May 2, 2023
According to a recent survey by QuickBooks, 965 experienced small business owners suggest seeking help setting up financial systems as the most important factor when starting a business. To make sure your systems are set up appropriately and effectively from the beginning, they advise consulting a professional.
Despite the availability of expert assistance, 38% of aspiring business owners who plan to start their businesses within a year intend to establish their financial systems without consulting any professionals. Additionally, 9% are still deciding whether they will seek help or not.
However, existing business owners warn that using incorrect financial systems for accounting can result in mistakes that may harm your business.
- Fixing accounting errors takes a lot of time. By implementing better systems, you can prevent common accounting mistakes from happening.
- Submitting an incorrect tax return to the IRS due to accounting errors can result in additional costs, such as interest, penalties, and fines. It is essential to ensure the accuracy of your tax return to avoid these expenses.
- Having accurate financial statements is crucial since stakeholders such as investors, creditors, and regulators depend on them. If the financial data is inaccurate, it can lead to a loss of confidence in your business.
Most significantly, if your accounting system generates inaccurate data, you won’t be able to make well-informed business decisions. If your financial systems aren’t working properly, you won’t be able to assess the financial health of your company, which could have detrimental effects. It’s crucial to have accurate data from your accounting system to make informed decisions for your firm. If your financial systems aren’t functioning correctly, it can be difficult to assess your business’s financial well-being, which can lead to significant consequences.
It’s important to prioritize improving your accounting procedures and ensuring your financial systems are correctly set up from the beginning. To help, here are 7 frequent accounting mistakes that are often mistaken for best practices, along with solutions to correct them.
The chart of accounts is the first step in small business accounting.
#1: Failing to update the chart of accounts
The chart of accounts is a listing and description of each account, and some companies fail to create sufficient account categories, which can lead to accounting reports that lack meaning. To avoid producing inaccurate accounting records, it’s important to regularly review and update your chart of accounts.
Imagine you own a hardware store with seven different departments. You can create subaccounts for each department under your main account. For instance, if your company’s overall revenue is listed under account #5000, you can track the revenue for the outdoor department under account #5100 and the revenue for the lumber department under account #5200.
To better manage your company’s profit and expenses, consider using subaccounts to generate department-specific financial reports. Additionally, keeping your chart of accounts up-to-date can streamline your accounting methods and increase efficiency. Accounting software can be a valuable tool in achieving these goals.
#2: Not using accounting software
QuickBooks accounting software has various features that simplify the work of an accounting professional:
- Using the software minimizes the chances of data entry mistakes. If you attempt to post an accounting entry that is not balanced, the software will promptly display an error message.
- Linking your accounting software to your bank and credit card accounts can save time for accountants. They can easily upload bank statements into the software and complete bank reconciliation quickly.
- By scanning receipts into accounting software, bookkeepers can eliminate the need for paper files. This can be done conveniently on a mobile device as well.
To handle your bookkeeping and accounting tasks efficiently, it’s recommended to utilize accounting software instead of relying heavily on spreadsheets.
The drawbacks of using spreadsheets
Using a spreadsheet takes far more effort and increases the likelihood of making mistakes. The following are the reasons why:
- The links between spreadsheet tabs may not be working correctly.
- The current version of a specific spreadsheet may not be available for use.
- Spreadsheets do not have the capability to integrate with bank statements, credit card reports, or payroll records.
- Training becomes more challenging as spreadsheets necessitate additional steps and data entry.
As your business expands, the volume of small transactions also increases, adding to your accounting workload. The more transactions you post each month, the harder it becomes to manage accounting through spreadsheet data entry.
You may also optimize your invoicing process with the use of technology.
Invoicing Automation
Maintaining positive cash flow in your business requires timely payments from your customers. Automating your invoicing process is an effective way to enhance your business finances.
When dealing with repeat customers, the majority of invoice information remains consistent. By utilizing automated technology, the processing time can be significantly reduced.
QuickBooks allows you to easily create recurring invoices for clients who order the same products or services each month. Simply type in the client’s name, and the invoicing application will automatically fill in their billing address and email address. Additionally, the template will populate with the customer’s previous order information for products and services.
