When it comes to managing a business your accounting is critical. Most mistakes that are made when it comes to the accounting aspect of any business are the fundamentals. Businesses fail, lose money, or struggle not because of the big stuff, but because of the fundamental skills it takes to run the business or the fundamental systems the business needs to support itself are not there. Avoiding these mistakes is easy as long as you take the necessary steps and have the right guidance to make sure you have the basics covered. We’ve listed 5 basic accounting mistakes that you can learn from:
Mistake #1: Mismanaging the company checkbook
Many small business owners manage their company’s finances by looking at their checkbook. Though your checkbook might tell you where your cash is, it will not tell you how profitable you are. The fact of the matter is that no company can have long-term success and growth by managing their finances through the checkbook. It’s like asking a doctor how you’re doing without first running tests or checking your vital signs. Instead, you should be receiving a Financial Statement every month to analyze the performance of your business.
Mistake #2: Not having an accounting system in place
A checklist should be created to gather all materials that are needed to produce your financial statement at the end of the month. Whether your statement is produced in-house or outsourced to an accountant, these are a few steps that need to be followed:
- Money coming in – do your deposits for the month equal your sales?
- Money going out – paying the bills consistently and timely.
- Tracking and paying your accounts payable and collecting your accounts receivables
- Keeping track of receipts: making sure you have an audit trail in place
- Make sure your sales and payroll tax deposits are timely and correct
Mistake #3: Not understanding your profit position and cash position
This is probably one of the most misunderstood concepts among business owners. Your profit position is simply your sales minus your expenses, which is shown on your Income Statement. Your cash position takes into consideration not just your expenses but also things like loan payments. While an Income Statement will show your profit, your Cash Flow Statement will show you how you got to your current cash position. These Financial Statements are like the scorecards for your business allowing you to understand why your profit position and cash position are two different things.
Mistake #4: Unintentional credit card usage: Mixing business purchases with personal purchases
The IRS does not like the mixing of business and personal expenses. If personal expenses are made using the company card, the individual must pay the company with a personal check. Ideally having two separate accounts makes it easier to prove your purchases and have an audit trail in place.
Mistake #5: Lack of an audit trail for receipts and invoices
All purchases in a business must correspond with a receipt, either paper or electronic. Just because your credit card statement says you spent 500.00 at ABC store doesn’t mean that it was a business expense. The receipt should break down the purchase and provide an audit trail of what happened. Write on each receipt what the expense was it was used for.
Make sure you have a system in place to cover all your bases ensuring if you’ve made any of these mistakes you’re able to turn them in to successes. For more information contact EWH Small Business Accounting at 262-796-1040 or visit www.ewhsba.com.