It’s fair to say that every business has to deal with its share of accounting problems. It’s one of those unavoidable truths of the business world.
When a business runs into problems with accounting, there are always options available for them. The very last option we want any business to consider is folding completely, yet many are forced to do this.
Why? Well, we can’t speak for all of them. But, not seeking the right advice at the right time has got to be the biggest mistake a business could make.
There are plenty more mistakes businesses make when it comes to managing their finances – we’ve all been there!
We’ve put together 8 of the most common accounting problems and tips on how to avoid them.
Poor cash flow management
Here’s a worrying fact: business owners’ failure to understand how cash flow works (and not being able to manage cash flow properly), is responsible for around 30% of all business failures in the US. A shockingly high statistic!
Any business needs to have accurate financial statements so they understand what’s flowing in and out at all times. This is critical if they’re hoping to grasp how financially healthy (or not) they are — avoiding further, more damaging accounting problems.
There’s no denying that cash flow management, and the reporting that accompanies it, can be hugely complex. You can pick up some of the basics online, but this will only get you so far.
After your business grows to a certain size, you’ll undoubtedly benefit from getting a professional set of eyes on your cash flow. Hiring a finance manager or accountant will give you peace of mind that your business finances are in safe hands!
Not managing payroll properly
Most small business owners are aware of their payroll costs. They tend to run into problems, though, in not knowing whether their staff are employees or contractors. There’s a significant difference between the two — both in terms of how you pay them and how you account for that cost.
Getting this wrong could lead to big problems down the line. For example, imagine you have been paying someone as a direct employee, but come tax season they suddenly slap a 1099 form on your desk. Now you have a whole lot of paperwork to do and, potentially, a few awkward conversations to have.
There’s a simple resolution to this one: be clear on your employment terms and ensure that every member of staff signs a contract that clearly states these exact terms. This is to protect them, as much as it is to protect you.
Getting mixed up about taxes
Speaking of tax season, are you aware of all the taxes your business needs to pay, and all the deductions available to help you save money?
Among the taxes you need to pay are income tax, employment taxes (including your employee’s FICA contributions), sales tax, excise tax, and possibly import and export taxes.
As for deductions, you can claw back a lot of money this way. But to get the most out of it, you need to know what to deduct, when, and how.
Many business owners tend to be pretty savvy when it comes to taxes and deductions, thanks to their years of experience. A professional accountant may be able to offer further guidance for an even greater benefit. If you’re starting out, seek advice from a professional to make sure you’ve got yourself covered.
There’s a common misconception about bookkeeping that needs dispelling: bookkeeping and accounting are not the same.
Bookkeeping is the process that provides the financial data, like a balance sheet, that you need to make decisions.
Accounting is the process of analyzing all this data to ensure that your business’s financial future is based on solid facts (and not just a gut feeling!).
Bad bookkeeping means that the data you use in your accounting processes will not be accurate, and you could end up making the wrong decisions.
Create an organized system for recording and filing your financial data. There are many apps and services available to help you keep track of your invoices and expenses that are perfect for smaller businesses.
Larger businesses could benefit from professional support or employing someone to focus solely on bookkeeping and accounting.
Not reconciling your accounts
The purpose of reconciling your accounts is to catch any expenses or earnings that may not be accounted for. It’s also to ensure that the data you have in your records matches your current financial situation.
You should strive to do this every month. Failing to pick these up regularly could result in a large disparity when you complete your end of year reporting. And, having more (or less) money on your books than you do in your account is not a great situation to find yourself in.
You could easily end up failing a financial audit, having to pay significant sums of money to make things right, and possibly damage your business for many years in the process.
Reconcile your accounts regularly. If you’re worried about remembering, set calendar reminders to give yourself a helpful nudge each month.
Poor financial record management
Poor financial record management can cause more problems than many businesses realize.
It can contribute to many other accounting problems, too. Without a paper trail, how can you submit reports, create accurate forecasts, or do anything else that ensures the profitability and success of your business?
Again, there are apps and accounting software solutions that can help make your financial records easily searchable among offering many other benefits. This will prove a massive help when completing tax returns and end of year reports.
Failing to budget properly
Budgets are one of the building blocks of any successful business. You have an annual budget dictating how much money the business can spend this year, based on what you expect to earn. Within that, you might have a training budget, a hiring budget, a marketing budget, and individual project budgets among a host of others.
Budgets create predictability and consistency and are a huge benefit to businesses when done effectively.
Don’t treat budgeting as a hypothetical exercise! It’s a vital part of planning for business success. It’s crucial to set budgets and stick to them as closely as possible.
We understand that the unexpected happens. But when it does, it’s best to re-evaluate and update your budget immediately. Doing this ensures you adapt to the new situation quickly and are on top of any excess costs before they become an issue.
Trying to do it all yourself
Managing business finances is no mean feat — especially if you are also the owner of the business and have many other hats to wear and jobs to do.
It takes a great deal of effort, over many years, to become great at accounting. And, when it comes to something so essential to the running of your business, you need someone to do a great job on it.
If you lack the resources, knowledge, and experience of a professional, the potential to make mistakes is too high a risk to take when your livelihood is on the line. This is exactly why professional firms like MBS Accounting opened up shop!
We’ve helped hundreds of businesses just like yours to thrive by creating financial predictability and security, saving them money, and making sure they make the right decisions for future success.If you would like to speak to us about how we can do the same for you and your business, get in touch!