After the template loads, you can double-check that the customer information is correct and modify the items and amounts displayed on the invoice if needed.
As your business grows, keeping up with all the tasks can be challenging, and mistakes may occur, especially if you fall behind. For instance, you may not have time for bank reconciliation if you have a busy week with new customer orders. In such cases, it is advisable to hire a professional to assist you with your business demands.
#3: Running a business without a skilled accounting staff
As your business grows, the people in charge of handling your accounting operations will change significantly.
When starting a business, the owner may handle the accounting tasks. However, as the volume of transactions increases, the owner usually hires a bookkeeper while remaining responsible for the accountant’s duties.
If the company is experiencing growth, the owner may need to hire a CPA to establish an accounting department, oversee the bookkeeper, and manage other accounting responsibilities.
The following are the distinctions between the function of a bookkeeper and the duties given to an accountant:
Bookkeeping Functions
The process of bookkeeping involves entering financial data into an accounting system. Business owners typically hire bookkeepers to enter and organize customer sales, inventory purchases, and other business expenses into accounting software. By utilizing a bookkeeper, the owner can focus their time and attention on other important tasks.
Responsibilities of an Accountant
To create monthly financial statements like the balance sheet and income statement, an accountant can rely on a bookkeeper to provide them with the required transactions, payroll data, and other records.
Because of their advanced training, accountants make decisions and judgment calls that bookkeepers don’t handle.
- Review of transactions: The accountant checks the bookkeeper’s work and may handle more complex transactions as needed.
- Adjusting entries: Adjusting entries, such as depreciation costs and interest received on bank accounts, are posted by accountants alongside other transactions.
- Financial reports: The accountant is responsible for creating essential reports such as the balance sheet, income statement, and other documents that management relies on to make informed decisions.
If you want your business to grow, hiring a bookkeeper is crucial. However, it can be expensive to have one on staff in-house.
As your company expands, you might feel hesitant to bring on a full-time bookkeeper. It is a common issue for small businesses because employing a full-time employee is expensive. However, if you plan to grow your business, it’s worth considering investing in outsourcing your accounting and bookkeeping tasks.
#4: Not Properly Separating Tasks
Assigning specific duties to different employees can help reduce the risk of theft.
It is logical that when workers have less responsibility, the theft risk decreases. As an example, let’s consider the cash account of your company.
It is advisable to maintain a clear distinction between these three particular responsibilities, if feasible:
- Asset Management: It is recommended that the individual in possession of the checkbook has no additional responsibilities for handling cash. For example, if the administrative assistant keeps the checkbook on his desk, he should not be responsible for any other cash-related tasks.
- Authority: Who is permitted to sign a check? For instance, if you are a restaurant owner, managers may have the power to sign off on food purchases. However, that manager shouldn’t be allowed to handle the company’s finances.
- Maintaining the books: One of the responsibilities of this job is to post accounting entries and reconcile the bank account. It’s important to separate the accountant’s role from other duties and to ensure they don’t have the authority to sign checks.
It is essential to keep a close eye on the balance of your petty cash account to avoid any possible theft. Similarly, accounts receivable also pose a theft risk and must be monitored closely.
If you run a small business, dividing the responsibilities of different tasks among employees may be impossible. In such cases, the owner may handle all the tasks alone. However, for expanding businesses, it is essential to separate these duties. Theft can be reduced by performing frequent internal audits.
One of a business’s most time-consuming tasks is handling its payroll.
#5: Not Using a Third Party for the Payroll Function
Consider outsourcing your payroll function to save time and ensure a smooth process.
To process payroll, follow these five steps:
Small businesses must follow five essential steps to calculate their payroll taxes and submit them on time and accurately. This is crucial for ensuring compliance with tax obligations.
- Collecting Data: As an employer, gathering an employee’s withholding tax information through Form W-4 during the hiring process is important. This ensures that federal income tax is withheld correctly and that any necessary deductions for company benefits are accounted for. As an employer, if you offer a retirement plan, an employee may request that a percentage of their salary be taken out and put towards the plan.
- Determining net pay: An employee’s total amount of money after taxes and benefit deductions is called “net pay.” To arrive at this figure, you need to deduct Social Security and Medicare taxes from the gross pay.
