What Accounting mistakes do small businesses typically make?

Accounting is notoriously complex, but as a small business owner, sound accounting practices are essential to the financial health of your organisation.

Taking your accounting seriously from the start is the best way to set your small business up for success, and it will allow you to operate much more efficiently in the future. On the other hand, lousy accounting can lead to financial and legal difficulties that may seriously threaten the survival and success of your enterprise. 

Here are the most common accounting mistakes made by small business owners so that you can avoid them. Errors compound over time, so it’s essential to pay close attention to your accounts right from the very beginning. 

1. Procrastination

One of the most common accounting mistakes small business owners make is waiting too long to prepare their financial information. When tax season is months away, it’s very tempting to put accounting off until later, but this is a dangerous misstep. The longer accounting mistakes go unnoticed, the more damage they are likely to do to your business. 

To make sure that your financial information is as accurate as possible, update your books on at least a weekly basis. This makes tax season far more manageable and prevents you from making mistakes that will require a lot of time and money to fix.

2. Misunderstanding Metrics 

In particular, new business owners often confuse terms such as revenue, net profit, and cash flow. A typical financial mistake small businesses make is focusing solely on income without subtracting expenses to calculate their net profit. This can lead to severe overspending.

Furthermore, many new business owners get carried away and forget that there may be a significant difference between their net profit and their NOPAT (net profit after tax). As well as encouraging overspending, this can lead to substantial financial problems when it’s time to file a tax return.

3. Mixing Personal and Business Banking 

Sole traders are legally permitted to use their bank accounts for their business, but this is not the wisest course of action. It’s best to separate your business and personal bank accounts as soon as possible to avoid financial blunders. 

For one thing, going back over your bank accounts and trying to remember which transactions were personal and which were business-related is a surefire way to give yourself a headache. It’s also a massive waste of valuable time that could be better spent growing your enterprise. Additionally, you may face various legal problems should your business be audited. 

4. Miscalculations 

Simple mathematical mistakes are all too easy to make, but an innocent error can compound over time and damage the financial health of your business. It’s important to concentrate fully and double-check every entry. Accounting software can automate many calculations for you to ensure accuracy, so a subscription may prove a worthy investment. 

What Apps do we recommend? Check out our thoughts

5. Trying to Do It All Yourself 

Trying to handle your accounts by yourself is a costly and time-consuming mistake. Many small businesses attempt DIY accounting when they first start to keep costs low, but this can slow down their growth and threaten their financial health. 

At a basic level, hiring a qualified and chartered accountant helps business owners avoid expensive accounting mistakes and saves them a tremendous amount of time, focusing on growing their business. Furthermore, accountants can save businesses a significant sum of money on their tax returns, thanks to their up-to-date knowledge and financial expertise. Although hiring an accountant does present an extra cost, it generates a very lucrative ROI. 

A good quality accountant will also bring market knowledge to the table and help business owners present a solid case to potential investors, further accelerating the organisation's growth.

Conclusion 

Like it or not, accounting is part and parcel of running a business, and it’s essential to do it correctly. By taking accounting seriously from the very beginning and hiring professional help, you can protect your business against the above accounting mistakes and focus on growth instead of putting out fires.