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11 Most Common Mistakes in Small Business Accounting and Methods of Their Elimination

If you want your small or medium business to be successful, accounting should be treated with special attention. It will help you see the real picture of the company’s financial standing and make justified decisions about the future of your business. Due accounting practices make it possible to efficiently track income, expenses, and the flow of funds. 

Accounting in small businesses

Competently organized accounting will give you the following opportunities:

  • Control profitability of your small business
  • Identify the areas that need improvement
  • Analyze the current trends
  • Evaluate expenses
  • Develop growth strategies

In addition, accurate and error-free accounting is based on the current accounting laws, which helps you avoid any potential fines or legal problems in the future. These are the main reasons why it is essential to avoid common accountant’s mistakes in the small business.

Accounting Mistakes: Consequences

Even a minor inaccuracy in the accountant’s report may entail negative consequences that will result in financial losses, damage to the reputation, and even the company’s failure. 

Here are the most widespread consequences of accounting mistakes:

  • Inefficient financial decisions. The accounting data which is not true-to-fact may result in erroneous analysis of the company’s financial situation and, as a result, wrong financial decisions.
  • Financial plan losses. Mistakes in the accounting of income and expenses may result in understatement or overstatement of the company’s financial indicators, which may influence the overall financial stability of your business.
  • Problems with creditors and investors. If the company’s accounting reports are not transparent enough or provide misleading information, the investors and creditors may doubt the solvency of your business and claim early repayment of liabilities.
  • Loss of clients and partners. If the company cannot ensure the provision of timely and accurate financial information, the clients and partners may suspect that the company is having problems, which will have a negative influence on further cooperation.
  • Audits. Accounting errors may entail the need for audits, which consumes time and resources.
  • Threat of legal consequences. If the accountant decided to cheat and forge financial reports, which resulted in the company’s failure to pay all the required taxes, such actions will be classified as fraud and evasion from tax obligations. This is fraught with negative legal and even criminal consequences.
  • Damage to the reputation. Systematic bookkeeping mistakes may damage the company’s reputation and undermine the trust of partners and customers.
  • Loss of time and resources. Correction of discrepancies in accounting may require additional resources, time, and effort.

Therefore, it is important to keep your accounting accurate, regularly audit the financial data and, if necessary, seek the advice of professionals in the accounting and taxation fields. Take a look at the list of the most common bookkeeping mistakes in small business and find out how to eliminate them.

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Do you have an offshore company? Read our article What Accounting Documents Should an Offshore Company Have?

Undue Accounting Procedures

The entrepreneurs passionate about their business are prone to doing everything by themselves. When the business is at the initial stage, its owner not only takes care of all activities but also keeps accounting. However, it is very important to learn to delegate and entrust accounting to professionals.

Due accounting is a fundamental aspect of the small business. However, it happens sometimes that the business owner does not pay enough attention to this aspect and concentrates on other business tasks. As a result, financial reports turn into chaos.

Undue accounting makes up a mess that complicates tracking income, expenses, and general financial standing, which may result in serious problems for the business. Therefore, accounting should be thought out at the stage of business planning. You can hire a full-time accountant or outsource these responsibilities. The owner should keep track of transactions and have all the accounting books close at hand.

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Failure to Understand the Difference Between Cash Flow and Profit

Cash flow is the money that goes in and out of the company as a result of financial activities, investment, and other operations. Profit is the amount left after the company’s expenses have been subtracted from the sales proceeds.

Even a profit-making company can theoretically go bankrupt. Let’s imagine that an entrepreneur bought a product at USD 100 and sells it at USD 200. He expects to get a profit of USD 100, but it is only recorded on paper. If we make a conclusion about the company’s profit from these preliminary reports, we will make wrong financial decisions. If such mistakes are made on a regular basis, the company will simply go bankrupt.

Here is one more example: a company can conclude a deal that will bring USD 75,000 over the next five months. You will need to spend USD 25,000 to complete the project. Upon the completion of the deal, the company does not have the profit of USD 50,000 yet: these are only the figures you see on paper. You will need to make an effort to get this amount in reality. The business owner should also take into account possible delays, overspending, and other problems that may hamper project realization and delay the customer’s payment.

