Keeping on top of the accounting requirements of their small business is usually the least exciting part of being a micro-entrepreneur, but if the owners do not pay it the attention it deserves, poor accounting practices will be their undoing. In fact, it is one of the key reasons why one in three small businesses fails in the first year of operation.
If you are thinking about starting up a new business, you are most likely thinking more about how to market your product or service than your accounting practices. Here are some of the mistakes that most new business owners are likely to make if they do not have basic bookkeeping skills or the right advice. Hopefully, you will take steps very quickly to correct any of these if you have already made them, and avoid them if you have not.
Not Keeping Separate Business and Personal Accounts
No business should be operating through the personal accounts of the proprietor. In the very early stages it is tempting to use personal accounts until the business takes off. As the business grows, it is very difficult to go back through bank statements to separate business and personal. The owners risk drawing too much cash out of a fledgling business and at tax time, cannot identify legitimate deductions and pay more tax than they should.
This mistake can be avoided by spending just a few minutes each day doing the accounting paperwork. While it is tempting after a busy day to leave it for later, as time passes and memory fades, the lack of a written record makes it much harder to recall transactions without the relevant dockets, invoices and purchase orders, amongst others.
This is especially important now that many transactions are electronic. There will be a record but it will be an electronic one. Just having a basic system to keep everything organised will make all the difference to knowing what has been sold, what has been paid and who is owed.
Not Having an Accounting System
No one is suggesting that a start-up business needs to spend much needed early capital on expensive accounting software designed for the larger business. In the initial stages, a spreadsheet is sufficient, and if the owner is not computer literate, this can be the old-fashioned pen and paper type.
This is the perfect opportunity for the business owner to choose an accountant such as Carbon Group. This decision will save a lot of stress in the long run, and an accountant can set up a typical spreadsheet that anyone can use. Many accounting firms also offer bookkeeping services so a busy owner can hand day-to-day transactions over to an experienced operator.
Failing to Communicate with Your Accountant
For many small business owners, the first personal contact with their accountant after the initial appointment is at tax time. This could be many months after the business has begun trading. This is a wasted opportunity because regular contact with their accountant gives the small business owner the opportunity to ask questions, become familiar with financial terms and understand the tax implications of some of their decisions.
Not Chasing Payments
This usually happens when business owners are trying to do everything themselves. They are so involved in generating and performing the service they deliver that they allow payments to slide well past the usual trading terms.
This is a huge mistake for obvious reasons. Getting paid is the reason they are in business, and without a constant injection of cash, it won’t be long before they have run out of funds. This is a task that they could easily delegate to someone else, provided they have a good accounting system.
It is tragic to think that so many viable businesses have ended before they reached anywhere near their potential. The mistakes made by these owners will have long-term consequences for their personal financial situations, but they could have been avoided by taking a few simple steps.