Common Accounting Errors for Business Owners to Avoid
Errors happen. Plain and simple. Whether it is a small typo or forgetting to record an expense, errors happen. This is why it can be beneficial for business owners to hire trustworthy advisors and employees to delegate tasks to and to help avoid errors. If you are a business owner looking for a tax advisor, we would love to be a resource to you.
For the business owners out there, here are some common accounting mistakes to avoid:
- Errors of omission.
- Whether it is collecting payment, paying expenses, or buying inventory, there are always a plethora of transactions happening and sometimes they can slip through the cracks and not be recorded. It is important to be diligent in recording transactions and to speak to your advisor about recording them properly, as these can affect the financial statements and taxes.
- Treating net profit and net cash flow equally (Accrual vs Cash)
- Net profit is the sales minus expenses in a given time frame.
- Net cash flow measures how fast you move money or the liquidity of funds.
- Accrual Example: If you make a $500 sale and you invoice the customer but don’t receive the payment right away, your books are going to show income of $500, but funds would be lower because the money is not on hand.
- Cash Example: Make a $500 sale and receive the payment immediately, but you still have expenses associated with the sale. The funds are available but you have to be prepared for upcoming expenses.
- Not Reconciling your books
- It is important to reconcile your books with your bank statement. Failing to do this can lead to mistakes going unnoticed, which will make them harder to find and more expensive to fix in tax season.
- Failing to use a budget or plan for taxes
- Many small businesses have limited funds and many business owners hate wasting money and overspending. Create a budget. Work with a tax advisor to plan for taxes that will be due and/or estimates that need to be paid.
- Spending too much time on accounting
- Many business owners feel like they have to do it all to keep the ship afloat. They spend countless hours working on the books when they could be generating revenue. It is okay to hire a trusted advisor to help with the books. They should be able to help you with the accounting, while you go out and generate revenue. Accountants can manage your books, or teach you effective ways to manage your books. Developing a relationship with a tax advisor will ease your stress throughout the entire year and in most cases the benefits outweigh the costs.
If any of these resonate with you or if you have questions or comments, feel free to send us an email or call and we would be happy to be a resource.