How can you avoid this mistake? You need to track your sales and expenses very carefully. It is recommended to check all financial reports on a monthly basis to get a clear picture of the state of affairs in your business.

If you record all the profit at once, you may create a misrepresentation of business successes by exaggerating real achievements. 

Checking Accounts Receivable and Payable

A business owner should pay the bills and monitor timely payment of invoices by the counterparties. 

Accounts receivable are the amount of funds that the clients or buyers have to pay to another company for the goods or services received. In other words, this is the amount of money which is outside the company but has to be paid. Accounts receivable arise when the company sells its goods or services on credit, and the customer has to pay this amount in the future.

For example, if company A sold the goods for the amount of USD 1,000 to company B and gave it 30 days to pay the cost, the accounts receivable of company A will make up USD 1,000.

Accounts payable are the amount of funds that the company has to pay to other companies (creditors) for the goods supplied or services provided to it. This is the company’s debt to other companies or suppliers. The accounts payable arise when the company buys goods or services on credit and is obliged to pay this amount in the future.

For example, if company A bought goods for the amount of USD 2,000 from company B and agreed to pay this amount within 60 days, company A’s accounts payable to company B will make up USD 2,000.

The accounts receivable and payable are important for the analysis of the company’s financial standing, liquidity evaluation, and also planning cash flows and working capital management.

Inability to efficiently manage accounts payable may ruin the relations with suppliers. If such violations take place on a regular basis, it may influence the company’s credit rating and the reputation of its owner.

Accounts payable should be a constant focus of attention – or the business may have insufficient funds to continue its activities. Accounting software may become an excellent first step to track the invoices to be paid.

Failure to Understand the Differences between Contractors and Employees

Employee and contractor are two different statuses of workers that have their peculiarities and responsibilities. The company has a number of legal obligations with regard to an employee in the form of taking care about federal income tax and social security taxes deduction, medical insurance, etc. All these deductions are made from the employee’s salary, and the calculations are made by the accounting office. 

Independent contractors are responsible for their own deductions and the company is not supposed to participate in this process in any way. The employers that mistakenly classify an employee as an independent contractor may have to pay fines. They will have to return all unpaid deductions in addition to the amount of fine.

Clear documentation that specifies who is an employee and who is a contractor is of vital importance. You should understand the difference between these two statuses to select the best option for your business in accordance with the current laws of the country where the company is registered.

Unification of Personal and Corporate Funds

If there are no borders between the company’s money and personal finances, it may have long-term unfavorable consequences for the business and its owner.

As soon as the entrepreneur starts a business, he should set clear limits between the business assets and personal money. It means that he should open a new bank account for the company and separate business purchases from personal ones.

Mixing personal and corporate funds may create a mess, increase the risks, and complicate business management. Therefore, it is recommended to keep separate accounts, track the income and expenses on each of them, and also consult an accountant or financial advisor to apply correct financial practices.

Disregarding Tax Payment Terms

One of the most important aspects of small business accounting is compliance with tax payment terms. Failure to fulfill this requirement may result not only in monetary fines but also entail legal proceedings. Small business owners are often overloaded with daily activities and skip the important dates when the tax returns have to be filed.

Failure to comply with tax payment terms may result in fines and accrual of interest that will accumulate quickly to create a load on corporate finances. These negative tendencies will surely attract the attention of tax authorities that may initiate regular audits of the problem company.

Avoid this mistake by staying organized and monitoring all the pending tax payment terms. You can do it by setting reminders, but it is better to entrust the required routines to professional accountants. If you treat your tax obligations attentively, you will ensure compliance with tax obligations of the small business while avoiding unnecessary financial stress.

Disregarding Tax Deductions and Credits

Tax deductions and credits may considerably decrease the total tax burden on the small business. However, many entrepreneurs miss these valuable opportunities, which results in lost savings. Day-to-day business operations make the entrepreneur lose real opportunities provided by the state with regard to tax deductions and credits.

