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The 4 Biggest Accounting Mistakes Small Business Owners Make

small business mistakes

Small business owners have got to master their numbers. If you aren’t in firm control of your finances, you’re treating it like a hobby. Though a poorly-run business has the potential to lose a lot more money – especially if it fails. 

Time and again, though, we see small and medium-sized business (SMB) founders and owners making the same mistakes or falling for the same myths when it comes to accounting.

Here are some of the most destructive: 

  • Failing to delegate. Owners need to know what’s coming in, and control what’s going out. But they shouldn’t be spending valuable executive time entering transactions and reconciling every account statement themselves. Instead, business owners should focus on serving customers and clients, selling, prospecting, training and leading salespeople and employees, and growing their business. They should focus on their core competencies – which almost never includes bookkeeping and accounting services. 

Bookkeeping and accounting are vital functions. But they are also easily and cost-effectively delegated to vendors for whom bookkeeping and accounting are core competencies. 

  • Failing to use the accrual method of accounting. Many small businesses who haven’t hired an accounting professional use the cash method of accounting, rather than the accrual method. But the CRA requires most businesses to use the accrual method, not the cash method. 

The cash method is much simpler for lay people to grasp. But most bookkeeping and accounting professionals will use the accrual method for most serious businesses. 

Under the cash method, you book revenues when the cash actually comes in the door, and you book expenses when you actually write the check. With the accrual method, you book the revenue and expenses  when you sign the contract, not when you actually get paid. 

The accrual method is more complicated. But it usually provides a better snapshot of the company’s actual book value. When you sell a business, the buyer conducting due diligence will usually expect to see your books handled under the accrual system. 

In Canada, there are a few instances where using the cash method is allowable for small businesses. But those circumstances are limited. 

  • Storing accounting data on site. Many small businesses do their bookkeeping on site, and store their accounting data in a server on site. Even when it’s backed up regularly, there’s always a risk of damage from a fire or flood. Your data is also vulnerable to employee theft or a disgruntled former employee looking to do you damage just before he or she leaves the company. 

For these reasons, on-site storage and backup can be very risky.

A better solution is to upload all your accounting data to a Cloud-based server platform. Modern Cloud servers have all the encryption and other security features as banks. They also allow you to access your accounting data from any device, anywhere in the world. Your data is backed up instantly, as soon as you key it in, in multiple locations around the world. 

  • Confusing profits and cash flow. Companies with good long-term profits can run into severe cash crunches that can bankrupt them.

Likewise, companies with good cash flow can be very unprofitable – and unless the owners recognize the problems and take action, these businesses are doomed to fail. 

For example, a business owner could be taking salary and dividends out of the business for years, thinking it’s profitable – but fail to account for depreciation – the gradual wear and tear on his or her equipment and vehicles. The business can operate for a time. But when the equipment fails and needs to be replaced, the owners can be caught short, blindsided by the expense to buy new equipment to replace the gear that was worn out. 

If they can’t get financing, it could be very difficult for the business to survive. 

Need help?

If any of these accounting mistakes hits a little close to home, take heart: Ledgers Online provides an affordable solution small and medium-sized businesses. 

It’s easy to get help. Contact LedgersOnline today for a free, no-obligation consultation.

We look forward to working with you. 

Posted in Blogs, bookkeeping