Accounting Mistakes Cause Missed Opportunities

“To err is human but to forgive is divine” goes an old adage. This may hold true in other areas of life but accounting is unforgiving and mistakes can take your business on a downward spiral and ultimately to ruination.

Hence, It is best to be aware of and avoid the mistakes listed below which are common in small or medium-sized businesses.

Mistake #1: Ignoring the difference between cash flow and profit

Cash flow and profit are not synonyms. It seems so simple but it makes a big difference to the financial health of your enterprise.

Let’s understand this with an example.

BRAC and company landed an order for $75,000 to be completed in three months. The owner, Bard, happily posted $10,000 of this as profit never once giving thought to the possibility of delay in executing the order. Unfortunately, the unforeseen happened and the order took seven months and fifteen days to complete. The cost escalated and profit disappeared. This is mistake number one which should be avoided.

Mistake #2: Managing all of your accounting in-house

Small and medium-sized businesses often believe in “do-it-yourself” with reference to accounting. They believe that they can use accounting applications without help and become expert at accounting. The added incentive is the money, they believe, they save. But if that were true, the mistake which Brad made in posting profit before the project was completed, would not have happened.

It is not easy for an entrepreneur to know all the laws and by-laws when submitting tax returns. Therefore, accounting assistance is necessary. Mistakes that untrained people do not even notice and so let slip are caught by the eye of a professional accountant instantaneously. It is usually cheaper to pay an accountant.

Accounting firms will minutely examine your accounts. They will categorize your inflows and outflows correctly and manage your accounting department. They can offer sound advice on how to curtail expenditure.  You can also seek the advice of your accountants on where and how much to invest. Help on so many fronts will leave you free to plan the growth trajectory of your company and to embark on the path to success.

Mistake #3: Poor communication with your accountant

Having understood the value of an experienced accountant, Brad did appoint one. He did not trust him completely and would withhold information about some transactions. The result was a disaster.
Even if you are using accounting software, it is imperative to upload even the smallest expenditure or income, for your books to be balanced truly.

Mistake #4: Forgetting to record small transactions

Inexperienced businessmen often forget that even small transactions need to be accounted for. This is a mistake that could, in the long run, bury your business under a mound of debts. Whether you do your accounting yourself or with the help of accounting software or use the services of an accountant, this is a mistake to avoid at all costs and in all cases. Petty cash and small transactions are neither petty nor small.

Mistake #5: Not being serious about accounting

Accounting shouldn’t be taken lightly. Establishing a pattern of accounting is important. Categorizing your books is even more important. Every transaction, whether it is payment received from a client or a payment made to a supplier, should be diligently recorded for your accounting to be effective. Only effective accounting can give you the correct picture of the financial status of your company at any given point in time. An accurate picture of your company’s financial health is important while filing your tax returns or applying for a loan.

Your accounting becomes effective only if your assets and liabilities are correctly categorized. Your inflow and outflows of cash should also be categorized. A monthly check saves time. The earlier the mistakes are found out, the earlier can they be corrected.

Mistake #6: Budgeting projects

Enthusiastic entrepreneurs may jump into projects without clearly demarcating funds for each head under which the project has to be undertaken. This mistake could lead to the project overshooting the cost. Returns on investment will get wiped out or at best, be diminished. There will be no way to control spending on a particular segment of the project. The spending will be erratic and uncontrolled.

It will be difficult to know which segment excessive expenditure is being expended. When the project is budgeted under various categories, you will know the exact amount spent on each category and consequently, you could tweak the expenditure accordingly.
Conclusion

The adage, “A stitch in time saves nine”, can be well applied to accounting. Diligent accounting will keep your company going smoothly and full-throttle ahead without speed breakers of financial glitches.