, time, or wish to become a certified bookkeeper, you can avoid some key pitfalls, which can impact on your business’ bottom line.
So here are some common bookkeeping mistakes made by small businesses — and how to prevent making them.
Doing it Yourself
We only have 24-hours daily. So as a small business owner, you need to ensure that you’re filling them with just the most vital tasks. Although managing money is absolutely an important task, you don’t need to do it yourself.
In actuality, if your bookkeeping and accounting skills aren’t strong, it’s best you hire someone to do it. Delegating this job to an expert will help you cross check for errors. Also, it gives you time to work on your business – and not in it.
Employing the Wrong Accounting Method
There are two principal business accounting methods: accrual and cash. The accrual method is simpler since it’s founded on the actual flow of money in and out of your business. The cash accounting is used essentially by sole proprietors without any inventory. That said, the accrual method documents expenses and income as they happen.
As your business grow and get more complex, you should change to accrual accounting. This method makes it easier to match income to expenses correctly. Otherwise, your business might appear profitable during periods with some expenses and profitless during months with huge expenses, without understanding the difference.
Failing to Monitor Reimbursable Expenses
Often, small business owners pay for purchases with their credit card. After paying, they fail to follow these expenses.
In essence, don’t mix business and personal spending. Keep your business and personal finances separate always. We advise small business owners to open a company checking account and keep business income into the account.
Next, get an accountant to devise an income management strategy directing how money is removed from your business. The following factors will drive your income management strategy:
- The profits that need to be reinvested back into your business
- Your long-term personal financial plan.
- Your annual cash flow needs
Not Negotiating Vendor Terms
A lot of small business owners often buy items from the same vendor always. If you do this, it’s essential to build a relationship with your vendors. Even if the purchases are little, always call and ask questions. Also, you can bargain longer payment terms or reduced pricing, allowing you to maintain more cash flow
Not Keeping Hard Copies of Records
In a world of Internet banking, several small business owners feel comfortable depending on the Internet to safeguard their records. Although going paperless is a no-stress and an eco-friendly option, always keep hard copies.
Most banks only allow access to these records for some months. As a result, you may come up short if you wait till tax time to reconcile your bank statements.
Lack of Communication
Bookkeepers can do their job effectively if they’re filled in and briefed on every financial transaction. A common mistake is paying someone without reporting it or getting supplies and not giving the bookkeeper the necessary information or receipts.
The Bottom Line…
You can avoid these costly bookkeeping mistakes. Prepare accordingly and watch out for warning signs. When in doubt, get the right information, know the right bookkeeping rules, and ensure that your books are accurate all year-round. If that all seems like too much work, please contact us today! We are here for your bookkeeping needs.
Your final balance sheet will thank you.
