As a business owner, you need to know something of everything about your business. That, however, does not mean you should handle all areas of your business on your own. Certain areas, including finance and accounting, require special attention from dedicated experts. For instance, hiring a professional accountant would help you manage your company’s cash flow and tax matters in a better and more organized way. At the same time, you can use accounting tools like the Xero accounting software to avoid costly data entry errors and allow your management team real time access to the latest accounting data. Here are some of the common accounting mistakes that businesses make that you should avoid.
The fact remains, however, that many small business owners choose not to use professional accounting services like cloud computing and other tools. Instead, they try to manage accounting on their own – which is never a good idea, because simple bookkeeping mistakes can go all the way to impede the growth of a business and affect its bottom line. Businesses need to keep themselves updated of the benefits of cloud computing to help them in the long run.
Combining business and personal finances
The importance of keeping your business and personal accounts separate cannot be stressed enough! No matter the size, every business should open a separate bank account for business related transactions. Make sure you use that business account to run any income or expenses related to your business. This will help you know how much money you are spending for and earning from your business. With a clear picture of your business’s income and expenditure, you’ll be able to file income tax returns more easily. Even when you have two separate accounts for business and personal finances, you may still need to use your personal finances for business purpose, at times. You need to keep a record of any such exceptions and log the transactions in appropriate columns. Cloud accounting services and tools like the Xero accounting software come with features that help log your business and personal finances separately, quickly and conveniently. Not only that, it also provides multiple currency accounting and provides training for newbies too.
Not performing bank reconciliation
Even with the best of your efforts, you cannot guarantee 100 percent bookkeeping accuracy. That is exactly why you need to double check your bank statements at the end of every month or week. One way to match your company’s cash balance with that of your company’s ledger is by performing bank statement reconciliation every few weeks. This helps you monitor your cash flow, detect any unintentional errors, and know about any potential risks well in time. You can even know about any disbursed (but not cleared) checks and stop payments, if required.
Failure to understand the difference between profit and cash flow
Just because your business account has a lot of cash does not mean your business is making a lot of profit. Sometimes, your business could be cash strapped but still profitable. Cash flow refers to the money coming in and going out of your business account. Not all of the money flowing in and out of your business is your money. Profit, on the other hand, implies what you actually earn after subtracting your total expenditure from the total revenue. Keeping an accounting transparency within your business can help your business to grow.