Whether you are starting a new business or have been at it for a while, your accounting practices are significant to your success. Although managing your finances in the early stages of a business might not seem like such a big deal, if you fail to create a budget, keep track of your cash flow, and maintain accurate records, you can’t make critical financial decisions to meet your business goals.
You also risk mismanaging your financial obligations and facing a mess when it comes time to file your taxes. Here we look at the biggest accounting mistakes businesses make, the risks they present for your business, and how to avoid them.
9 Biggest Accounting Mistakes Businesses Make
1. No Formal Fee Schedule
Knowing your worth and consistently charging the same for your products or services is vital to business success. If you don’t have a fee schedule, or do but fail to track your time, you end up losing money. You also create a less transparent billing process which can lead to trust issues with your clients.
Tip: Post your fees on your website/brick-and-mortar location or set up a quoting system that ensures you are consistent and charge your worth.
2. No Invoicing Process
Everything you sell and every service provided needs to be invoiced using a formal process. Otherwise, you can’t track who owes what and understand your expected cash flow. Without a process, you are likely to experience cash flow issues.
Tip: Adopt accounts payable best practices, including:
- Dispatching invoices immediately
- Monitoring payments
- Setting up multiple payment options to make it easier for customers to pay you
- Sending out reminder notices
- Setting a deadline determining when you resort to collections
- Applying interest
- Determining when to offer discounts to customers with larger orders or clients who pay in advance or on time
Accounting software can make it easier to set up a streamlined accounts payable process.
3. Not Keeping Personal Expenses Separate
“Dipping into the till” is one of the most important accounting mistakes to avoid. It is an unacceptable business practice that can destroy your finances. In addition, when you use your business account to cover personal expenses, it creates a mess of your financial records.
Tip: Set up a business account and business credit cards used strictly for business expenses. This makes it easy to track your spending, manage cash flow, and make smarter business decisions.
4. Not Having A Contingency Fund
The financial mistakes business owners make can compromise their business. Proper financial management ensures you always spend your money wisely and have sufficient funds to manage emergencies. For example, if your business depends on one or two major customers and they leave, you won’t have money to meet your financial obligations. You can’t rely on credit in these situations and will need savings to sustain your business.
Tip: Manage your profits wisely. Do not spend money without contributing to a contingency fund to remain solvent should sales slow or unexpected events disrupt your business.
5. Focusing On Sales, Not Profits
You might enjoy tremendous sales, but you need to focus on profits. A sale is only worth its weight in gold when it generates enough profits to cover the costs and more. That “more” is what counts, as sales don’t reflect your business’s earnings. Your net profit margin tells you what’s left over after all your expenses, so you see how much actually goes into your income stream.
Tip: Understand how to calculate profit margins. You need to deduct expenses to understand your true profits. For example, if you are a writer and charge someone $150 to write a 1000-word document, but it takes you 10 hours to write it, you only earn $15 an hour. Profit margins also tell you if you are charging enough for your product or services.
6. Not Saving Receipts
Every penny you spend or earn needs to match up to a receipt. Without receipts, your taxes become a nightmare, and you’ll be in trouble should your business be audited.
Tip: Ensure you keep all receipts, including canceled cheques, cash register tapes, credit slips, etc., for the following:
- Gross receipts for the income you earn
- Purchase receipts for items you sell
- Your business expenses, such as travel expenses, client entertainment and gifts, etc.
- Assets purchased, such as office equipment or manufacturing machinery
Consider using an app to scan and store your receipts, and work with a bookkeeper to manage your books.
7. Lack Of Financial Planning
A lack of planning makes it difficult to set goals and meet them. Financial planning sets objectives with clear goals you can meet to expand your business. It also ensures you can plan for the expenses associated with expansion. Finally, you need to understand how money flows in and out of your business to become more strategic.
Tip: Hire a bookkeeper to track your finances and create reports you can review. You can also work with an accountant or fractional CFO to evaluate your finances, offer advice, and look for opportunities to find capital to invest in your business to facilitate growth.
8. Non-Compliant Invoicing
Not understanding the types of taxes you need to charge customers is one of the most dangerous accounting mistakes businesses make. This oversight can lead to serious tax implications at tax filing time. For example, businesses that make over $30,000 must charge GST. Most sales must also charge sales tax. If you don’t understand provincial tax laws related to your product and service, the onus is on you to pay those taxes. You also face late fees, interest, and penalties for any taxes owed. For example, if you made $100,000 in sales but failed to charge GST and sales tax, you would owe the government $15,000 plus interest and penalties.
Tip: Work with an accountant to understand how your sales and services are taxed to ensure you collect taxes correctly. An accountant or bookkeeper can also set up auto payments for your GST and sales tax so you avoid penalties.
9. Not Paying The Bills
When you don’t keep up with accounts payable, it leads to poor credit and bad standing with suppliers. This has a detrimental effect on your business, making it difficult to access the supplies you need and the financing required to expand your business. However, it also makes it difficult to track cash flow and make informed financial decisions.
Tip: Set up auto payment for things such as rent, utilities, and regular shipments of supplies so you never miss a payment. Leverage early payment or cash payment options to reduce costs. Meet your financial obligations so you can access more credit with suppliers to expand your business.
The sooner you adopt smart accounting practices, the more successful your business will become. Avoiding these mistakes is easier with the support of a bookkeeper or accountant. For help navigating your business accounting, call Intrepidium at 778-762-3445, or click here for a complimentary consultation with the Intrepidium Team.