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Accounting may not be the first area you think of when deciding where to invest your time and resources to grow your company, but failure to do it properly could severely hurt or even end your business. From Enron to WorldCom to AIG, accounting scandals have disgraced companies for decades, but often more mundane issues could cause you to lose money, shake the confidence of your investors or scare off a potential acquirer.
Here are 5 accounting mistakes that could damage your business:
1)Not budgeting properly
Proper budgeting is essential in creating a plan for growth. In the process you set goals for where you want the business to go and create a plan for how to get there. Beyond just making sure you don’t overspend vs. your target, budgeting gives you the opportunity to decide how each dollar is spent to maximize your marginal return for the business. If your business is at an early stage, you may want to revisit your budget quarterly or even monthly, to take into account new learnings that could affect your longer-term projections, for better or worse. Some accounting software have reports that can make this a bit easier. For example, QuickBooks’ Budgets & Forecasts Reports lets you see how your company is performing and compare your actual expenses and revenues and expenses to your budgeted amounts.
2)Not defining and following accounting procedures
It is important early on to lay the foundation for a well-developed system of accounting controls. The longer you go with a messy, inconsistent or ill-defined accounting system, the harder it will be to unwind as the business grows and stakes become higher. Areas for which to define clear controls and procedures, include accounts payable, accounts receivable, payroll, cash, inventory and employee benefits.
3)Not reconciling your books with your bank accounts
If you are making mistakes with your bookkeeping, you may have a rosier picture of your business than actually exists. As such, it’s critical to reconcile your books with your bank accounts as a sanity check to make sure your idea of how the business is performing is accurate. This should be done monthly as errors or small transactions that go unrecorded can really add up over time and it then becomes a bigger project to go back and figure out what happened.
4)Not using accounting software (and not backing it up)
Using accounting software like Xero can improve accuracy of reporting and reduce the risk of user error that comes with manual reporting. The automatic capabilities of accounting software can give you access to timely data to make fast and accurate decisions and cut the time employees spend preparing financial statements. Freshbook’s website claims that you will save 192 hours a year just by using the software.
Using the software is not enough, however – it must be backed up on a regular basis. You should also take the time to check the backup files and ensure that all of the data was backed up and the file is not corrupted. Fortunately, most new accounting software is cloud-based, which can automatically back up your data to the cloud.
Lastly, you might consider a subscription model where you pay monthly and which will keep you from getting stuck with an outdated version you paid for in full. Zoho and Kashoo can both be found for less than $20/month.
5)Doing all your own accounting
Many small business owners try to save money by doing their own accounting, but there are several reasons why this may not be the best idea. First, it is extremely difficult for someone outside of the tax profession to keep up with the ever-changing tax code. A professional can make sure you take all of the deductions you qualify for or, conversely, not underpay your tax bill and incur penalties. An accountant can also help you in other ways such as understanding if you require an audit, ensuring that employees and independent contractors are classified correctly, overseeing payroll and payment processes and creating appropriate timelines for sending W2s and 1099 forms.
You also don’t have to find an accountant in person. New online accountants like Bench.co have made this much easier and more affordable than ever. For as little as $115 a month you can have a team of professionals handle your bookkeeping for you.