4 accounting mistakes small business owners need to avoid
With the sheer numbers of small businesses in existence — 28 million in the US and hundreds of millions more all over the world — survival can be quite difficult. The competition is high and you have to work really hard every day to get customers, pay your bills, and run your business.
To make that harder, since you’re probably doing all these things by yourself, you’ll have to take care of the financial part of your business as well. Although it’s logical for small business owners to act like small business accountants, it can cause a lot of accounting mistakes.
If you’re not careful, this constant push and pressure can lead to burnout. But it can get better with the right knowledge and best practices. So to help you out, we’ll look at four of the most common accounting mistakes small business owners should avoid at all costs.
Not separating personal and business finances
The first and potentially biggest mistake is that many small business owners do not have separate bank accounts for their business and personal finances. This is a very big mistake and can get you into a lot of financial and potentially legal trouble.
Separating your business and personal finances allows you to not only track your expenses accurately, but also helps prepare you when tax time rolls around. If you haven’t separated your personal and business finances, you will have to rely on your memory and parsing through a year’s worth of debits and credits in your one bank account.
This is a recipe for disaster from the perspective of any governmental tax body. Do not fall into that trap — prepare for the financial future of your company and create a separate bank account and separate bank card for your business finances. Then, go ahead and strictly use your personal account only for personal purchases and the same with your bank account. You’ll reap the benefits later.
Not keeping receipts
When you are doing your taxes, you will have to accurately report your expenditures. However, because so many small businesses tend to throw away, lose, or just forget to take receipts for their business expenses, it’s extremely difficult to be accurate.
There are many ways to create good systems for storing your receipts for the year. It could be as simple as having a (well-organised) shoebox to store your receipts. It could also include online invoicing software, such as InvoiceBerry, which will let you scan and save your receipts on the cloud.
The important thing here is that you are taking receipts and not losing them. It’s absolutely necessary, of course, to also have a great organisation system so that it will be easy for you to sort through them for accounting purposes.
Not recording payments
When you are your own accountant, you’ll have to send out invoices. When you send an invoice to your client, you should think of it as opening a debt on them in your own books. When your client pays you, it is your responsibility to close that debt by recording the payments made.
In accounting lingo, these would be receivables, which are crucial for accurate bookkeeping. If you skip this crucial step, you won’t be able to decide what the status of your cash flow for the month is. Well, that is, unless you just rely on your memory — which is well-known to be unreliable. Furthermore, when your business grows, you’ll need to have a good system in place, and it’s widely known that good practices begin with the small, not when you’re already big.
Not chasing payments
The last and very real accounting mistake small business owners often make and should avoid is that they are too loose on getting their invoices paid.
In fact, freelancers and small business owners wait, on average, 72 days for payment, and more than 3/5 of UK small businesses had to cease operations to chase late payments.
These are very real numbers that reflect a very real situation: getting paid is crucial to your business, and late payments are detrimental to it.
Although late payers are often just a fact of the business world, the length of late payment shouldn’t be 72 days. You can help avoid this simple accounting basic by lowering the number of days in your payment due terms on your invoice. Instead of stating that invoices should be paid within 30 days, bring it down to 14 days. On the 14th day, send a friendly query asking if they’ve received the invoice. If within a week the email is not answered, you can send another email or, more simply, make a quick phone call. This should be enough, and most businesses are able to pay by the time you send the first reminder by email.
Getting paid is crucial to your business running well, and therefore not chasing late payments is a very big and detrimental accounting mistake you can avoid.
These are, of course, only a few of the accounting mistakes that small business owners make. However, they are also four of the biggest ones to make, and once you’ve got a handle on these, you will see your business booming and yourself becoming a better businessperson.
Good luck!
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
