Modern technology has made accounting easier than ever before. However, accounting mistakes are still common; they can cost you money and even threaten the survival of your business. Here are some simple steps you can take to prevent various different types of errors being made:
It sounds obvious, but it’s surprising how many business owners forget to record the small transactions. No matter how big or small your company, and no matter how insignificant those cash purchases seem, it’s vital to make note of them all. Forgetting transactions here and there can become a bad habit, potentially leading to your balance sheet being skewed. Get into the habit of being thorough and force yourself to record every single penny you spend.
Always set a budget
What happens when you go food shopping and don’t take a list? You end up buying items you don’t need and spending more money than anticipated! The same principle applies to accounting. You should set a budget for every project. This way you establish how much it should cost before you start. Without a budget, it’s tempting to keep spending that little bit more on a project to make it work, and this can lead to costs spiralling out of control. A budget keeps you disciplined.
Checking that the number in your account matches the total amount you’ve actually spent is something else you should be doing regularly. If you’ve followed our first piece of advice, then your accounts are likely to be accurate anyway, but reconciliation is a useful error correction procedure that you shouldn’t neglect. Accurate statements prevent poor business decisions being made.
Appoint someone who knows what they’re doing
Many small business owners take on the accounting themselves in addition to all their other duties. While this might seem a good way to save money, it’s not always the best option. Accounting is time consuming and not everyone has a knack for it. Appointing a professional ensures a higher level of accuracy and let you focus on other areas of your business.
Keep your personal and business accounts separate
Forgetting to set up a separate business account is another typical error. You don’t want important business transactions mixed up with your grocery shopping. Keep them separate and it makes balancing accounts far easier.
Make use of technology
As we said at the start of this post, technology means accounting is easier than ever before. Yet many business owners are put off by their lack of knowledge of accounting software and stick to more laborious traditional methods. You don’t have to invest in the most expensive, most complicated, most sophisticated piece of software. Nevertheless, you should learn how to use accounting software (perhaps with a free trial) and use it to your advantage.
Know the difference between profits and cash flow
Whenever you close a deal, your natural instinct might be to record the income in your accounts straight away. However, be careful! All that profit doesn’t become cash in hand for you to spend straight away. Not being aware of the difference between profits and cash flow can make your business seem healthier than it really is and leads to overstatement.
Accounting errors here and there will inevitably happen at some point. However, you can avoid significant accounting mistakes simply by establishing good habits and being thorough. Good practices applied consistently will have positive outcomes for your business.