If the enterprise fails to use the available tax incentives on time, it will pay much more than it should. It is bad practice as these funds could be used to scale or automate your business, thus increasing productivity and, consequently, project profitability.

It is vital for business owners who want to avoid this mistake to be aware of deductions and credits specific for their industry. Working with a professional accountant that specializes in small business taxation could be an optimal solution.

No Cooperation with an Accountant

It happens that a business owner hires an accountant and forgets about his/her existence right after that. However, this approach is also fraught with missed opportunities and losses for the company. Absence of regular interaction with this employee may result in lost tax planning opportunities, inaccurate financial reports, and potential problems when it comes to compliance with requirements.

It is very important to quickly and accurately provide all the relevant financial information to the accountant. Regular checks will ensure clear understanding of business goals, problems, and any changes in the circumstances that may influence the company’s finances. Building close relations based on trust and efficient communication will make it possible for both parties to work together more effectively to achieve financial success of the small business.

Saving on Accounting

Hiring an accountant at the lowest rate, using pirated software, and disregarding novelties in the sphere of accounting automation inevitably result in problems. The accountant makes mistakes due to poor qualification, the software brings viruses to the corporate network and immobilizes the whole system, and you miss the deadlines of accounting reports submission as you use outdated accounting methods. Savings are good, of course, but they should be reasonable rather than total.

Therefore, don’t blame the results if you are on a constant lookout for cheap solutions. It’s better to spend a little more at the start than eliminate the consequences of an ungrounded economy which may sometimes cost several million. A miser pays twice is an ideal saying for these cases – with the only difference that a stingy entrepreneur sometimes pays thrice.

Disregarding Software and Cloud Technologies

If you use software, all accounting operations (such as budgeting and payroll) will be done automatically. Present-day developments made it possible to save time and spend it on more interesting business tasks.

Many accountants are sure that Microsoft Excel is very efficient. However, remember that Excel’s functionality will always be less advanced and interactive than good accounting software. For example, Excel has no human mistake check, while cloud accounting software uses a double entry method that makes it possible to exclude such inaccuracies.

A successful business owner always keeps pace with the times and applies the latest developments of cloud technologies in his or her corporate network. As a result, he or she has access to financial reports on a 24/7 basis, sees the real state of affairs in the company, and can make efficient decisions. You can use an ERP system for these purposes.

Absence of Regular Back-Up

Many accountants that work for small businesses do not realize the importance of regular back-up. However, you should always be on the alert as you may lose all financial calculations and the work done earlier in case of loss, theft, flooding, and other adverse events. 

Regular back-up is a critically important practice for small businesses due to a number of reasons:

  • Protection from data loss. Back-up copies will help you recover the lost data in case of hardware failures, virus attacks, user errors, or other extraordinary situations. 
  • Ensuring business continuity. Back-up copies make it possible to quickly restore functioning and continue business processes even after unexpected events.
  • Protection from cyberattacks. Small businesses are from time to time attacked by ransomware. If you have backup data copies, you will be able to retrieve information without paying the extortionists.
  • Customer data preservation. Regular back-up copies help preserve the confidential data of customers and partners. Loss of such information can damage the reputation and violate data protection laws.
  • Protection from human error. Human factors should always be taken into account. One mistake made by an employee may entail a loss of the company’s valuable financial information. Back-up copies make it possible to recover all the files you need. The business that takes care of data preservation looks more reliable and trustworthy in the customers’ eyes.

Regular use of cloud back-up services is an important practice that helps ensure data security and business continuity in case of unforeseen situations. Accountants should remember to create copies on a regular basis.

Small business owners should put accurate accounting as a top priority, differentiate profit and flow of funds, efficiently manage accounts receivable and payable, make a difference between contractors and employees, personal and business finances, plan taxes, and timely create quality back-up copies. Avoiding these common accounting discrepancies will help small businesses ensure long-term success and growth.

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If you have any questions or need help with the organization of accounting in your company, please get in touch with the experts of our portal at [email protected].

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