The following is a guest post from Renay Law of 10 Point Bookkeeping.
It is easy for a small business owner to get caught up in the fast pace of a business launch. This can cause accounting to take a backseat to managing daily priorities. Many small business owners struggle with tax time finding themselves in need of circling back to correct mistakes and to account for every transaction. You will save time and accounting fees by making yourself aware of some common accounting mistakes and by investing time to set up an accounting system correctly from day one. Below are five common accounting mistakes to avoid from the get-go.
1. Comingling business and personal funds
Many small business startups don’t consider setting up a separate business bank account until it is much later in the game. Doing so, however, will enable the business owner to keep business expenses separate from personal expenses. This helps with several areas:
- Bank statements and check registers from the separate business account provides support for account reconciliation which can pinpoint small mistakes before they turn into larger ones.
- Cash flow projections can be tracked through the checking activity.
- Separate business and personal bank accounts make year-end tax preparation much easier.
2. Putting bookkeeping on the back burner and not taking it seriously
The first step in effective accounting is to record everything. Small business owners often think small transactions aren’t as important as the larger ones (such as customer invoices & payments) however it is important to record ALL transactions and properly categorize each item in your accounts. No matter how small your company may be, taking accounting seriously gives you a much more reliable picture of your company’s health aiding in goal setting & forecasting.
3. Managing all of your accounting in-house
It is tempting to lower costs by handling your accounting on your own when you are first starting out. This may seem like a great money saving idea at first, however, it could actually cost you more money in the long run. Hiring an outside accounting firm will come with greater costs than managing your accounts by yourself but it will also save you money. Whether that be by informing you of tax deductions you didn’t know about or by spotting errors you may be too close to see, managing all of your accounting in-house causes you to miss time and money saving opportunities.
4. Not budgeting for each project
Jumping headfirst into projects is typical of most newly formed businesses because they are simply excited to have the project in the first place however not taking time to create a clear budget for each project could end up costing you far more than you ever intended. Failing to effectively budget makes it difficult to quickly adapt when a project begins to cost your company more than it should. This can cause you to spend your limited funds on projects that won’t produce a return on your investment. As your business becomes more established budgeting will make it easier to quickly spot the projects that are large enough for success but not wasteful or excessive.
5. Avoiding automation
Early in a startup business there are fewer transactions to be recorded and can easily be maintained by hand or by using a quick spreadsheet but as a company grows the number of transactions drastically increases. A manual accounting process becomes extremely time-consuming and inefficient sometimes leaving the small business owner lost and frustrated. Investing the time to set up a fully automated system in the early stages of a business allows for more effective growth. Selecting the correct software system early on can be a business owner’s greatest asset and can help minimize any growing pains a business may encounter.
To avoid these common mistakes and early pitfalls of small business accounting, management should build a financial management framework that can handle future growth. A customizable accounting solution tailored to your business is the best way to ensure future success and accurate reporting. Contact Ten Point Bookkeeping today for your free initial consultation. We can be reached at 512-265-0711 or via our website at www.10ptbookkeeping.com.