12 Poor Accounting Practices That Will Damage Your Business
Poor accountant practices can make a thriving business sink. If you’re overlooking where you could be saving money and where you’re spending your money, you could make it impossible for your company to achieve goals you had in mind for profit.
Many of the most common errors are easy to spot, avoid and fix. This article discusses twelve common accounting mistakes you should avoid to give your business the chance to thrive.
Not Tracking All Your Expenses
If you don’t know what expenses to track, you might be keeping and tracking the right documentation. When you have a system in place it is easier to know what to track and to ensure you don’t miss anything. Almost any business expense is tax deductible, from your home office space to dinner you had with a business associate. You can deduct more off your taxes and owe less if you keep tracking of everything.
Assuming Profit Means Cash Flow
It can be tempting to write down each deal as income when it happens before the work is completed. This could be a big mistake down the road if the project takes longer to complete, be paid off from your client or if costs increase. Writing down income as profit right away can give a distorted view of your business and make seem healthier than the actual condition of the company.
Not Separating Your Personal and Business Finances
A big mistake a new small-business owner might make is not separating their business and personal finances.
A sole owner might think that the funds are all going to the same place anyway. This thinking can set small business owners up for disaster if they are ever audited by the IRS. It is harder to track your expenses when you don’t separate personal and business expenses and income. Make sure to keep a separate business account for all your business transactions.
Failing to Save Receipts and Notes
Even if you only have one credit card for your business expenses, your statement alone can’t provide a clear picture of how your transactions were related to your business.
Your statement shows how much spent to the dollar amount, but your receipt validates that expense as a business expense. Keep your receipts and make note of how the items were used or how the business benefited from the transaction. These notes will come in handy when memory might fail you. Log as many details as you can with your receipts.
Not Taking Your Bookkeeping Seriously
Providing accurate data with your bookkeeping allows you to have an accurate and reliable view of your company’s financial health. Categorizing everything from a small transaction to a large payment will help you determine how well (or poorly) your business is performing in a certain period.
Taking your bookkeeping responsibilities seriously and ensuring you’re recording everything sets your company up for success.
Being Unorganized When Dealing with Your Accountant
The more unorganized you are with the information you provide to your accountant, the more money it will cost you. Most accountants charge by the hour. If you’re handing over a box of receipts to your accountant, your bill is going to add up quickly. You can save your accountant time and yourself money by providing a digital folder with income and expenses reported monthly.
Filing Taxes Late
Filing your taxes late can result in a hefty fine and scrutiny from the IRS. Business owners can often put off their tax preparation too late because they are busy running their day-to-day operations. This can result in gather up receipts and documents at the last minute and throwing it into a box. Save yourself time and trouble during tax time by keeping your records up-to-date all year long. Have your files organized ahead of time, so that you avoid fines or audits.
Errors in Paying Your Employees
One of the biggest expenses a business can incur is labor. Errors in tracking costs and time can cost you money and cause your staff to lose trust in you as an employer. Decreased morale can increase turnover. Save yourself this trouble by making sure your employees are paid accurately, consistently and timely.
Not Keeping Documents for 7 Years
The IRS has various rules about how long to keep tax records. Two to three years is sufficient in most cases, but some cases call for documents to be saved for up to 7 years. Additionally, your tax accountant might need to more details about your tax history. Hold onto your financial documents for 7 years to make sure you’re covered.
Failing to Reconcile Your Books with Your Bank Statements
Small business should prioritize reconciling their books monthly. Ensuring all of your transactions are accurately recorded will prevent their books from becoming out of sync and provide a real status of their accounts. Knowing how much is in your account and how much you can spend, can help you make informed decisions about expenditures.
Small costs and expenses that you might think about could go unrecorded and could accumulatively cost your business a lot of money. Reconciling your business bank account’s cash to I’s payable account – gives you an accurate view of your financial situation.
Not Making a Budget for Each Project
Taking on a project without assigning a budget to it could be a costly risk.
Going into a project without an idea of how much it could end up costing could end up costing your company far more than they intended to spend. Without having a budget from the beginning of a project might make it hard to rein in expenses for that project and end up costing your company a lot of money. This could cause your company to spend its limited funds on a project that might not produce its return on investment.
The longer you exist as a business the easier it will become to understand how much you need to continue operating. This will make it easier to set budgets that are not excessive or wasteful.
Failing to Track Your Time and Labor
There is more way to track labor than just paying out accurate payrolls.
By doing regular audits, you can see if more hours are being used than needed. This could indicate overstaffing or employees’ clock in and out at the wrong time. Low labor costs are problematic too as they could indicate your staff is delivering decreased service or that they are overworked and might get burned out.
This article will also discuss:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Are Accounting Practices?
Accounting practices are systematic procedures and controls used by the accounting department to create and record business transactions. These practices should be consistent since a large number of business transactions reoccur regularly and should be handled in the same manner to produce consistent financial statements. Clear financial statements help auditors perform their duties.
Here are examples of good accounting practices:
- Consistently using the same calculation to determine the amount of overtime paid to employees
- Issuing billings to customers on the same day that goods are shipped to them
- Paying supplier invoices on the day when they are due
- Consistently using the same depreciation method for the same class of fixed assets
Once an accounting practice has been established by a company, routinely examining departures from the mandated process flow helps errors to be spotted and issues to be corrected. This examination is only possible if the accounting staff has the right training to understand:
- When a departure from the authorized process has occurred
- The proper process flow
- How to correct an error in the system
- How to make sure they change in implemented properly in the process going forward
You should always be updating and installing best practices into your accounting practices so that you are always improving the effectiveness and efficiency of the process.