Every business wants to make sure they are utilizing the resources and business processes they have implemented to the fullest extent. Nobody wants to lose money. Everyone wants to make sure that everything that they do, be it hiring a new member of staff, or relocating, contributes to more stability in profits. That’s why it’s so important to review different aspects of business processes from time to time to make sure they correspond with your grander mission. Today we wanted to look at accounting in greater detail to see what mistakes small businesses often make and how they can be avoided.
Weaknesses are something that every business has, no matter how successful they are, and every single company has certain sides of doing things where they are losing money. If we look at statistical data we see that a lot of losses that occur can be traced back to accounting. For example, according to a report by Clutch surveying 302 different businesses, 95% of small businesses are confident in the accuracy of their financial statements, but 30% of business owners also believe that they are overpaying taxes. Here we see that there is definitely a potential for improvement, as filing taxes and getting tax returns are very much connected to accuracy, and is something that contributes to businesses experiencing unnecessary losses.
The same report has also found that a staggering 27% of businesses do not have a separate business account, which is crucial for proper reconciliation of accounts and can prevent businesses from being able to track and record thousands of dollars in business-related expenses. 23% of businesses see mixing business and personal finances as their second-biggest financial challenge, second only to unforeseen costs. Other aspects such as account reconciliation and expense categorization lead to many costs down the line, as without it, it is very difficult to be able to see the actual health of the company and follow its real net profit.
While there can be many sides to how mistakes in accounting can hamper business growth, today we will look at the following five:
Data entry errors
Let’s begin with what may seem as obvious, yet this still is a very commonplace occurrence – manual data entry inevitably leads to errors. With a multitude of professional accounting software, no one should really be tracking financial records by hand anymore, as according to a report from global analyst IDC, an estimated cost of human error in the US and UK is about $385 per employee per year or $22 billion dollars for each economy.
Another issue connected to errors in data entry is forgetting to record small transactions. Especially in retail, it’s quite easy to start thinking of petty cash business transactions as unimportant, but in reality it is crucial for a business to have a complete picture of their income and spending.
Employing a combination of software that allows you to seamlessly track your income and expenses in one place (for example using QuickBooks and professional apps from Intuit Appstore), will allow you to automate the absolute majority of the data entering process, ruling out the mistakes while leaving you in full control of your business performance.
Failing to categorize income and expenses
When business owners come across the concept of categorization, they might not immediately intuit the worth that’s hidden in the practice of proper categorization. When we talk about optimization or growth, many times business owners look at it from a larger perspective, taking into account things such as market climate, supply and demand, and other factors. But experienced businesses working with an accountant will know that so much can come from implementing a practice of income and expense categorization. One of the most important reasons to categorize is that it helps to maximize profitability. Without knowing how much money you earn right next to how much is being spent, you will not be able to see the actual profit, and will mistake profit for actual cash flow. You might have a picture of how much money is being spent, but by breaking it down, you are actually able to see where there is a potential to cut expenses.
Another large factor is tax preparation. The IRS asks you to categorize your expenses, because some qualify for full deduction, and others may only net a partial deduction. Proper categorization allows you to make sure nothing important is left unclaimed. So, as you see, sooner or later you will have to categorize, and by not doing it as a regular business habit, you will have to pay for it either with your own time or by hiring someone unfamiliar to your practice to do it last minute, doubling your work.
According to Unit4, 17 percent of US businesses regularly don’t expense all they could, while the percentage is even higher in Canada, at 23 percent, which results in $10.7 billion in unclaimed expenses.
Not delegating enough
As we’ve mentioned before, using accounting software allows you to outrule the factor of human error in manual data entry. But even if you yourself, as a business owner, excel in utilizing technology, it could be a good idea to hire a bookkeeper or an accountant. A useful practice can be to ask a professional to recommend you good software or help you in your first tax preparation after you’ve started using software. Automating and delegating administrative tasks that do not require your input and do not add a clear value to your company can be an advantage.
