Most would agree that the accounting function is one of the most important aspects of any growing business. Many successful companies, whether large or small, are run by CEO’s and MD’s with a financial background and there is a reason for this. Staying on top of the financial developments in your company is difficult but necessary and the most important part of this is being organised. Even if your company doesn’t have an established accounting department, it’s important to have all your finances organized and recorded. Many businesses fall short of the mark when it comes to financial organisation. Here are some of the accounting mistakes that small to medium businesses make and how to avoid them:
1. Using the Wrong Software or no software
A common mistake of starting a business is doing the accounts yourself with antiquated techniques such as pen and paper or even worse, assuming that this function can be avoided altogether at the outset to save start up costs. This is a bad mistake. If you don’t have accounting software, then you really should. You also need to know that this is not a one size fits all scenario, every businesses’ needs are different. It’s important to opt for the right software to make your accounting more efficient. For instance, if you have to keep inventory (i.e. if you sell products), then you should find a software package that includes inventory management. If your business grows and starts to employ more people, then you need accounting software that offers payroll solutions. The right software can make your business more efficient and more profitable.
2. Not Backing Up Your Software
If you’re like most small businesses, then your entire financial history is kept safely on a hard drive. One must remember that even hard drives are prone to failure, and if you don’t back up your software, then you run the risk of losing everything. The solutions are simple, you can either invest in an external hard drive or you could do some research and invest in software that provides automated off-site back ups. In this way painful losses of information can be avoided. Another option is to choose accounting software that’s based in the cloud which will allow you to organise all your accounting information without the threat of it crashing and losing all of your data.
3. Not Filing and Saving Your Physical Documents
There is no doubt that accounting software has made it easier to track your financial progress, however, you do still need to keep physical copies of important documents. Storing and filing things like receipts, bank statements, bills, invoices, and other vital records is incredibly important and should be a priority in your small business. Think of it as a physical back up, giving you the ability to maintain some of your records even if your software crashes.
4. Not Recording Transactions Immediately
Running a business is a time-consuming and busy undertaking and it is easy to get caught up in the daily grind. It is easy to put off things like recording transactions to another day, but forgetting to input transaction information into your accounting software can cause major issues later on. It also leads to bad habits – the old adage of not putting off till tomorrow what can be done today should apply. Whenever you make a transaction you should input it into your accounting software. Not only should all transactions be inputted immediately, but as a sanity check, at the end of each month, you should also compare your records with your bank statements to ensure that everything is balanced.
5. Avoiding Budgets
We get it – everyone hates budgets, but one of the biggest mistakes that small businesses face is the lack of proper budgeting. Every project, objective and job requires a budget to ensure that you work within these confines. A budget keeps you on track and without it, you may end up overspending by leaps and bounds. We talked about being organised earlier on, budgets also help keep your business organised, and they also provide a great way to make projections for the future.
6. Estimating Blind
No estimates should ever be done by someone with little or no accounting experience. In small businesses tasks are often given to the least busy person or simply the one who is available, but when it comes to estimates, this is not a good idea. It is important to get a clear understanding of each job or project from all angles. Accountants make it all about the facts and figures and because of this, they will generally come up with a better, broader estimate that you likely could not have come up with on your own.
7. No Accounting Team
Many businesses start off with outside accountants managing their finances, but as businesses grow, this option becomes less and less attractive. Even with great software, the reality is that once you get to a large number of employees, an accounting team may be necessary. For small and medium businesses this might not seem cost-effective, but the improved efficiency you’ll gain will more than make up for it. For a small to medium business, a dedicated team whose only job is to ensure the organisation of your expenses, income, accounts received, and accounts payable is invaluable.
Good accounting is probably the most valuable asset for any small business. Taking heed of these avoidable mistakes is a sure fire way to increase the efficiency of your business and make it more profitable.