For Business Owners

7 Common Accounting Mistakes Small Business Owners Make

Common Accounting Mistakes

Many small business owners attempt to manage their accounting alone rather than hiring an internal accountant or bookkeeper. In this article, we summarized some of the most common accounting errors that small businesses make, along with some advice for preventing them.

The Most Common Accounting Mistakes Made By Small Businesses

A simple accounting blunder can have a huge negative financial impact on your company. Below are a few instances of typical accounting mistakes.

Exaggerating cash flow: An essential component of managing a successful business is having enough cash flow. Sadly, a lot of companies overestimate their financial reserves. It may be challenging to control your cash flow, pay your vendors and staff, and fund significant business acquisitions if you overestimate your cash flow.

Inaccurately recording revenue: If you don't measure your company's revenue correctly, you risk overstating or understating your income. Future tax repercussions of this may be felt.

Related content: Revenue vs. Income: A Thorough Comparison.

Incorrectly recording expenditures: Failing to track part of a business's expenses is another typical error. Your taxable income will rise as a result, which means you'll owe more in taxes at the end of the year.

Not paying bills on time: Vendors who provide services will often have a due date of between 30 and 60 days when they send out bills. It's simple to forget about these deadlines and pay your bills after the due date if you don't keep up with your accounting. This may result in late fines and sour relations with your suppliers.

Ignoring the warning indicators: While some business owners outsource everything, others handle all accounting tasks themselves.

Never let your business finances get to the point where you are unaware of what is happening. If you don't keep track of your funds, you risk missing fraud's warning indications.

Let Wafeq manage your business finance and keep track of debits and credits, manage your inventory, payroll, and more.

7 Accounting Mistakes To Avoid

These are some frequent accounting errors that entrepreneurs make, along with some advice on how to prevent them.

1. Failure To Engage A Qualified Finance Expert

Even seasoned accountants and bookkeepers occasionally make mistakes, but they work in the finance industry, whereas you generally don't.

Even if you are, is managing your company's books independently truly worth the extra time commitment?

Employing a pro will reduce the possibility of mistakes in tasks like keeping track of expenses, paying suppliers on time, balancing bank accounts, and processing payroll.

2. Poorly Keeping Track Of Corporate Expenses

Your accounting and bookkeeping will be far less successful if you are not keeping correct records.

You expose your company to financial loss and bill payment default when that occurs. This sets you up for significant troubles during tax season and additional issues that may obstruct a developing organization.

3. Combining Personal And Professional Accounts

Small business entrepreneurs frequently blur the distinction between their personal and corporate money. That makes sense, especially when a company is just getting off the ground.

You visit Costco or Walmart to get some workplace supplies, and while you're there, you also pick up a few things for your house.

Yet, it goes beyond just merging commercial and domestic purchases on one invoice. According to a Clutch poll, more than 25% of small business owners don't have a separate bank account for their company.

Utilizing one account might make it more difficult to separate your personal and corporate operations, which could lead to serious problems come tax season.

You could even overlook an item that you could claim as a business deduction if your financial accounting is badly done.

4. Ineffective Billing Administration

Cash flow is crucial for a firm to continue running from one day to the next.

Effectively billing or invoicing clients helps to ensure that your income arrives on time so you may use it for costs, payroll, and other purposes.

Businesses that don't manage the accounting side of their operations properly occasionally struggle to generate enough cash flow.

When clients wait longer to pay, and invoices are delayed, your company is forced to work overtime just to pay the bills.

Read more: The Top Accounting Software for Small and Medium-Sized Businesses. The Benefits of Electronic Invoicing for Business Owners and Accountants.

5. Failure To Adequately Prepare For Tax Season

Do-it-yourself For small firms wishing to cut costs on an accountant or other tax professional, tax software may be appropriate for producing a simple tax return.

Suppose you're doing your business tax file on your own. In that case, you can run into trouble if you haven't taken the necessary procedures to document your company's finances along the process properly.

Read also: Tax In KSA: Income Tax, Zakat, And Other Taxes Simply Explained.

6. Inadequate Employee Classification

Small companies rely on staff members, independent contractors, freelancers, and gig economy workers to complete tasks. If they categorize these people incorrectly might lead to legal action and financial fines.

7. Going Without Paper Yet Keeping A Backup

A tax audit is the last thing a small business owner wants to experience. The more paperwork you have, the better off you'll be if you do have to.

It's natural that individuals don't preserve their documentation for a few weeks, much alone seven years, in this digital age when everything resides in the cloud or on an app. Still, the tax authorities will need it during an audit.

As a general guideline, keep the following records for at least seven years:

  • Refund of business taxes
  • Tax records for payroll
  • Up-to-date personnel data
  • Records of business ownership
  • Financial records
  • Information about operations

Related content: How To Create And Follow A Budget For Your Small Business In 8 Steps.

The Conclusion

Doing your own accounting as a small business is a viable option, however, there are several things you must consider along the way. With the right software, you can easily improve your accounting even on your own.

Wafeq, for instance, offers various features that make your life easier and shorten the time you have to spend with accounting—reach out now.