Accounting Mistakes SMEs Should Avoid
Every business owner knows that managing finances is key to running a successful business. But even small accounting mistakes can impact your business financially.
These owners often manage their finances themselves instead of hiring an accountant.
Without expert help or Built, this can lead to more accounting errors.
What are Accounting Errors?
Accounting errors are mistakes made in the process of recording and managing financial transactions.
These errors can impact the accuracy of financial statements and lead to incorrect conclusions about a company’s financial health.
Identifying and correcting accounting errors is crucial for maintaining accurate records and ensuring financial integrity.
HERE ARE SOME ACCOUNTING MISTAKES TO LOOK OUT FOR :
1. Mixing personal and business finances
One common mistake SME owners make is mixing personal and business finances. This can make it difficult to show your business’s financial health and performance. For businesses structured as separate legal entities (e.g., LLCs, corporations), mixing finances can “pierce the corporate veil,” meaning the owner’s personal assets could be at risk if the business faces legal action or bankruptcy.
To avoid issues, keep personal and business finances separate. This ensures accurate reporting, simplifies record-keeping, and helps manage taxes and track expenses..
Tip: If you’ve been using the same bank accounts for personal and business transactions, it’s time to switch.
Open a separate business bank account, and check if your current bank offers any incentives for this. When shopping, always keep business and personal purchases separate and save your business receipts
2. Not hiring an experienced finance professional
Even skilled accountants and bookkeepers can make mistakes, and as a small business owner, you might not have the same level of expertise.
Many SMEs try to handle their finances on their own to cut costs, but managing business finances requires specialized knowledge that goes beyond basic bookkeeping.
Without a finance professional, business owners risk misunderstanding financial data, missing important financial obligations, and making decisions that could harm the business.
Here are some options for getting a finance professional
- Hiring a Full-Time Accountant
Employing a full-time accountant provides dedicated support for your financial needs. They can manage day-to-day accounting tasks, prepare financial statements, and ensure compliance with tax regulations
- Outsourcing to Accounting Firms
Accounting firms can handle a wide range of services, including bookkeeping, tax preparation, payroll management, and financial consulting. This option is cost-effective for businesses that require comprehensive financial services but do not have the budget for a full-time accountant
- Engaging Freelance Accountants or Bookkeepers
Freelance accountants or bookkeepers provide flexible financial assistance on an as-needed basis. They can help with specific tasks such as monthly bookkeeping, financial reporting, or tax filing.
This option allows businesses to scale their financial support based on current needs and budget constraints.
Built’s technology finance system can manage a range of financial tasks, including tracking expenses, handling invoices, processing payroll, and generating reports.
This automation cuts manual input and errors, provides real-time financial data, and allows business owners to monitor finances and make informed decisions without waiting for monthly or quarterly reviews.
3. Ignoring cash flow
Cash flow is the movement of money into and out of a business. It’s important for keeping the business running smoothly and making sure there’s enough cash available to cover expenses.
If businesses focus only on profits and ignore cash flow, they may find themselves with insufficient funds to cover immediate expenses like payroll, rent, or supplier payments, even if they are profitable on paper.
This oversight can lead to financial strain, missed opportunities, and, in extreme cases, business failure.
For a small business to thrive, it needs a steady cash flow, not just revenue. Regularly monitoring cash flow and performing routine checks is essential for maintaining financial health.
4. Not properly planning for tax season
When businesses fail to keep accurate and up-to-date financial records throughout the year, it often leads to a last-minute scramble to gather the necessary documents at tax time.
This can disrupt cash flow, strain financial resources, and ultimately harm the business’s financial health.
As a business owner, enmake sure your business uses an accounting system that effectively tracks expenses, payroll, and other key elements of its profit and loss statement to reduce tax errors and oversights.
5. Neglecting record-keeping
Failing to systematically track all financial transactions—such as sales, expenses, receipts, and payments—can result in incomplete or inaccurate financial data.
This oversight can lead to problems like difficulty monitoring cash flow, inconsistencies in financial statements, and complications during tax filing.
Moreover, insufficient record-keeping may result in penalties and harm your credibility in the event of an audit.
6. Not Using Accounting Software
Even though digitalization is on the rise, many small businesses continue to use manual record-keeping or basic spreadsheets. These methods can be time-consuming, prone to errors, and inefficient for handling complex financial tasks.
Without good accounting software, you may struggle with maintaining accurate records, tracking expenses, and generating timely financial reports.
Use built to automate repetitive tasks, reduce errors, and provide real-time insights to streamline cash management.
It also enhances efficiency in financial reporting, expense tracking, and invoicing, allowing you to manage your finances accurately like a pro .
7. Neglecting Depreciation
Depreciation involves spreading the cost of a long-term asset—such as machinery, vehicles, or equipment—over its useful life. This process ensures that the asset’s value on the balance sheet is accurately represented.
If depreciation is ignored, your asset values might appear inflated, which can mislead stakeholders about your financial situation.
Additionally, without accounting for depreciation, you might report inflated short-term profits, as the true cost of using your assets is not reflected
8. Not Backing Up The Data
Data backup is imperative for every business due to the many risks of data loss, including ransomware attacks, accidents, natural disasters, and computer damage.
Regularly back up your company’s accounting data. Note that without proper backup, your business may face the risk of losing critical data from unexpected events like system failures, accidental deletions, or cyber-attacks.
Such data loss can disrupt operations, complicate record reconstruction, and create potential legal and compliance issues.
This use of cloud-based accounting software, like Built, can have your data automatically backed up in the cloud at no extra cost, thus getting extra protection at no additional cost.
9. Not Reconciling Bank Statements
Bank statements act as a mirror, reflecting the financial health of your business. Without bank reconciliation statements, discrepancies between your records and the bank’s can lead to missed transactions, unauthorized withdrawals, or recording errors.
Most importantly, reconciling your bank statements helps you catch fraud before it’s too late
To avoid making errors, make regular reconciliation of these statements with your financial records to ensure that the mirror remains clean and clear, offering an accurate view of your financial health.