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Top 10 Common Mistakes In Small Business Accounting

We know managing the financial side of your small business is difficult – so we have put together this list to help you avoid the common pitfalls of small business accounting.

With accurate accounting, your business’s ability to grow improves. Whether you run a for-profit or non-profit entity, avoid these common accounting mistakes to put yourself on the right path to success.

Common Mistakes in Small Business Accounting

1. Misrepresented Revenue and Profit

Not as an intentional mistake, but it can be easy to misrepresent a deal as making more profit than reality.

What makes this important?

Accurately reporting revenue is important to give you a realistic picture of your company’s financial position for future budgeting and strategic decision-making.

How to avoid this?

Have proper accounting workflows in place. Ensure your bookkeeper is entering incoming payments against open invoices instead of posting the payments directly as revenue.

2. Not Reconciling Your Books and Bank Accounts

It is tempting to rely too much on automated software to handle this for you. Automatically syncing accounting software is great, but you still need to reconcile your statements each month.

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Why is this important?

The benefits of validating your books with your bank and credit card statements each month are two-fold: you will detect errors faster and help prevent fraud.

How to avoid it?

Schedule your review as an event in your calendar. It is far easier to follow through with when you have time set aside beforehand instead of deciding to do it on a whim.  

3. Ineffective Checks and Balances 

We understand in a small business there is already too much on everybody’s plates but under no circumstances should one employee have full control over the business’s finances without oversight.

Why is this important?

By not having proper checks and balances in place, you are leaving your business open to fraud.

How do you avoid this mistake?

Implement accountability checks into your accounting system. Be sure, at a minimum, to review your bank statements each month for signs of abnormal activity.

4. Poor Record-Keeping

In today’s digital world, it can be easy to let the standards of record-keeping slip. Digital records should be handled and organized with just as much care as paper records.

Why is this important?

If your company is audited or sold you will be expected to produce detailed and accurate records of all company expenses. Also, proper record-keeping is another element of limiting fraud.

How do you avoid this mistake?

We can use technology to help keep accurate records. Implement a receipt recording, filing, and backup system to your accounting workflows to improve the organization of your financial records.

5. Overstated Revenue Due to Missed Deposit

This happens when a payment is recorded in your bookkeeping system but the deposit hasn’t been posted.

Why is this important?

Having a misinformed idea of your business’s financial situation can lead to poor decision-making or overpaying taxes.

How to avoid this?

Verifying and having accuracy checks on deposit and payment records should be a part of your accounting workflows.

6. Mixing of Balance Sheet and Profit & Loss Statement Items 

This error often occurs when assets acquisitions or liabilities payments are noted as expenses – or loans are recorded as income.

Why is this important?

Your balance sheet and profit and loss statements should remain two separate financial statements – each serving its own purpose. Keeping these statements accurate will be crucial for filing taxes or applying for funding or financing.

How do you avoid it?

Ensure basic accounting practices are followed by your bookkeeper and have your accountant regularly review your statements to ensure the items are categorized correctly.

7. Over-Reliance On Automated Processes 

Taking automated processes at face value and assuming they cannot make mistakes can lead to uncaught accounting errors.

Why is this important?

AI (artificial intelligence) is trained by learning from your data over time – or from an aggregate of data collected from businesses of all kinds. In either case, the suggestions or automation completed by your software may not be completely accurate.

How do you avoid this?

Have well-defined accounting processes that ensure no step is over-reliant on an automated system. Have your bookkeeper verify automated transactions from your banking feed to ensure the accuracy of all transactions. 

8. Poorly Trained Staff On Accounting Software 

Accounting software is an excellent and necessary tool for today’s businesses. But there is a catch, your bookkeeper needs to understand how to properly use the software for it to be effective.

Why is this important?

A misunderstanding of how your accounting software works will hurt the accuracy of your financial records and produce a false picture of your financial situation.

How do you avoid it?

Ensure there is a proper training period for your bookkeeper, especially if they are a new hire. 

9. Not Verifying Loan Statements

Verifying your loan statements will ensure the liabilities side of your balance sheet is accurate.

Why is this important?

We often see loan payments posted against the principal balance of a loan without accounting for interest. This will result in your liabilities and interest payments being underreported.

How do you avoid it?

Taking time out to verify statements is difficult to do without setting aside time in advance. As with reconciling your bank statements, set a time in your calendar each month to go through the process so you do follow through with it.

10. Missing Small Transactions

By not ensuring all transactions – regardless of size – are recorded, your business will struggle to accurately manage all your transaction records as you grow.

Why is this important?

As with most items on this list, being misinformed about the financial health of your business will lead to poor decision-making. Having the workflows in place to record transactions of all sizes will allow you to seamlessly continue the process as your business continues to grow.

How do you avoid it?

Having well-documented receipt collection and transaction recording workflows will ensure transactions of all sizes are accurately reported. 

Wrapping Up

Accounting mistakes will inevitably happen, but as a small business owner, it is your responsibility to help mitigate and reduce the number of errors that happen.

Take care to watch out for the mistakes we’ve outlined here and you’ll have taken your first step in doing just that.

If this all seems a little overwhelming, we’ve got your back. At Haven Financial we provide outsourced CFO and accounting services to small businesses just like yours.

Contact us today and we’ll help support you through your growth.