Accounting is the lifeblood of a business. It helps you determine whether your business is profitable or if you have the funds to carry out your future plans.
Unfortunately, it’s easy for business owners to make costly mistakes that sabotage their accounting. We’re going to share seven accounting mistakes to avoid and what to do instead.
How to Sabotage Your Accounting – Avoid These 7 Accounting Mistakes
1. Not Updating Your Books Frequently
Accounting is time-consuming. There’s no way around it. When you run a business and have a to-do list that’s a mile long, it’s easy to put off bookkeeping tasks until later. But if you’re not updating your books regularly, you’re going to make your life more stressful in the long run.
Eventually, you’ll find yourself scrambling to get your books up to date, which creates more stress and increases the risk of errors. Many business owners wait until the last minute to update their books, and this can sabotage their accounting.
What to Do Instead
Don’t put off your bookkeeping tasks. Set aside time every week to record your:
- Income
- Payroll information
- Expenses
- Other transactions
Pencil this time into your schedule and commit to it. Eventually, it will become a habit.
Updating your books frequently will give you an accurate picture of your business’s financial health and can ultimately help you make smarter business decisions.
2. Not Separating Your Business and Personal Bank Accounts
Another great way to sabotage your accounting is to commingle your finances. Many business owners fail to separate their business and personal accounts, and this can lead to:
- Accounting errors
- More time spent parsing through transactions
- Difficulty gauging the financial health of your business
It’s difficult to determine whether your business is profitable if you’re spending your revenue on business and personal expenses.
What to Do Instead
Open separate accounts for your business and personal use. Only use your business bank account for business-related expenses, and transfer a regular salary from your business account to your personal account. If you’re an S corporation, make sure you’re paying yourself a reasonable salary. An accountant can help you determine what amount is reasonable.
Separating your finances will make it easy to determine whether your business is turning a profit. It will also save you a great deal of time when preparing taxes or updating your books.
3. Not Using Accounting Software
Using accounting software can help businesses reduce data entry errors, but only about 50% of businesses are taking advantage of the software. Relying on spreadsheets is a really effective way to sabotage your accounting. Why?
When you use spreadsheets for accounting:
- It’s easy to miss transactions
- It takes more time
- It’s more difficult to spot errors
- It’s messy
What to Do Instead
Find accounting software that will work for your business. Accounting software will sync with your business bank account to automatically bring in transactions and classify them. It’s a streamlined approach to accounting that will save you time and reduce errors.
4. Not Setting Up Your Accounting Software Properly
Using accounting software doesn’t make you immune to accounting sabotage. Just like any other tool, software needs to be used properly for it to benefit your business.
If your software isn’t set up correctly, it can lead to errors and more wasted time.
For example, misclassification of expenses may mean missed opportunities for deductions. Incorrect expense classification can also paint an inaccurate picture of your company’s profit margins.
What to Do Instead
Work with a professional to set up your accounting software. If you’ve never used accounting software or aren’t tech-savvy, having a professional handle the setup process is worth the time and expense.
Proper setup will save you time and money in the long run.
5. Not Recording Your Income Properly
If you’re doing your own accounting and doing it the old-fashioned way, it’s easy to miss a transaction (especially if it’s a small one). But not recording your income properly can lead to underreporting and hefty penalties from the IRS.
It’s important to go through your business records and checking account to verify that your income is accurate.
What to Do Instead
Use accounting software, like QuickBooks, to keep track of your income automatically. Take the time to update your records daily so that no transaction slips through the cracks or goes overlooked.
6. Not Keeping Receipts
Low-value receipts often wind up in the trash because businesses assume it’s not worth the effort to track and save them. However, over the course of a year, these low-value receipts can add up to hundreds or thousands of dollars that you can write off.
If these receipts wind up at the bottom of the wastebasket, you’ll miss out on this deduction when tax season rolls around. Furthermore, you’ll need them in the event that you’re audited.
What to Do Instead
Save all receipts for business-related expenses, and keep them in a safe place. Better yet, digitize your receipts to save on space and keep things organized.
7. Not Hiring a Professional
Business owners often wear many hats, and that includes accounting. In 2019, an estimated 41% of business owners and managers took care of accounting and finance tasks themselves. Taking the DIY approach can easily sabotage your accounting.
Finding time for accounting and bookkeeping can be challenging, especially during busy periods. Rushing the process can lead to errors and frustration when handling financial-related tasks.
At the end of the day, accounting is not your specialty. Even if you have experience and knowledge, there’s a good chance that a professional has a higher level of expertise that can benefit your business.
What to Do Instead
When business owners have trouble finding time and motivation to handle their accounting, it’s time to call in a professional. Hiring a virtual accountant can save you time and reduce the risk of costly accounting errors.
Final Thoughts
Accounting plays an integral role in every business, but errors and inaccuracies can easily throw your business’s finances into chaos. While many business owners make these seven accounting mistakes, you can avoid them by following the tips above.
For many business owners, hiring a professional saves them time and money in the long run.
Do you need help with your bookkeeping and accounting? Contact us today to schedule a consultation.
