Being an entrepreneur can be a beautiful & fulfilling journey with you being your own boss and watching your business grow from strength to strength. However, it also comes with its fair share of challenges. You are the CEO, the marketing manager, and the event director all wrapped into one. There is the constant juggle of wearing many hats including in areas one might not necessarily have any experience whatsoever. One such area is Accounting! Let’s look at the top 10 mistakes that Small Businesses can avoid in this domain.
✔ Doing it on your own.
Imagine this! You are a patissier and you run a business of baking artisanal cakes, your value-added tasks are the tasks for which customers are ready to pay you. To run a successful baking business however, you will have to undertake some support tasks as well which could be marketing and of course maintaining financial and accounting records. As much as the support tasks might be necessary and important, they do take away some of your focus from your core business activities. However, with the support activities, one does have a choice to either work on them on one’s own or outsource them.
✔ Not using Cloud Applications.
Accounting can be daunting for a business owner, but the advent of cloud computing has ensured that everyone can have organized, user-friendly, and secure accounting software at their fingertips. Using cloud accounting software provides reliable data with less room for human errors. A large amount of sensitive data can be stored that can be easily accessed by business owners thereby giving them the power to know the financial position of their business at any given point in time.
✔ Creation of Multiple Chart of Accounts.
A coherent COA is the foundation of the reporting that the business will be required to perform. From a record-keeping perspective, a Chart of Accounts is the most fundamental planning that is required of a business. Creating multiple Charts of accounts can be one of the most serious accounting mistakes a small business could make as the Chart of Accounts is the framework on which the reporting – whether for bookkeeping, GAAP, or tax – will be based.
✔ Delay in Accounting.
Regular accounting helps you track the movement of money in and out of business which helps you make informed decisions leading to a thriving business.
✔ Focusing on Revenue and not Cost.
Most small businesses want their revenue numbers to show a steady rise and who doesn’t. But in the rush to get great top-line numbers, many small business owners tend to overlook focus on cost. To put it simply, your Revenues – Cost = Profit. So, while the topline might look good, the bottom line which is the profitability of the business and which is more valuable for a healthy thriving business gets ignored. How does one achieve a balance between focusing on costs along with revenues? Ask yourself questions like: Is there a way you can save taxes? Is there a way to standardize the processes? Are you managing your inventory efficiently?
✔ Not segregating personal expenses and business expenses.
Small business owners oftentimes do not segregate their personal and business expenses given that they might be the sole proprietors of the business. This can lead to challenges when it is tax time. Underreporting/over-reporting of business expenses results in an unclear picture of the business income.
✔ Not reviewing Profit and loss accounts on a monthly basis.
A Profit and Loss account shows the health of your business in terms of what is your income and what is your expense. You can identify the costs needing analysis, and also whether your revenue is in line with your goals.
✔ Just focusing on cash management.
Cash is undoubtedly one of the most crucial financial metrics. Hence the goal of good management should be to eliminate surprises pertaining to cash and ensuring that there is sufficient cash for the business to meet its daily cash needs. Also, while excess cash might seem great for the short term, for the long term it might indicate the business did not utilize it effectively to generate more profits and indicates the opportunities the business might have lost while being short-sighted in managing its cash.
✔ Too much inventory.
While a business would always want to maintain an optimal level of inventory to avoid any future raw material shortages, it runs the risk of being too cautious and being stuck with excess inventory which eventually can lead to cash inflow issues. Excess inventory is also more susceptible to theft More than optimal inventory also means there might be slow-moving stock which is a source of working capital loss. The ideal way to manage inventory is being proactive and on top of the requirements which means accounting and recording of data must be up to date.
✔ Being unaware of compliances.
Legal compliances are an integral part of any business. Businesses need to meet compliance requirements to be able to run the operations smoothly without levy of any penalties. Knowing the compliance requirements not only helps the businesses to be on the right side of the law but also brings in a lot of customer trust. Small businesses are no exception when it comes to meeting compliance requirements. The compliance requirements can range from Legal (entity-specific compliances for businesses depending on whether they are Sole Proprietorship, Private Ltd. Company, or Partnerships) to Human resources (Labor laws) to Tax (includes Income tax, National Insurance, Corporation Tax & VAT).