Accidents happen. There's no way to avoid the occasional error or misstep. But there's a big difference between a minor, unavoidable mistake, which you can recover from easily, and a major, company-damaging blunder.
With that in mind, here are four examples of the latter category. Every business leader should make avoiding these accounting no-nos a top-level priority. And if your firm is making any of these mistakes right now, you need to course correct ASAP.
1. Mixing business and personal finances
According to both Vertaccount (via ChefZone) and Paychex, this is the No. 1 accounting mistake that small to medium-sized businesses make. It's easy to see why this happens. Entrepreneurs will often need to invest their own money in order to get their businesses up and running in the first place, and if you're the only owner, do you really need to delineate between your personal finances and the company's?
"Setting up and maintaining a distinct account for the business is absolutely imperative."
The answer is YES! This is a huge deal, and can lead to major problems if ignored. Not only are there responsibility and accountability issues here, but you also won't have an accurate picture of how well or poorly your business is doing unless its finances are clear and separate. This may get annoying and require discipline, but setting up and maintaining a distinct account for the business is absolutely imperative.
2. Confusing profit with cash flow
This is another common mistake, as highlighted by Vertaccount. To a seasoned business leader or accounting professional, the difference between the two is clear: Profit is revenue minus expenses, while cash flow is all of the money that comes into or leaves the company's accounts. When firm leaders get confused here, they run the risk of running out of cash, and that can cause a host of serious problems.
By keeping this distinction in mind at all times, SMB leaders will always know how much cash is - and is likely to be - available, and that will lead to better, more responsible spending and decision-making.
3. Letting revenue and expenses go unrecorded
Paychex highlighted this accounting no-no. The source pointed out that it's an easy mistake to make. A lot of businesses tend to ignore small-scale revenue and expenses, letting them go unreported because they don't seem all that important. But even minor transactions can add up over time, to the point where they can undermine the business's record-keeping overall. If any revenue or expenses go unrecorded, the company simply won't be able to have an accurate view of its accounts. If that's the case, then it'll be impossible for SMB leaders to remain fully informed of their firm's financial status at any given time.
4. Using the wrong tools
Last, but not least, businesses need to make sure they're using the right accounting tools. This is a subject we recently touched upon in a separate blog post on spreadsheets, but it's so important it's worth reiterating.
Relying on spreadsheets is just one example of a major mistake that countless SMBs make when choosing their accounting tools. Granted, it's probably the single most common and most damaging example. After all, spreadsheet programs like Excel are not really meant to serve as accounting software, and they present a huge potential for oversights, mistakes and miscalculations.
But randomly selecting actual accounting software tools can be equally damaging. There are a lot of programs on the market, and SMB leaders need to choose the solution - and the service provider - that can best meet their specific, unique accounting requirements.
By avoiding these no-nos, SMBs can help to ensure their accounting efforts are reliable and problem-free.