“Excellence is in the details. Give attention to the details and excellence will come.” – Perry Paxton
Everyone makes mistakes, and if they aren’t bad mistakes, everyone can recover from them. Yet accounting mistakes can have long-lasting effects; customers and vendors can leave, and the IRS and financial institutions will certainly take notice, too. Managing the money that comes in and out of your business is one of the most critical tasks facing you and your company on a daily basis. If you pay attention to the details and you are aware of the problems that can arise from simple accounting errors, you have a head start on avoiding the worst mistakes. The following accounting mistakes are among the most common errors facing small businesses. Some simple actions can save your small business big money. Some of the most common accounting mistakes are listed below:
1. Failing to follow accounting procedures.
Even the smallest business needs accounting procedures. Too many small business owners think that they can “just wing it” when it comes to procedures, but one of the first steps towards success for a small business is the establishment of accounting policies and procedures. Controls need to be established and documented. Even the most detail-oriented owner can forget to instruct employees or accountants on the rules for their business. Setting the rules early on ensures that the business is protected in the event that the owner is too busy to oversee every last accounting transaction. Controls need to include even the simplest activities, such as the proper way to accept, document and deposit payments, pay bills and deal with routine issues like payroll and taxes. Put the procedures in writing; create a policy binder and make sure you – and your accountant or whoever provides accounting services – is aware of every step that needs to be followed. If you’ve written the policies correctly, you’ll make it possible for any employee or accountant to quickly and easily record transactions the right way… the first time.
2. Forgetting about systems.
The days of accountants toting big leather-bound ledgers while wearing green eyeshades are long behind us. Most small business owners would like to think that the choice of accounting systems might not make a big difference, but that choice may be one of the most critical ones they face. Finding a system that meets the need of the business and easily and quickly provide information that the owner needs may be the difference between spending time trying to worry out data versus getting out and generating revenue. Owners need to make sure that the system they choose works not only for their business and their accountants or bookkeepers (if any), but for THEM. A good accounting system should be easily customizable to provide the reporting and analysis that an owner needs on a regular basis to analyze the financial health of his or her business.
3. Thinking your business doesn’t need a budget.
Most small business owners like to think that they are careful with spending. They keep an eye on every dollar that’s going out the door, and consider whether the expenditure is worthwhile or not. Many owners think they don’t need a budget: a careful consideration of expenses on a case-by-case basis is enough. Wrong! You can’t control overspending in one category or invest a surplus in another if you don’t know they exist. Budgets are key for understanding the progress of your business. They offer a baseline that can be used to measure where the business is versus where it could be. Budgets don’t have to be complicated. They can be general and high-level, but they do need to be drawn up. Some expenses can fall into “miscellaneous” categories – but not too many. Any business can look at the average of the last few months’ expenses, for example, to determine a reasonable budget; but any business owner who dismisses this step because he or she “watches expenses” is making a serious mistake.
4. Outsourcing too many functions.
Small business owners may look to outsource some basic functions that require particular expertise: accounting, taxes, IT or marketing. All of these functions are good candidates for outsourcing if the owner doesn’t have experience in that area. But reliance on outside contractors and firms can be a weakness if the owner chooses simply to dump the responsibility for that function. Owners need to have an understanding of every aspect of their business. If areas are outsourced to contractors, those contractors should be overseen. If functions like IT, accounting or taxes are sent to outside firms, the owner of the business has a responsibility to meet with the firms on a regular basis to review the status of work and make sure he or she is aware of upcoming issues or challenges for the business. Even if functions like accounting are outsourced, any small business needs to have at least one person working for the company who understands accounting. Recording the transactions that might affect the business is simply too important to toss out the back door.
5. Failing to record details.
Many transactions can be roughly categorized into a few general categories. Sales. Travel expenses. If transactions aren’t recorded with a sufficient level of detail, some of the key business intelligence an owner needs to keep the business running profitably is lost. The key step here is setting up the initial chart of accounts. Making sure that the business transactions are properly categorized in the correct accounting when they are initially recorded, including every balance transfer, can save a lot of time and trouble down the road, when researching and recreating the original transactions might be difficult.
6. Relying on “experts” who don’t understand your business.
When choosing an accountant, tax adviser, bookkeeper or other financial professional, small business owners have to make their first order of business a verification that the person or firm who are being hired have experience with their type of business. Accounting principles are generally universal; but some specific types of business may have particular rules and compliance issues that are specific to that type of business. If an owner isn’t aware of ALL of the issues facing their business, they need to find advisers who are.
It’s sad to say, but sometimes half of the battle is simply making sure that documents and records are properly filed. Disorganization with receipts, bank statements and other critical documentation can create problems with accounting and taxes, of course. But a hidden cost – one that probably costs small businesses more than many other errors – is simply the amount of time and effort it sometimes takes to research a transaction, contract or other record. Hours are lost constantly due to intensive searches for that one little piece of paper. Small businesses need to establish filing systems, and focus intently on ensuring that the filing is followed without fail. Paperwork is the bane of small business, but clearing that inbox out on a daily basis – and filing it, instead of dumping it into a “to be filed” stack – can make a big difference in efficiency.
8. Ignoring petty cash.
Petty cash seems almost quaint in the 21st century, but many employees will be reluctant to incur expenses, even on a company credit card, if it isn’t paid by the company. Many small businesses still maintain a petty cash fund for stamps, deliveries, office supplies and so on. The amount of money seems small compared to many other expenditures, but the simple fact is that petty cash is one of the most easily abused assets of a company. If controls aren’t established and regular reconciliations aren’t performed, petty cash can quickly slip away. Petty cash usually flies under the radar of auditors, owners and even many employees, but it’s an easy way for unscrupulous employees to swipe a dollar here or there.
9. Making data entry errors.
We’ve all made the mistake where we’ve entered a $432 in place of a $342 in a spreadsheet at some point in our lives. It’s an easy error to make, and a costly one if you’re a small business owner. Certain levels of data entry errors are just par for the course for any small business. These accidents happen, and the controls that you would need to prevent them up front (entering all numbers twice, for example) are too costly to consider. However, there are ways to prevent data entry errors from hurting the business long-term. The number one method? Reconciliations. Make sure that accounts are reconciled against bank accounts frequently and that any accounts requiring frequent data entry are routinely reviewed and reconciled – before month end, if possible. Small errors don’t just disappear – they eventually become bigger problems.
10. Backing up information.
With the increasing reliance on servers and cloud computing – as well as long-lived desktops and notebooks – everyone is assuming that data is safe. Not so. The customer contact information you keep in your Blackberry might not be getting backed up on your server, and that invoice you sent might disappear if you created it after your daily backup has already run. Even the best backup system has holes, and a small business owner has to be aware of the amount of data and time that will be lost if any system goes down, any time. Think of backups as insurance. It’s likely they’ll never be needed, but the one time you do they’ll be invaluable.
Just the first step…
Paying attention to these common mistakes won’t necessarily do a thing to attract customers, get the lowest prices from vendors or generate revenue. But failure to pay attention to these common mistakes can be the difference between a small business that stays afloat and one that fails. Paying attention to these common problems, especially early on in small business’s life, can make a huge difference. As the old saying goes, “an ounce of prevention is worth a pound of cure.”