If we’re being honest, accounting is no small business owner’s favourite task. It is, however, vital that you keep on top of your accounts in order to prevent money leaking out of your company. The following accounting mistakes could mean that your small business is bleeding money and losing profits, without you even knowing about it. Let’s take a look at six small business accounting mistakes to avoid.
1) Overly Generous Payment Terms
Decades ago, 30 or 60 day payment terms made sense. It could take weeks for cheques to process and invoices to be sent back and forth in the post. However, in this day and age it is no longer necessary to be so generous with your payment terms. Thanks to the power of email, it takes mere seconds, rather than multiple days, for an invoice to reach your client’s inbox. Meanwhile, digital payment methods means that it’s faster and easier than ever for them to pay you. Shortening your payment cycles will see money in your bank account faster and make it significantly easier to manage your cash flow, which is the biggest challenge facing many business owners.
2) Failing to Balance Bank Statements
It’s vital that you balance your checking accounts every month. Mistakes happen often – you may be accidentally under- or over-charged, send transfers for the wrong amount or receive payments that weren’t intended for you. The faster that you identify and resolve these mistakes, the better. If left unnoticed, these errors can compound over time, cause you to misunderstand your financial situation and create a huge mess.
3) Lax Invoice Management
Failing to stay on top of your invoices can create huge cash flow problems. Sending an invoice late, for example, will likely mean that you get paid late, too. Equally, failing to send out payment reminders or chasing up on customers whose deadlines have passed may leave you out of pocket. It’s a good idea to use cloud accounting software to automate much of your invoice management for you, and to keep track of who has and hasn’t paid. You should also create a strict follow-up schedule to ensure that your clients pay on time.
4) Not Balancing Cheques and Invoices
No business owner wants to believe that their employees would steal from them, but it happens more often than you’d think. One of the easiest ways for employees to steal from companies is to create fraudulent invoices for vendors that do not exist. Therefore, it’s important that you are vigilant and be careful about which members of staff are able to create new vendors using your accounting software.
5) Poor Inventory Management
Mismanaging your inventory can create huge cash flow problems. Too much inventory means that an excess amount of working capital is tied up in goods, which can cause your cash flow to stagnate. Furthermore, inventory that expires or becomes outdated can cause a huge drain on your finances. Conversely, too little inventory means that your customer fill rate is too low. If your loyal customers cannot get the products they need from you, they may well defect to your competitors instead.
6) Failing to Keep Track of Business Expenses
Last but not least, failing to keep track of your business expenses will see you losing out on write-offs and paying more tax than you need to. It may seem like a hassle to have to log every minor expense, but they really add up over time. It’s a good idea to use cloud accounting software that connects to your business bank account and allows you to upload pictures of your receipts. This way, you can keep an organised log of your transactions without spending a lot of time doing so.
Correcting the above accounting mistakes can save your small business a significant amount of time and money, as well as improving your cash flow and overall financial health. Whilst accounting isn’t many business owners’ idea of fun, it’s important to recognise the impact that it has on your enterprise. If you are struggling to manage your accounts then it may be time to outsource to a quality accountant who can make the process significantly easier for you, as well as offering shrewd financial acumen and insight.