Many small business owners do not want to delegate responsibility to other capable professionals, or quality software, but doing it in such spheres as accounting, legal, IT, and other administrative functions can reduce errors and increase profitability if you use the newfound time wisely.
For example, by replacing the process of printing and mailing invoices with an online invoicing system, companies have been saving up to 80% of an invoice cost according to a report done by Billentis (think printing, billable hours, postage etc).
Lack of good reconciliation between the books and bank accounts
It’s very important for businesses to reconcile their accounts frequently. In short, reconciling can be defined as the process of checking that an account balance as listed on your books is accurate, up-to-date and fully correct, ensuring that it matches the real balance reflected in your bank account.
The main reason to reconcile is to ensure the accuracy and validity of financial information. When you reconcile transactions, any discrepancies that have occurred during the reporting become clear, giving you a clearer picture of your finances. It’s especially important because 82% of businesses fail due to poor cash flow management, and reconciliation helps to tackle this issue at the very core.
Small businesses should always reconcile their books at least once a month to ensure that all of their transactions are accurately recorded, no fraud has occurred and to prevent their books from becoming out of sync with the real balance on their accounts.
Not paying enough attention to bookkeeping
If you want to ensure effective accounting (and might we say effective business!) the key is definitely recording everything. From minor transactions to large payments from your clients, it’s important to make sure that everything is recorded and properly categorized in your accounts.
No matter how small your business might be, approaching accounting seriously gives you a clear, reliable understanding of your company’s health, letting you determine exactly how you’ve performed in a given period, and make sure that you are ready for the tax season.
From categorizing different types of income, expenses, assets and liabilities correctly to performing a monthly reconciliation of your books and accounts, establishing a sound bookkeeping and accounting system for your company will help you keep it financially secure.
How to avoid these mistakes in your business accounting?
We’ve seen how much professional accounting software can help by automating many tasks and eliminating human errors. Let’s look more closely at each of the problems we’ve found to be especially alarming and see how using accounting software such as QuickBooks, in combination with one of the highest-rated solutions on Intuit’s AppStore – Synder App.
- Data entry errors – by recording your financial data in QuickBooks and using the help of Synder, you can completely automate data entry for all of your online transactions. By connecting your PayPal, Stripe or Square accounts to QuickBooks using Synder, all transactions will be automatically recorded in the accounting system, with an option to undo any synchronization, leaving full control in your hands. Read about connecting Stripe to QuickBooks to see how you can connect a payment platform to QuickBooks for automated accounting (are more for guides for PayPal and Square).
- Income and expense categorization – having discussed the massive importance of categorizing transactions for the overall health of your business and particularly for the sake of correct tax reports, you can also look more closely at automating the process of categorizing transactions. You can learn more about introducing automated categorizing your income and expenses in QuickBooks, and more specifically about automating this process for your income, and PayPal expenses.
- Delegating your tasks – there are many tasks that can be automated and delegated. You can start by replacing manual data entry with automated bookkeeping for online transactions, introducing smart rules for auto-categorization of your income and expenses, but that’s not nearly the limit. Another thing you can do is that instead of manually creating invoices you can implement a simple e-invoicing system to easily receive credit card payments to your QuickBooks invoices, or get paid via an instant checkout, by sending a payment link to your customers. You will save lots of time and money on replacing these tedious manual tasks with smart online alternatives.
- Reconciling accounts – many businesses are terrified of the word “reconciliation”, and 90% of companies manually reconcile using Microsoft Excel, according to a report published in Financial Management in 2013. Building on our previous points we see how much time and resources can be saved on automation and delegating tasks which don’t require your attention, and that’s where Synder can assist as well. Learn more about reconciliation and what it means from this blog post in order to ensure the accuracy and validity of your financial information.
We have seen how many accounting mistakes are connected to human error and to simply not paying enough attention to bookkeeping. By reviewing your company’s attitude and processes related to accounting you will be able to identify areas of improvement and help your business move forward efficiently.