Bookkeeping is one of the least appealing tasks for small business owners. It is often set aside to make way for other business obligations. Negligence of bookkeeping tasks has an impact on your business. Here are 5 bookkeeping errors that should be avoided whenever possible.
Errors of omission is a common mistake that is often overlooked unless its negative effects become obvious. When buying inventory or collecting payments, it is important to record transactions to prevent business activities to slip through the cracks. You will instantly throw off your books if your financial records are accurate. Aside from having difficulties measuring your profitability, filing small business taxes will also be a challenge. Make sure you note every business transaction even the ones you deem insignificant. Make it a habit to keep the receipt and organise small expenses into their proper accounts. Every business keeps a small amount of cash on hand. This is referred to as petty cash. In case you are going to buy something with petty cash, make sure that the purchase is recorded.
While cash flow and net profits have to do with expenses and income, there is still a big difference in how cash flow and net profit measure money.
Net profit enables to determine whether you are making money after paying your expenses. Your net profit is obtained when you subtract your expenses from your sales. It reflects the amount of cash your business gained during a certain period as it also measures a specific block of time.
Cash flow has to do with measuring how fast you move money. It also gives you an idea of the amount of cash coming in and going out of your business. This is shown on your cash flow statement. Your cash flow shows you the liquidity of your funds. It is important to know the difference between net profit and cash flow because when making a sale, but you do not receive the payment right away, it will only reflect the net profit you earned. Since the customer has not made a payment yet, it will result in having low available funds (cash flow).
Financial records need to be accurate at all times. Aside from keeping records and receipts, reconciling your books with your bank account is also a must. Your accounting records and bank statement should match. However, if you fail to reconcile your books, accounting errors will go unnoticed. When you reconcile your accounts regularly, it will be easy for you to spot errors of original entry. Some bookkeeping errors are a simple fix, but since they are ignored, they will snowball into a bigger problem in the end. Keep in mind that it may take six months to notice the mistakes when filing taxes. These errors could have been prevented, have you been diligent in reconciling your accounts.
If you are working with limited funds, you need to avoid overspending and plan for income and expenses according to your business budget. Using a budget helps you keep your money on track. It also saves you from any guesswork in financial planning. Refer to past bookkeeping records so you will determine future income and expenses. You will also need to stick with your budget once you have put it in place to prevent overspending.
Just because you are a small business owner does not mean that you should not hire a bookkeeper and resort to DIY bookkeeping. Your obligations become unpredictable when that it results in ignoring your bookkeeping tasks. Although managing your books demand time, it is important to find an effective way to handle this task so you can focus on running your business.
Peter Broberg is a bookkeeping professional with over 20 years experience in the finance sector. With more than 2 decades of experience, Peter provides payroll and bookkeeping services on a professional level. His services cater to small and medium enterprises in Cannington, Kalamunda.