Running a small business is never easy. You have to wear multiple hats at any given time. Most people are skilled in one area, but not another. They might be great at making sales or marketing the business online, but not so good at dealing with the day-to-day admin or maintaining the accounts.
Technology does make our lives easier, but technology cannot always save you from making disastrous accounting mistakes. We all make mistakes. After all, we are only human. However, ignorance is not a defense, so where possible, try to avoid making any of the following mistakes.
Failing to Keep the Books
You cannot run a business without keeping accurate books. Accounts provide a snapshot of the business at any given time. Cash flow statements, profit and loss accounts and balance sheets tell you how well the business is performing and how many creditors you have. Without this information, it is very difficult to make plans for future growth.
Implement an accounting system from day one. Create spreadsheets, download an accounting software package, or delegate the process to a small business accountant. Any one of these options is better than doing nothing.
Not Maintaining Records
Accounts are not much use unless they are up to date. Information needs to be updated regularly, by you or by someone responsible for the bookkeeping. If you are unlucky enough to be selected for a tax audit, the tax inspectors will expect to see well-maintained, accurate financial records. Anything less is a major strike against you. You could be fined or even imprisoned for not keeping proper records, so don’t make this mistake.
Disorganized accounts are unhelpful at best and misleading at worst. Imagine the embarrassment if a major client rings up to ask for a copy of an invoice. How would it look if you couldn’t find the original invoice? Not very professional is the answer. Do not make this mistake. Be as organized as possible. File invoices and receipts in a filing cabinet or digital storage system. Log all paperwork promptly and accurately, and update your books regularly.
We all make mistakes. Transposing numbers, forgetting to include a decimal point, or even missing out a transaction happens to the best of people. The odd mistake won’t matter too much and the chances are good that your accountant will pick up on any minor errors before they cause too many problems. However, sloppy bookkeeping could come back to haunt you. The Internal Revenue Service takes a dim view of businesses that submit sloppy tax returns or file inaccurate paperwork. Always check your bookkeeping and if you do spot any errors, correct them as soon as possible.
Hiring the Wrong Employees
Once your business begins to grow, it’s only sensible to delegate some of the admin to other people. Plenty of small business owners hire accounting staff to take care of their bookkeeping, or they outsource the work to an external provider. This is a good idea, especially if you don’t have a head for numbers or you don’t have time to pour over the accounts every evening. However, hiring the wrong person to maintain your books could turn out to be the worst mistake you ever made.
Inexperienced or dishonest accounts staff can cause havoc in a small business. Mistakes have a tendency to snowball into catastrophic errors and a dishonest employee who siphons money into their own pockets could easily bankrupt your business. Always check whether a job candidate has the right experience for the job and if they do, scrutinize their references closely to make sure they are honest.
Hiring the Wrong Financial Professionals
Most small businesses use an accounting professional for the end of year tax submissions and more complex accounting. A good accountant will save you money and make life a lot easier, but a bad or unscrupulous accountant could cost you your reputation and business.
Ask for recommendations before hiring a financial professional and check their qualifications with the appropriate regulatory body. There are plenty of accountants and tax experts out there, but not all of them are ethical or have your best interests at heart. Listen to your head and if an accountant tells you a tax avoidance vehicle could save you a fortune, question whether this is really such a good idea.
Trying to Do It All
Be sensible. Trying to do everything will, in theory, save you money, but in practice, it probably won’t work out so well. There is a lot to think about when running a small business and most owners don’t have the time or the energy to do everything. Forgetting to invoice a client or missing an important tax deadline could be an expensive mistake. Do you really want to end up in this position?
Delegate tasks and stop micromanaging the business. It is a lot more efficient to let other people take care of the admin and bookkeeping. Once you accept this, you can move forward and concentrate on the tasks you are good at, such as marketing to new clients and working on existing client relationships.
Sticking Your Head in the Sand
If problems arise, deal with them quickly and efficiently. Ignoring a cash flow problem is not going to make it go away. Instead, look at why you have a problem and try to find ways to fix the issue. The same applies to IRS issues. The more you ignore letters and telephone calls, the worse your woes will be.
Flying Too Close to the Sun
It is very easy to lose sight of ethics when you are pursuing wealth and success. Plenty of entrepreneurs take risks in the early days; it’s all part of making their dream a reality. However, take too many risks and before long your misdeeds will catch up with you. Don’t be that person.
Staying in control of your accounts and keeping the lines of communication open between you and your accountant won’t stop you going bust, but it should minimize the likelihood of it happening.