Bookkeeping mistakes you should avoid
When it comes to growing their businesses, small and medium enterprises (SMEs) have a lot of enthusiasm, but most of the time they fail to understand the fundamental criteria.
One of these things is bookkeeping, which places your company’s business process in peril if it is not taken care of properly.
Many people who own businesses have the misconception that accounting is a relatively straightforward procedure, therefore they don’t give it the necessary attention it requires. This is a mistake.
However, improper accounting and bookkeeping procedures have the potential to have a negative impact on the organization’s overall financial health. Repeated errors in your company’s bookkeeping can, in many instances, put your company in jeopardy of going bankrupt.
Having an unhealthy reliance on a certain piece of accounting software
A manual audit will pick up on many of the bookkeeping mistakes that are caused by simple oversights that are simply able to be found and corrected. Now more than ever, it is usual for smaller companies to entirely avoid them since they are overly reliant on the accounting software that they employ.
It is necessary for small firms to conduct appropriate financial audits in order to search for bookkeeping problems contained within their spreadsheets as well as faults that were not detected by the accounting software.
The sooner you come to terms with the fact that not all errors will be repaired by any accounting programme, the better chance you will have of preserving an error-free record of your bookkeeping activities.
Cannot Accurately Track Even the Smallest Amounts of Cash
As a result of the relatively low quantities involved, many firms do not bother to keep accurate records of their petty cash.
Petty cash, on the other hand, has the potential to become a sizeable sum over time.
Every time an employee needs funds from the petty cash reserve, they are required to fill out and submit a petty cash slip.
Additionally, a straightforward accounting system should be in place to record the total amount of money that was initially deposited into the petty cash reserve. Before putting any new money into the petty cash reserve fund, you need to make sure that the total of these slips is equal to the amount of money that was initially put into the fund.
It is recommended that proprietors of smaller companies retain a little amount of cash on hand at all times in order to handle any unanticipated business-related costs.
However, the fact that the sums are relatively insignificant does not mean that they do not have to be properly accounted for.
A bookkeeper may devise a system for managing your petty cash that is both straightforward and stringent, so reducing the likelihood that seemingly insignificant monetary losses will, over the course of the year, amount to a significant sum.
Cannot Accurately Track Cash Flow Versus Profit
There are occasions when companies are unable to adequately differentiate between their cash flow and their profits.
This is something that commonly takes place when expenses and payments that are still overdue are not accounted for in a proper manner.
For instance, even though there may be a positive cash flow, the company may still be operating at a loss because there may be expenses that are still due but have not been paid.
In a similar vein, a negative cash flow may only be of a transitory nature, as it may be caused by unpaid balances owed by consumers, and the company may actually be profitable.
Combining personal and business finances
This is one of the most common mistakes that we see individuals make when keeping books, despite the fact that it is also one of the simplest to avoid.
Regardless of the size of the organisation, business and personal spending must always be recorded in different ledgers and kept completely separate.
The owners of small businesses should make it one of their first priorities to set up a separate bank account for their company’s finances and deposit all of their revenue there.
The following step is to consult with an accountant in order to design a plan for the management of earnings.
This plan should define how cash should be kept separate from the firm in order to cover personal expenses.
Your strategy for managing your earnings will be determined by a number of factors, including the proportion of your profits that must be reinvested in the company, the timing of payments for significant business expenses, your requirements for cash flow during peak seasonal periods, and your long-term personal financial plan.
When you combine your personal finances with those of your company, you run the risk of missing out on tax deductions on the one hand, and on the other, you run the risk of incurring potentially expensive fines if you declare personal receipts as business expenses.
The problem arises when you combine your personal finances with those of your company. In the long run, it will be less stressful for you to hire a professional bookkeeper to handle your accounting for a set number of hours each month.
Regardless of the size of your company, you must keep all of your personal and business transactions completely separate from one another if you want to maintain an accurate record of your company’s financial situation.
You should keep your personal finances and your business finances in two separate accounts, and you shouldn’t put any money from the business into your personal accounts under any circumstances.
You need to devise a plan for taking money out of the business account so that you may pay for your personal costs and share the profits with investors.
In addition to this, you need to make sure that you have enough money to pay for your business.
Your personal funds and those of your company must be kept completely separate at all times, regardless of the size of your company, how much money it makes, or how much money it turns over. One of the first things that the owner of a new business needs to do is open a separate banking account for the firm, and then deposit all of the income from the business into that account.
Failing to Keep Relevant Receipts
It is essential to keep all of your receipts from money spent on business. If you lose these, either completing your tax return will be difficult for you or you won’t be able to get any of your money back for the expenses you incurred. Nobody is interested in that.
Keeping all of your purchase receipts, including those for things like stationery and other items, may seem pointless at first.
