Starting your own small business is an amazing thing to do but it is also notoriously risky!! There is a lot to think about when you first start out on your own and it can be tempting to put accounting on the back burner, but that would be a huge mistake.
Good accounting is crucial to the financial health of your business and mistakes can be devastating, especially in the early days. It is important to know which mistakes to avoid ensuring that your small business is around for years to come.
1. Bad Bookkeeping
New small business owners are often overwhelmed and tend to neglect bookkeeping. However, it is essential that you keep the books up to date and record all your earnings and expenses. Without this data, you will not have a clear picture of how you are faring financially, which can lead to a myriad of nasty problems.
Meticulous bookkeeping allows you to spot trends, understand your spending and examine which practices generate the largest return on investment (ROI). You can then leverage this data to improve the financial health of your small business, maximize your profits and manage your cash flow.
Staying on top of the books allows you to stay one step ahead and put out fires before they start!
2. Confusing Cash Flow and Income
The money you take is not the money you make.
$100,000 in revenue sounds great, but if you had to spend $30,000 on equipment, insurance, and employees to make that money, you are left with $70,000 profit. You will then have to pay tax on your gross profit, so the net amount will be smaller again.
It is vital to know not only how much money is coming into your small business, but how much is going out. Getting carried away with gross numbers is a common mistake that new small business owners make, and it quickly lands them in hot water. It is important to stay grounded and know how much you are really making so that you do not overspend.
3. Using Outdated Practices
You are a 21st century small business and your accounting practices should reflect that. Online bookkeeping software is faster, easier, and dramatically more efficient than ledgers and Excel spreadsheets.
Online bookkeeping software is easy to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means that you are much less likely to make mistakes on your tax return. It also reduces the risk of making the wrong financial decisions due to inaccurate information.
With this type of software, you will not have to spend hours updating and organizing your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. It may be more expensive than the DIY approach initially but using online software will save you many hours!
4. DIY Accounting
Accounting is complicated; there is a reason it takes accountants years to fully qualify. Trying to manage your accounts all by yourself is a surefire way to waste time and stress yourself out. Besides, without extensive financial knowledge it is unlikely that you will be able to save a significant amount of money on your tax return. Furthermore, you will be heavily penalized for making even a minor mistake on your tax return which could cause financial problems for your small business.
Trying to manage on your own is a drain on your resources so the sooner you seek professional help, the better. Investing in the services of a qualified Chartered Professional Accountant (CPA) is one of the best decisions you can make regarding the financial health of your small business.
It is important to avoid the above accounting mistakes to set your small business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it is best not to take any risks. While it is tempting to put accounting off until later, you need to make it a priority right from the very start. Good small businesses and bad accounting just do not go together!