- Process payments: To ensure payments to your employee, you can either use direct deposit to transfer funds to their bank account or write a check.
- Reporting Taxes: To comply with tax requirements, you must file a tax filing with the IRS and the state revenue agency for federal and state tax withholdings. In addition, contributions to retirement plans, state unemployment benefits, Social Security and Medicare taxes must be reported to other relevant agencies.
- Payment withholdings: It is necessary to send all tax and benefit payments to the appropriate authorities, retirement plan companies, and other providers of benefits.
It’s important to consider the changes to payroll that your business may need to address, as this can make the process more complicated and time-consuming. Additionally, keep in mind that tax laws may impact the amount of taxes you are required to withhold from the paycheck.
Each year, there may be changes in the workforce, such as new hires, promotions, or terminations. Additionally, employees may adjust their tax and benefit withholdings due to changes in salary or family circumstances. As a result, an individual employee’s tax liability may change frequently over time.
Consider outsourcing your payroll process to a third-party company. This will enable the company to make necessary adjustments for tax law changes and manage employee additions or removals efficiently.
It is important to have a manual that documents all of your accounting processes.
#6: Not having a procedure manual in place
It is recommended to document all routine tasks in a procedure manual.
Your manual should include a comprehensive list of all routine tasks, along with detailed instructions on how to perform each task and the individual responsible for completing it.
Establishing a procedure manual can effectively streamline your business operations and prevent misunderstandings. Moreover, it can serve as a beneficial training resource for your employees.
Finally, every business needs to have a budget in place to operate.
#7: Lacking a budget at the start of the year
This might be the most difficult habit to break.
It’s wise for business owners to create a budget at the beginning of each year. This allows you to consider various factors in your business and make better decisions by addressing any challenges during the budgeting process.
Once the New Year begins, your schedule will likely be busy and full of distractions. Without a proper budget in place, there’s a chance that you may make some detrimental financial decisions. It all begins with how you manage your money.
Managing Cash Flow
For a business to operate smoothly, it needs to have regular cash inflows. However, some companies struggle with forecasting their cash flow accurately. Several factors, such as the following, have an impact on how much money a business needs to operate effectively:
- Accounts receivable: The outstanding credit sales that have not been collected in cash yet and the average time to receive the payments.
- Inventory: The cost of purchasing stocks to fulfill customer orders in the upcoming months.
- Debt Repayments: Interest and principal repayments are due in the coming months.
The aforementioned factors determine the amount of cash required to operate your business. In cases where cash inflows are not enough, the company may need to obtain a line of credit or raise additional capital by issuing stocks or bonds.
Generate a personalized report that forecasts your cash flow for the upcoming months. Keep in mind that your company could potentially allocate a significant portion of its funds toward inventory purchases.
How to predict inventory needs
To plan your inventory purchases, determine your projected sales for the year and create a budget accordingly.
It is important for businesses to have a planned ending inventory balance at the end of every month. This ensures that customer orders can be fulfilled promptly at the beginning of the following month.
To calculate ending inventory, use this formula: beginning inventory plus purchases minus sales equals ending inventory. Typically, ending inventory is determined as a monthly sales percentage.
Let’s say a hardware store starts the month with 25 lawnmowers in inventory and anticipates selling 200 mowers throughout the month.
If the company wants 20 mowers (10% of anticipated sales) in ending inventory, it should purchase 195 mowers (200 anticipated sales plus 20 ending inventory minus 25 beginning inventory = 195 mowers purchased).
Ensure that you have enough inventory by utilizing the ending inventory formula.
Changing your accounting practices requires significant time and effort, but the results will be worth it.
Make it better next year.
Business owners who succeed are those who constantly strive to improve.
Every business, whether a start-up, mid-size, or large company, can benefit from implementing better accounting practices. There’s always room for improvement in this area.
Follow these helpful recommendations to minimize errors, save valuable time, and optimize your business processes. Make it better next year by starting to implement them today.
At Elite Business Solutions, we take pleasure in offering our clients the highest level of professionalism and quality in all that we do. See some of our clients’ glowing reviews to find out why working with Elite Business Solutions is the right choice for you.