Failing to track the invoices
The process of billing customers is an essential component of managing cash flow and should be every bookkeeper’s top priority. However, the majority of business owners report that it is difficult to get payments on time.
It is necessary to draught efficient invoices that include links to online payment systems and to send them to the client as soon as the job is completed and handed over to them. In most cases, the bookkeepers would follow up with the customers to remind them to make the payment by the due date.
They make it plain to them about the late charge clause in case there is a delay, but they do not come off as being intrusive. The proprietor of the company does not take all of these precautions, and as a result, the company receives late payments, which disrupts the flow of funds into the company.
If you require help with your bookkeeping, you can give us a call on (03) 8568 3606 or email us on [email protected].
Incorrect classification of data
When the books that are being made by the business owners have an excessive number of categories that are the same, this can become a problem. It’s possible that business owners won’t be able to tell the difference between the two, and they’ll wind up entering the identical thing twice under two distinct headings.
It has the potential to alter the total sum and provide you with an inaccurate figure. Because all of the important decisions in the firm are based on the amount of money that is now accessible, this can throw the entire company into a state of disarray. If the number that is being used is not exact, it is possible that both the budget and the investments will be thrown off.
For example, the cost of purchasing stationery ought to be recorded as an immediate expense, whereas the acquisition of a photocopier ought to be recorded as the acquisition of an asset whose value will decrease over time.
Incorrect amounts being added to the accounts can also lead to an understatement of accounts due, which occurs when the owner thinks they have more available capital than is actually the case. It has the potential to cause issues with the venture’s finances.
Employees are improperly categorised
There are many distinct types of workers, including full-time, part-time, and temporary employees, as well as independent contractors, such as freelancers and consultants. Full-time employees are paid the highest hourly rate, followed by part-time employees and temporary employees.
Because these categories decide who is qualified for employee benefits, incorrectly classifying your workforce in one of these categories might result in significant financial losses.
Your records need to be accurate and in accordance with the requirements set forth by the government, and a bookkeeper who has completed all of the necessary training can assist you in doing both of these things.
Giving Up on Chasing Down Overdue Payments
It’s not very enjoyable to stay on top of your accounts receivable. When you’re counting on the money to come in, but it’s not in your account, it may be a very stressful situation. You are, after all, running a business. You offer a product or service, and you anticipate receiving payment in exchange for it.
Be careful to create payment conditions for your customers so that they are aware of when they are expected to make payments and so that your request for money does not appear to come out of the blue. Keeping up with your books can assist you in streamlining your billing processes, which will allow you to get paid in a timely manner, which will then allow you to pay your bills in the same manner. Simple.
A failure to commit sufficient time to the process of bookkeeping
One of the factors that will determine the success of your small business is how well the books are kept. Whether it’s a small payment or a substantial transaction from consumers and clients, it is essential to make sure that every monetary transaction is properly recorded and categorised in your accounts.
This holds true regardless of the size of the transaction.
Regardless of the size of your organisation, if you treat the process of bookkeeping with the seriousness it deserves, you will be able to gain an accurate understanding of the success of your business. It enables you to have an accurate understanding of how well (or poorly) you have performed over a specified time period.
Not keeping a record of small purchases
Even the most seasoned entrepreneurs are prone to slacking off when it comes to properly recording their company’s financial dealings.
Even though it might not seem like a big deal if a meal ticket is lost, these seemingly insignificant expenditures can quickly add up if they are disregarded repeatedly.
A second consideration is that you don’t want the government sniffing around your business to see whether you’ve claimed expenses for which you don’t have any proof to substantiate them.
If you go to your neighbourhood stationery store and buy $250 worth of printer paper and other key resources that need to be supplied periodically, it is absolutely necessary to record the purchase under “office supplies” and then write it off as a business expense.
Being conscious of insignificant dealings makes it far simpler to handle the more significant ones in the long run. When done in this manner, you will find it much simpler to keep your records updated even if the size of your organisation and the number of transactions both rise.
If, on the other hand, you decide to buy a new printer, you will need to record this transaction differently. You have to realise that the actual purchase is not the most important thing; what matters is whether or not the things you buy have any practical use. Because a printer is something that will in all likelihood be used for an extended period of time, it should be recorded in the books as an asset and depreciated throughout the time that it is expected to be useful.
Not knowing the distinction between cash flow and profits
It’s possible for a tiny company to be successful despite having a positive cash flow within a short period of time. Again, it is possible for it to have a negative cash flow in the near term, but it can still end up being profitable in the long run. The first scenario is very typical for small firms, as these companies frequently have to make payments to their suppliers before they are paid by their customers.
You need to maintain open communication with an accountant so that he or she can regularly compile the financial statements for your company in order to obtain an accurate image of the genuine financial status of your company at all times. These should be presented at least once per quarter and include a balance sheet, profit and loss statement, and income statement.
