Avoid the Common Pitfalls Business Owners Face When Managing Their Finances
When it comes to managing a business, your accounting is critical. But there’s hope: most accounting mistakes made by small businesses stem from a misunderstanding of the fundamentals. Businesses fail, lose money, or struggle not because of the big stuff, but because the fundamental skills and systems the business needs for success are absent. As long as you take the necessary steps and have the right guidance, you can be confident you have the basics covered and avoid these mistakes. To help you on your journey, we’ve compiled some basic accounting mistakes that your business can learn from:
Accounting 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. No company can have long-term success and growth by managing its finances exclusively 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 and health of your business.
Accounting Mistake #2: No 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, here are a few considerations to keep in mind:
- Money coming in — do your deposits for the month equal your sales?
- Money going out — pay bills consistently and in a timely manner
- Monitor your accounts payable and collect your accounts receivables
- Keep track of receipts with an audit trail
- Make sure your sales and payroll tax deposits are timely and correct
Accounting Mistake #3: Misunderstanding your profit and cash positions
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 additional factors 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 scorecards for your business, allowing you to understand the difference between your profit position and cash position.
Accounting Mistake #4: Unintentional credit card usage
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. Having two separate accounts makes it easier to prove your purchases and have an audit trail in place.
Accounting Mistake #5: Lack of an audit trail
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 a 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 used for.
Make sure you have a system in place to cover all your bases. If you’ve made any of these mistakes before, this is your guide to turn them into successes. For more information, contact EWH Small Business Accounting at 262-796-1040.
