Accounting is essential for all businesses but is often overlooked as a business grows. For instance, many business owners will take accounting responsibilities onto themselves during the initial stages of their company’s growth but fail to anticipate the impact their growth will have on their accounting needs going forward. In this article, we look to advise on the most common accounting mistakes that business owners make, and how to avoid them.
What You Will Learn:
1. Assuming that Profits are the Same as Cashflow
Business owners often confuse profits with cashflow – this is especially common among individuals who do not have an accounting background. While many assume that being able to demonstrate a profit is equivalent to enjoying profits, this is not the case. A business can be profitable but also experience a negative cash flow. These situations are dangerous as businesses can run the risk of bankruptcy / insolvency.
When analyzing accounting records, business owners should try to understand their cash position and what affects it. Being able to identify the key drivers of a business’ cash flow can help business owners better manage their costs, and can help improve their bottom line.
2. Not Doing Bookkeeping Properly
Bookkeeping is the task of recording financial transactions and is essential to the accounting process. Despite its importance, new business owners often adopt an ad-hoc approach to their bookkeeping process and frequently depend on Microsoft Excel spreadsheets. While Excel can be sufficient in the early stages of a company, bookkeeping through Excel can quickly become increasingly difficult to manage as a business grows. When this happens, it can be incredibly difficult for business owners to reliably understand the financial health of their business.
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, for the production of audited financial statements and 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.
3. Not Performing Reconciliations Regularly
Reconciliation is an accounting process that confirms the financial activity stated in a company’s internal financial records. As reconciliations help identify any unusual transactions that result in non-compliance with accounting standards, it is a very important tool used by auditors and accountants alike.
Because of the importance of reconciliations, it is not something that should be performed at the last minute. Performing reconciliations on a frequent basis will reduce the risk of letting accounting errors go undetected for extended periods of time. This is especially important since unaddressed accounting errors can snowball, resulting in cash shortfalls.
Reconciliation is also useful in helping a business owner verify their cash flows. As small business owners typically work with comparatively smaller amounts of capital as compared to larger companies, properly accounting for resources provides transparency on a business’ exact cash position.
4. Lacking Proper Documentation Procedures
It is statutorily required in most countries for businesses to undergo an audit. During this process, auditors will scrutinize a company’s financial information to determine whether their financial statements present a true, fair and complete picture of their business.
The audit process can be long and complicated as auditors will need to inspect multiple sources of information, therefore proper documentation procedures can help facilitate this process. If a business does not have a documentation process, they run the risk of non-compliance in the event that an auditor requests to see certain pieces of information.
Proper documentation procedures are especially vital for Hong Kong businesses as it is required for Hong Kong companies to maintain records of their transactions for at least seven years from the date the transactions occur. In the event that a business is requested to produce documentation to support a transaction, 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. Utilizing 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 categorized.
5. Not Using Accounting Software
As mentioned earlier, new business owners will often manage their finances in a Microsoft Excel spreadsheet. This is a manual based accounting method that is inefficient and susceptible to accounting mistakes.
One of the simplest ways to avoid making accounting mistakes is to utilize the right business tools. Cloud accounting software can help reduce the occurence of mistakes and ultimately, make it easier for business owners to handle their finances.
Cloud accounting softwares, like Xero, has extensive functionality that allows users to generate reports, access key metrics and other financial snapshots to facilitate transparency on a company’s financial health. As many cloud accounting softwares can sync up with third-party applications, users can customize their platform to relay information from all the third-party apps used. By consolidating all sources of financial information of a company, business owners will be better able to manage their accounts payable, accounts receivable and reduce the chance of incurring bad debt.
6. Not Seeking Professional Accounting Help
Small businesses have the reputation of minimizing costs by performing tasks in-house when possible. While this may work in the initial stages of a company, this method loses effectiveness as a business grows.
Unfortunately, as mentioned earlier, the accounting needs of a business will grow alongside a business. This could end up being costly for those who do not want to out-source their accounting responsibilities. To make sure that accounting resources can keep pace with the growing needs of a business, infrastructure must be invested in. However, the resources to be invested can be more effectively used to engage an outside service provider.
To find a professional accounting firm 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 (has a CPA)
- Understands how to utilize the latest cloud accounting solutions
- Has experience serving companies of similar industries and sizes as your business
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 maximizing their accounting resources and are preparing well in advance. When all else fails, don’t forget that you can always engage a professional accounting firm to assist!