Not preparing a budget
The majority of bookkeepers are professionals in the process of developing a financial plan for your company, which assists in the process of budget forecasting and the creation of plans for investments and cost savings in Melbourne. It is a strategy that outlines how the company can make the most of its financial resources without falling into debt.
Having a budget assists in maintaining the momentum gained from the previous year and investing intelligently in assets and resources that will bear fruit in the long run. However, entrepreneurs typically skip this phase, which leads them to wind up working without any financial goals and spending significantly more money than is allowed. As a result, the budget ought not to be disregarded.
Not reconciling your books
One of the most important components of bookkeeping is making sure that your books are in agreement with your bank statement at the end of each month. It is as easy as doing a comparison between the numbers on your books and the statement from your bank every month to check for inconsistencies and make sure there are none. In the event that there are, steps ought to be taken to address them right soon.
A competent bookkeeper not only knows exactly what they are looking for, but they also know how to handle irregularities and may, if necessary, call the bank on your behalf. If you hire a trained professional to take care of this for you, you can rest assured that it will be done correctly, which will help you prevent serious financial troubles in the future.
Erroneous Monthly Balance Sheet Reconciliation
Your company’s balance sheet needs to be reconciled on a monthly basis in order for you to have an accurate picture of the company’s current financial situation, which should include an analysis of the company’s income, expenses, and inventory levels.
This is one of the most fundamental duties in accounting, yet it is occasionally missed or not handled effectively by those who are responsible for it. It is essential to carry out this activity carefully in order to prevent any accounting errors from occurring and to fix those that do occur.
This will ensure that the errors do not build up and result in more significant financial issues.
Treating Assets or Liabilities as Expenses
You absolutely must be familiar with the distinction between items that appear on the balance sheet and those that appear on the profit and loss statement (remember that your bookkeeper can assist you with this by explaining the profit and loss statement, what it means, and what it is telling you about your company).
Using the wrong accounting method
Cash accounting and accrual accounting are the two primary approaches to bookkeeping and financial reporting. In cash accounting, the revenue and expenses associated with a sale or service are recorded when the cash itself is received, whereas in accrual accounting, revenue and expenses are recorded when they are actually incurred.
It is essential to have a solid understanding of how and when to switch between different methods, as well as which method is appropriate for the nature and size of your company.
A professional bookkeeper will have the knowledge, experience, and expertise required to assist you with this task.
Using the DIY Method of Bookkeeping
Many owners of small businesses take pride in their ability to juggle various responsibilities, including the upkeep of their company’s books and finances. However, an expert ought to be in charge of this aspect of the company’s operations.
The process of bookkeeping and accounting can become rather intricate and involved. Spending money on a professional bookkeeper or accountant, even if only on a part-time or contract basis, will prove to be useful in terms of the amount of time that will be saved as well as the number of errors that will be avoided.
Using Manual Accounting Systems
It is no longer feasible to enter manual accounting records into a spreadsheet programme like Excel using a spreadsheet programme. Excel spreadsheets do not offer any protection against the entering of inaccurate data or any other types of bookkeeping errors.
Businesses and people who are self-employed should seriously consider making the switch to an accounting system that is built to detect even the most basic of errors, the kind that could lead to significant complications in the long run. When there are so many other, simpler ways to accomplish the same thing, nobody really has the time to sit down in front of a spreadsheet and crunch the figures.
Lack of communication with your bookkeeper
Your bookkeeper ought to be aware of everything that is going on in your company at all times. It is necessary for your small business to have a full record of all of its transactions, and it is even more essential that this information be thoroughly communicated with the bookkeeper.
It would appear that seemingly insignificant errors, such as buying products or services, particularly those with monthly recurring charges, and failing to inform your bookkeeper of this fact, can result in significant problems in the future.
Maintaining a paper record of all of the transactions, regardless of how large or small they are, makes it much simpler to keep track of all of your revenue and expenditures. This is in addition to maintaining clear contact with your bookkeeper.
It’s easy to get sucked into the allure of trying to save money by doing your own bookkeeping using the do-it-yourself method. However, in the absence of the competence provided by a trained professional, things are prone to become chaotic. Failure to recognise when it is necessary to seek the advice of an expert can result in the failure of a firm.
The knowledge and experience that a professional bookkeeper possesses can be helpful in organising your money, preserving a sound and consistent long-term strategy, and ensuring that your firm stays on the right path.
Bookkeeping services that are both accurate and performed by trained professionals are absolutely necessary for the prosperous operation of any organisation. In addition, hiring a professional accounting service can aid a business owner in successfully operating their company by giving the business owner information on the various sources of revenue and expenses related to running their firm.
This service is also essential for preserving your company’s records and complying with the requirements of all applicable taxing authorities.
We have provided an overview of several bookkeeping mistakes that proprietors of small businesses need to be aware of in order to avoid a catastrophic loss of financial resources.