The life of every business depends on its ability to maintain accurate and reliable financials.
When you have a strong understanding of your accounts, you can actually predict if you will make a profit or loss. You can detect your existing rate of growth or loss and what you need to charge for your services/products to stay afloat.
Accounting should be a tool that businesses large and small use to guide their decision-making. But you can only rely on your financials if they are clear and accurate. Most business owners struggle with maintaining clean and transparent accounts and as a result don’t trust the predictors of up or downswings in their market even when they see them clearly. Therefore it is necessary for every business to carefully take account of its day to day activities and transactions.
Sometimes it may feel like your time is better spent completing the bare minimum. Submit your taxes, save your receipts, and cross your fingers that everything will turn out okay at tax time. Maintaining your accounts is a good first step, but the more accurate and reliable your accounts are, the better. It is paramount to ensure accuracy, clarity and reliability to ensure maximum yield and growth of the business.
Small business owners often lack an effective understanding of businesses accounting. They then spend all of their time trying to become part-time accountants rather than focusing on growing their business and doing what they love. While it’s important to understand you business’s financials, sometimes trying to do everything yourself can lead to poor productivity.
A good way to look at accounting is as ‘the comprehensive recording of every financial operation in a business’. Due to the constantly changing and (ideally) never-ending nature of financial transactions, small business owners are often susceptible to making certain mistakes in their business accounting. Unfortunately, most small business owners don’t even realize that they have made a mistake until it has developed into a larger issue or impacted the growth of their businesses. With the goal of ensuring maximum yield and growth, this article will explain 5 common accounting mistakes many small business owners make.
Here are 5 common mistakes the Flow CPA team see small business owners making:
1. No separation between personal finances and business finances: This is surprisingly common! It is of utmost importance to keep the two finances separate. If personal and business accounts are kept together, it will be impossible to calculate the profit generated from investment.
The bottom line: Personal finances should be separated from the business finances so that you can easily see what resources are intended for the business only. Talk to your bank about their low cost options for additional business accounts. When you talk to your bank, remember that most fees and rates are negotiable. Always remind them how long you’ve been a customer with them to sweeten the deal.
2. Attempting to do all of your accounting solo: Accounting can be a very hectic and time consuming job in a business. It is therefore advisable to get an expert or a professional in this field to help you manage and oversee the accounting and bookkeeping operations of your business. No matter how small the scale of your business may look, you don’t want to miss important details or opportunities. Take the time to understand your financials then refocus and spend your energy growing the business.
The bottom line: Hire accounting experts and professional to help you with your business accounting. Don’t risk messing up your accounts for the sake of saving money. The amount owners pay in accounting fees are often covered by new opportunities, faster growth, and mitigated risk of penalties and financial mismanagement.
3. Underestimating the power of small transactions; Small business owners often regard small transactions as insignificant and do not include them in their regular accounting. It is essential that you have a record of all business transactions no matter how unimportant they may seem. This sets a precedent so that you can easily manage your business as it expands in size and in its transactions.
The bottom line: No transaction is too small: Record them all so that you can be confident as you grow and expand.
4. Operating with no budget; Most small business owners are fond of embarking a new project without having a clear budget. Budgets are useful in curbing overspending, and also used to establish real financial objectives. Create budgets for every project in your business, this way you will get honest operating results and will be better able to judge the progress of each business line.
The bottom line: Don’t spend without a plan.
5. Your bank account balance is not a measure of income; Many small business owners often use their bank statement to make financial decisions and determine profitability. This can be deceiving as they are not taking into consideration the GST/HST and payroll obligations. This creates lot of anxiety and uncertainty for business owners who often end up requesting line of credits or business loans not to grow or scale their businesses but rather to catch up with government agencies.
The bottom line: Educate yourself on understanding your financial statements.