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Friday, July 16, 2021

Costly Accounting Mistakes You Should Avoid

Proper accounting is crucial to ensure businesses make money and thrive. It streamlines your financial operations by allowing you to keep track of overall income and expenditure. You can make the right business decisions by having accurate financial information at your disposal. But the information you receive must be correct.

Still, being human, we are bound to make mistakes. These mistakes can sometimes prove to be very costly. Identifying accounting errors is crucial to maintain the financial stability of your business. Poor accounting practices can be the biggest obstacle to any company’s growth and long-term profitability. So it would help to identify such mistakes before your ship sinks to the bottom of the sea. Listed below are some accounting errors you should avoid.

Not following standard accounting procedures

Poor accounting literacy leads to small business owners and employees not follow accounting and reporting standards. Hence, knowing a few basics goes a long way in preventing day-to-day procedural errors and ensuring compliance. It would help to read up on what skills do you need to be an accountant to gain some level of competence. Or, consider taking short courses online and quickly skill up.

Still, to follow proper procedures, start by creating a checklist to ensure that you do not skip anything. For example, while setting up a new vendor, your list should include the vendor’s name, address, employer identification number (EIN), and documents like signed contracts and insurance certificates. To process payments, you should enter information in the accounting database correctly. Having a checklist will ensure that you do not miss anything. Similarly, create SOPs for other tasks and stick to them. 

Not keeping professional and personal finances separate

Keeping a joint account for personal and business expenses will not only mess up your cash flow but will also reflect poorly in your financial statements. You’ll overstate business expenses and liabilities, and it will also negatively affect your credit score. It can become a problem when seeking more loans for business expansion or when the IRS reviews your financials for an audit. 

Hence, always create a separate bank account to manage their business cash flow. Use it to pay business expenses and deposit all business income in it. In addition, you should use only a business credit card. Separate statements will help you to submit the claimable expenses conveniently when filing your tax returns. 

Not leveraging technology 

If you do not leverage technology to manage your accounting processes, you cannot perform tasks efficiently. Manual accounting is tedious and prone to human errors. Not to mention, it uses up way too much paper and increases business costs because of inefficiency.

Your business growth hugely depends on how you make the best out of technology to manage daily finances and accounting processes. It would be best to familiarize yourself with the latest software and tech tools to reduce the risk of errors and find out new ways to enhance profitability. 

Using the right web or mobile applications will help you keep track of receipts and justify claims by having an accurate record. With the proper use of accounting technology, you can collect accurate data and generate/share reports with a simple click. Cloud-based solutions provide you with another way to keep track of work and access it from anywhere, anytime. These solutions also help to increase collaboration across the organization and streamline workflows. The result- higher efficiency and profitability.

Operating without a budget

Running a business without a budget is just like working without direction. You should have a budget to analyze the operating expenses of a business. A budget helps you to keep an eye on overspending and achieve realistic financial goals. It enables you to spend according to the available resources and decide whether you need to reduce the operating expenses or increase the revenue.  On the other hand, not having a budget is the perfect recipe to mess up everyday accounting activities.

Not preventing data entry errors

Data entry mistakes commonly occur in manual accounting processes. It is hard to avoid these types of errors altogether, but you can have a policy in place to ensure they do not arise frequently. To minimize these errors, ensure timely reconciliation of accounts and balances. This will provide you sufficient time to identify any mistake and correct it. You can also determine the possible errors by running the budget-to-actual variances. It helps you trace the errors in expenses, classifying revenues, and payment reports. If there are any unusual transactions, you should review them immediately to look for any data entry mistake and ensure its accuracy. 

Not having a backup of accounting data

You must have a backup of your accounting data since there is always a chance of losing it because of software failure, data theft, or natural disasters. Files can get corrupt anytime, so you should backup your accounting software regularly. You should activate the feature in your accounting software to backup the data automatically. It is also essential to keep checking the backup regularly to ensure it is working correctly. Once you are sure that you have the backup of all crucial data files, you can focus on other accounting operations with a stress-free mind. 

Not categorizing expenses and income

Not having a clear idea of all money coming in going out will leave your business without any money pretty soon. Proper categorization is one of the basic principles of accounting and financial management. It would be wise to categorize expenses and income properly. The process will help you improve cash flow management and ensure that your business never runs dry. It will also make your tax preparation much more straightforward.

Conclusion

Accounting is one of the most intricate business aspects that demands complete focus. So, stick to the basics and follow all the accounting procedures correctly. It is also essential not to merge professional and personal finances to have clarity about your business finances. Technology helps simplify accounting in today’s era- use it smartly. It is also essential to have a backup of your complete financial data to avoid any hassle if you lose it. Avoiding the mistakes mentioned above will help you improve your accounting processes and financial reporting.


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Kiara Dawson
Kiara Dawson comes from an Engineering background, with a specialization in Information Technology. She has a keen interest and expertise in Web Development, Data Analytics, and Research. She trusts in the process of growth through knowledge and hard work.

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