A clerical error on its 2010 Race to the Top application cost New Jersey $400 million in education funding, the Association of American Educators reports. A staffer input finances from the wrong year, and efforts to verbally correct the error did not help. While the average small business accounting mistake won’t cost $400 million, it will save you money in the long run to learn good accounting habits now. Learn to avoid these common accounting mistakes.
1. Tossing small receipts
While you may think of the $20 you spent on cleaning supplies or the $50 you spent on business trash bins as a small expense, these incidentals add up over time to a large chunk of change. However unlikely it may be that the IRS asks to see your receipts, you should get in the habit of saving them. Those receipts serve as documentation for your business expenses and any of those deductions you’re claiming on your taxes.
2. Not staying on track of reimbursable expenses
You’re picking up the prepaid catering for that business meeting and realize that your office manager forgot to order beverages, so you pony up your personal credit card for $30 in drinks and slip the receipt in your pocket. If you forget the receipt is in your pocket and you wash your pants, you’ll probably lose the receipt and never submit that expense. Whether it’s a one-time occurrence or a tenfold slip, mistakes like this cost you money and can introduce bigger errors in your accounting process. Always submit reimbursable expenses.
3. Counting sales as immediate income
When you sell $500-worth of goods, it’s hard not to immediately visualize that as money in the bank. However, if you treat a sale as immediate income, you risk getting a faulty picture of your cash flow and profitability. Wait until you have delivered the product to the customer to count those sales figures as income. If the product ships within 30 days, you’ll need to count the item as next month’s inventory. Over time, this habit helps you gain an accurate picture of your sales and expenses, bottom line and cash flow.
4. Confusing profits with cash flow
New entrepreneurs often invest money earned back into the business to meet demands, keep products in stock or support growth. If not checked, this can create an imbalance where more money is going out than coming in. Track money going in and out and evaluate any product expansion plans carefully. Sometimes it’s better to grow slowly than expand right away, if it means going into debt.
5. Not backing up the books
When the majority of your financial record keeping happens online, you may forget to back up your expenses. This can lead to problems if your online banking system goes down, or if you close that bank account and open a different one, in which case you might lose old records. Get into the habit of backing up all financial record keeping by using a dedicated external hard drive, cloud storage or online payment solutions software that offers automated backup. Losing access to your financial transactions makes tax time extremely challenging, and you may misreport your business finances or fail to maximize your deductions because you cannot accurately recreate your expenses.