You’re working hard to grow your small business and you can see success in every entry in the Credit column of your general ledger. But the same ledger that makes you proud to be in business can also because you trouble if your bookkeeping skills are less than stellar.
Here are five accounting mistakes that are easy to make—and easy to avoid, if you know what to look out for.
Data entry errors
After four hours poring over receipts, invoices, and bank statements, it’s easy to start transposing digits, moving decimals, or seeing a 3 and thinking it’s an 8. Unfortunately, those tiny errors can lead to big problems when you record an $8,000 sale that was really only $3,000.
How to avoid them: Double-check your accounting entries at least once a month, and get a second pair of eyes on them to see if there’s anything you’ve missed. (Scan and save all of your financial documents to make this process easier.) And use bookkeeping software that detects possible errors and brings them to your attention.
Counting sales revenue before it hatches
You might have big plans for that $100,000 sale you just landed. But if the product won’t be delivered for another month, those plans are going to have to wait—there’s no telling what might happen in those four weeks. If you’ve completed a sale of a product or service, but you haven’t delivered the product or service yet, it isn’t income yet. Jumping the gun and recording it as income can give you a false impression of profitability—you don’t want to make plans for your money now if you don’t know when you’ll actually have it on hand.
How to avoid it: Don’t count any sale as income until the product or service has been delivered to the customer.
Underestimating the impact of major purchases
The tax benefits of depreciation can make large purchases like equipment look pretty attractive. But that big cash payment won’t necessarily translate into big tax benefits—depreciating that asset over time means not claiming it as a one-time expense. And that means not seeing those savings as much, or as quickly, as you’d like.
How to avoid it: Consider whether a major cash outlay is the best choice for a major purchase, or if you’d be better off with a short-term loan, low-interest credit card purchase, or lease.
Mistaking profits for cash flow
It’s a common problem for small businesses: Your books show that you’re consistently in the black, but you still find yourself struggling to make expenses at the end of the month. That’s because you’re spending money faster than you’re making it. And if you’re using your credit card to cover the difference, the debt can really add up by the end of the year. You could end up with a profitable business that’s covered over in debt and spending a lot of revenue on interest payments.
How to avoid it: Track not just income and outlay but also spending and selling—not just how much money is moving, but when it’s moving. This can help you with week-to-week and month-to-month budgeting, and it can help you make incremental changes now in preparation for big moves in the future.
Trying to go it alone
Accounting, even for small businesses, isn’t a one-person job. Building your business all day and then sitting down to do your finances at night can result in burnout and accounting errors. And giving someone else in your organization complete control over your books and accounts can lead to fraud.
How to avoid it: Use the buddy system. Designate two people to take care of accounting tasks—for instance, one to update the books, and another to make payments and deposits—and have them check up on each other to catch any unnoticed errors. Use accounting software to keep financial information centralized and minimize errors. And don’t be afraid to call for backup if you need it—many accounting companies offer services that can lighten your load or take care of projects on an ad hoc basis.