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Saturday, February 22, 2014

Accounting mistakes small businesses make

By Phil Steel

No matter how small your business is, setting it up, sustaining it and keeping it profitable - is a highly challenging job!  

Whether you are a sole-proprietorship, a partnership or a privately owned company – if you want to survive, you will need to focus on more than just marketing! 

Irrespective of whether you run an online business, a small-scale manufacturing unit, a restaurant, a guest-house, a legal firm, or even a convenience store – without proper accounting, your business simply cannot succeed!

Common small-business accounting mistakes

Since, small business owners are more directly involved in the day-to-day functioning of their businesses; many may not find the time or have the inclination, to oversee accounting on a regular basis. This may lead to a lack of perspective, which may eventually result in the business becoming unprofitable, going broke and even bankrupt!  In order to guard against such horrific situations, it is necessary for owners to avoid some common accounting errors. ‘Using the wrong accounting method, combining personal and business finances, not performing basic account reconciliation, overlooking 'petty cash' reserves, not knowing the difference between profits and cash flow, and relying too heavily on a paperless environment;’ are among the top accounting blunders that small businesses make, says  dnbsmallbusiness.com

Bookkeeping errors that may be viewed as frauds

Strange as it may sound, even the smallest accounting error can prove fatal to a small business! Especially so, when it is viewed to be ‘intentional,’ or seen as an attempt at evading taxes levied by the government.  “One small mistake in recording a payment from a customer can lead to underpaid sales taxes ultimately resulting in unnecessary penalties and interest charges,” states C. P. Morey, on accountingweb.com. “Accounting errors and fraud are serious issues for all businesses, but they are especially challenging for small companies where cash is always a top concern. Errors and fraud undermine decision making, lead to financial losses and, in some cases, even force companies to lay off staff or shut their doors,” he cautions.

Not considering the financial impact of buying business assets

According to entrepreneur.com, when making a capital expenditure for your small business, you need to consider the short-term and long-term accounting impact it will have, finance-wise and tax-wise. “When you pay cash for a new server or piece of equipment, one of the benefits is that you can depreciate the equipment over time. But experts say dipping too far into cash reserves can put a business at risk in more ways than one,” it states.  “When making a major purchase, such as equipment, consider a short-term loan if purchasing with cash would put a serious dent in your reserves. Using a credit card is an option for items you know you can pay off in a few months, but beware of high interest rates. Leasing is also an alternative if, say, the equipment you're considering requires periodic updates or you need to use an item only temporarily,” it advises.

Internal audits that need to be maintained but are not

Small business owners, must focus on running their businesses and leave accounting to professionals and accounting specialists. However while doing so, they must ensure that, the accounting staff they hire are adequate in number and have the necessary qualifications, expertise and experience, relevant to their business. Speaking on this issue, Morey states: “small or even single-person accounting staffs and limited internal controls,” are responsible for small business accounting errors. The reason that ‘small businesses also are less likely to discover such errors, is because their financial audits are almost never performed,’ he rues.

Not asking your accounting staff or consultant to simplify accounting jargon

Many small business owners may not fully understand a lot of the accounting terms, norms and procedures, which their accounting advisor or staff member, discusses with them. In such circumstances, it is necessary to overcome their shyness and clarify doubts. Not doing so, leaves them confused and at a loose end! As Michael Di Lauro, author of ‘The Net Present Value of Life,’ states: “You’re a small business owner. You’re not a financial professional. And nowhere does it say you have to be up-to-date on all the latest accounting blather. Besides, buzzwords, jargon and fancy strategies are why you pay your accountant. Translating all that techno-talk into language you understand should be part of the package… Bottom line is, if you and your accountant speak the same language then she’s part of your team. She’s watching your back, and she’s providing advice you can bank on.”

About the author: This article was written by Phil Steel, an accountant who specializes in small business accounting and frequently writes on the subject as well.
Image license:Smartphotostock