Accounting in business is far from a simple thing. Tracking your cash flow, making projections, ensuring that you’re accounting for debt and profits that are to come in the future. There’s lots of room to make mistakes, and plenty of people do. Here, we’ve taken a look at some of the most common mistakes new business owners make with their accounts. Take a look, make sure you’re not replicating any of their behaviours, and learn from their mistakes.
MIXING THE BUSINESS WITH THE PERSONAL
If it’s a small business, you may have launched it as a sole proprietorship or a partnership, in which case you have the option to keep your business finances and your account linked. Even though the opportunity is there, you should avoid taking it by all means. Create a new account for your business and keep it separate from your account. For one, it makes it a lot easier to account for business profit and expenses when it comes to tax season. More importantly, you’re less likely to dip into one fund for the sake of the other. For instance, you can avoid making a discretionary purchase in your personal life using business funds.
NOT LOOKING AHEAD
Accounting isn’t just about tracking how far you’ve come ahead. It can help you create and utilize much smarter strategies in the future, too. Use the data you collect on your finances to start building more accurate cash flow projections for the future. You can begin by identifying things like seasonal slowdowns and potential growing cost risks, allowing you to make adjustments ahead of time rather than having to be surprised by a lean season or two. Cash flow projects help you predict your annual profits against your existing debts and are crucial for creating future financial goals. Take the time to make detailed accounts of how much you plan on bringing in vs how much you’re likely to spend.
LOOKING TOO FAR AHEAD
Sometimes, thinking only about the future can end up making you lose your perspective on your current financial situation, however. It isn’t about cash flow projections, however, but rather your understanding of your accounts as they stand. In particular, you might include all profits equally in your cash flow analysis, including gains you haven’t made yet because you haven’t finished the service for a particular client. The difference between cash flow and profit is that cash flow should only measure the money you already have in the business. If you include benefits you don’t yet have, it creates a false understanding of how much money you have in the company. It could lead you to on spending money you don’t have which is something to be avoided.
NOT GETTING PAID
What about those future profits that you should already have? A lot of smaller businesses might spend so much time working and looking for new clients that the process of actually getting paid can sometimes fall by the wayside. Make sure you have a thorough invoicing system that keeps track of every single account, what date you sent the invoice, how much you’re owed, whether the client has had a reminder and so on. It can help you remember when you need to make that reminding phone call or email. If you’re waiting on invoices and they’re starting to seriously impact your finances, check out this website for financing options that can help you temporarily correct the balance. It’s worth considering cutting off clients who are unable to pay on time or start implementing late fees and a payment-by date in your future contracts.
MISSING COST CREEP
Not paying attention to ongoing expenses is one of the most fundamental mistakes to make, but it can be one of the most corrosive in the long-term. Utilities, services, software packages, subscriptions can increase in cost with time. Usually, you will have some notification, but if you miss it, it could mean your understanding of your budget is way off. Keep it updated and ensure you’re tracking different expenses individually. That way, you can see which overheads are taking up most of your budget, helping you identify which costs you have to take control.
NOT RECORDING EVERYTHING
That need to record and continuously update your understanding of your overheads feeds into the overarching point that you cannot slack when it comes to recordkeeping. Every invoice, every expense, every monthly report, you should have a digital and a physical photocopy of all of them. Your bookkeeping factors into not just your understanding of your accounting, but your taxes, business plans, any applications for future funding, and so on. Accounting software can automate some of it, so you don’t have to spend too much time every single day updating it manually. Whether done manually or with some automatic help, you can’t let it fall by the wayside, so plan and set aside time to keep your books up-to-date.
PAYING TOO MUCH TAX
How much tax are you paying and are you sure that you couldn’t end up keeping a little more of your money? Being able to track expenses accurately you can recuperate or spot potential tax breaks you might otherwise be missing could make the business significantly more profitable. But to be able to detect those opportunities takes a lot of research and training. For that reason, you need to consider looking at this site and what an accountant can offer you. Chartered accountants aren’t just bookkeepers, they are qualified and licensed to give you legal advice that can keep you compliant yet also help you take advantage of the system as its supposed to be.
There are a lot of ways borrowing could go wrong, so always spend some time planning before you submit any applications. For instance, ensure you know why you’re borrowing, how much you need, and that you’re not borrowing for wrong reasons like you’ve maxed out your credit, or you’re pouring more money into losses. Ensure you have a business plan and a plan to repay the debt laid out in full, so you know you can reliably do so. Check your business credit ahead of time and see if there are any erroneous reports you can repair or opportunities to bump up your score to get a better interest rate or more flexible repayment options. Never borrow on a whim and never acquire without a close look at your current financial and credit situation is.
Once you have those loans, ensure that you’re actively following the plan to pay them back. A lot of businesses might think to borrow then start spending more of it again in future, sticking only to the minimum for now. Even worse, you might think to pay the debt out of the remaining money you have at the end of the month. But what happens if one month you have expenses that add up so that you don’t have the funds to manage said debt anymore? That can land you in a lot of trouble. Pay debts first, and make sure you’re continually tracking how much you have left to pay off at any given time. If you find that you have difficulty managing payments, you can try and negotiate a different repayment schedule with your lender though it will harm your credit.
FAILING TO PLAN FOR GROWTH
One of the most common reasons a business will borrow is because they plan to scale the business. Again, “plan” is the operative word there. Scaling is exciting and can lead to all kinds of opportunities. Buying more equipment than you can afford to maintain, hiring employees too soon, and taking on more expenses before thinking them through can end up sinking the whole business. Consider carefully not just the initial costs of scaling but how they’re going to inflate your overheads and make sure your business model can sustain them before you bring about any grand plans.
NOT HAVING RESERVES
You shouldn’t be dipping into your profit as opposed to taking a real salary from the business. Nor should you be reinvesting every single penny you earn. Instead, you should budget your earnings seriously and make sure that you set aside a portion that’s explicitly designed to go into your cash reserves. Those reserves can act as a source of funding for any future scaling plans, an emergency fund, and much more. It offers a little more wiggle room in your budget that can help you be flexible with surprise costs or immediate opportunities. Without some flexibility, your finances are rigid and, thus, brittle.
The best advice to offer to any business owner is not to handle the accounts themselves or do them by hand. The right accountant and bookkeeping software can reduce a lot of the workload while also removing much of the element of human error. You still need to be financially savvy, yourself, but they can offer a lot of help. Contributed Article.