Accounting is a weapon in the arsenal of a business owner that allows them to understand their capabilities and limitations so that they can go on to conquer the market. But like all weapons, if used incorrectly, accounting can misfire.
The practices of recording, analysing and presenting financial data in order to manage, improve and develop a business are central to accounting. Understanding what is happening with your business’s money is of utmost importance, as it allows you to make evidence-based decisions.
Many small business owners choose to manage their own accounts but this often leads to problems and complications. With so many processes and responsibilities to understand, there are plenty of mistakes to be made. Most potential disasters, however, can actually be very easily avoided. With attention to detail and a bit of forethought, you can prevent costly accounting mistakes.
- Ignoring the Books
Bookkeeping is one of the simplest accounting practices, but it is also one of the most important. The books are your financial records, a place where information is stored on every transaction you make, and every asset your business owns. Accurate books allow you to gain a clear picture of your exact financial situation and run your business accordingly.
Poor maintenance of the books, however, results in an inaccurate representation of your company’s financial situation, which may lead to bad decisions being made, potentially even leading to serious consequences. For example, if you don’t maintain the books you can’t be certain of your exact business expenses, and you may be paying out more than your business can actually afford.
The simple way to maintain accurate books and avoid this accounting mistake is to update them regularly. Stopping to input data after every transaction is going to be a hassle, but scheduling daily or even weekly updates will ensure that the books stay up-to-date and you stay on top of your game.
- Overpaying Suppliers, Service Providers, Loan Interest and Banking Fees
As a business owner, you have a lot to deal with. Not only do you have to worry about the monetary aspects of the business, but also strategy, operations, sales, customer service and more. All this takes time, which means other, less loud and attention grabbing, aspects of business operation slip into the background. But these easily forgotten details could actually be a financial drain on your business, with the potential to do serious damage.
What we are talking about is overpaying on fees, be they to service providers, suppliers, banks or anyone else that is providing something to your business. It’s all too easy to agree on fees at the start of business operations, and then leave them running without ever giving them a second thought. But, much like that gym membership you never get round to using, many of these payments may actually be overpriced and unnecessary, available cheaper elsewhere or no longer required for your business anymore.
Ignoring these costs can drain resources, so it’s vital you set aside time to review your expenses and be sure that any money going out is going out to the right people for the right reasons.
- Mistaking Gross Profit for Net Profit
Say you own a shop and sell £50,000 worth of stock in one year. You may think that you’ve earned £50,000, but you haven’t. After taxes and business costs, not to mention the cost of product acquisition or production and money you need to personally live on, you may only have made a fraction of that, you may have even made a loss. Having £50,000 in sales may seem exciting, but considering it as net profit is dangerous. If the figures don’t add up, you’ll find that you’re losing money even though you’re making sales.
What’s vital here is good accounting and bookkeeping practices, as this allows you to accurately track all costs that lead to your £50,000 in sales. Looking at the overall cost of suppliers, property costs, business tax and personal outgoings allows you to paint a picture of exactly what your net profit is. Once you understand your net profit, you can make decisions about business strategy.
However, if you fail to get a true understanding of your net profit and instead run a business based on sales invoices, you may just find your money runs out sooner than expected.
- Failing to Admit Defeat
Fighting an unwinnable fight against your accounts is not only time consuming, but massively costly. For every day you spend in an out-of-control financial situation, your business suffers. If you are unable to rein in your accounts — you don’t know what tax you have to pay, the books keep going unmanaged, you aren’t sure of your profits — then it’s time to admit defeat.
This by no stretch means it’s time to shut-up shop, but it does mean you should consider professional help. Experts are able to bring your finances under control, allowing you to regain an accurate understanding of your business’s situation. Once simplified by a professional accountant, business finances are easy to work from and maintain.
Russell Smith, a chartered accountant from Leeds in the UK, is an accounting expert with over ten years of experience running his own business.v