Are you managing your company's bookkeeping? If you’re not a trained bookkeeper, you might be guilty of a few bookkeeping “bad habits.” Unfortunately, these mistakes can quickly turn a booming business into a nightmare. Here are five bad bookkeeping habits that are common in many small businesses.
Using The Wrong Accounting Method
Using the correct accounting method (cash or accrual) for your business is vitally important. Ultimately, your accounting method impacts your ability to make smart business decisions. Each method provides you with information that could be important to your decision making based on your business type and industry. There are also certain features and limitations in the financial statements that differ between cash and accrual accounting. For example, the accrual method provides detailed insight into your accounts receivable and accounts payable that you can’t access with cash accounting.
Choosing the right accounting method depends on a number of factors, such as the type of product or service you provide, your revenue and the size of your business. Your accounting method also impacts your tax requirements. For example if you’re using cash accounting, your taxes must be reported on a cash basis. Sounds simple, but these technical requirements can slip right past the untrained eye!
Improperly Managing Cash Flow
Many companies have met a premature death because they didn’t properly manage their cash flow. Knowing the cash flow of your company is vitally important to maintain operations and keep the business running. By monitoring your cash flow properly, you’ll be able to make smarter business decisions in regards to tasks such as bill payments. For example, you can plan for a bill payment to be processed during a week when larger receivables come in, instead of paying when you’re low on cash.
Knowing if your company is tight on cash will help you make smarter operational decisions and limit frivolous spending. Proper cash flow management also allows you to make more complex business decisions, such as if, and when, you require fundraising. So, remember to stay on top of your aging reports, be diligent in collecting your receivables and make sure to have a grasp on your business’ cash flow status at all times!
Ignoring Opportunities For Integrations And Efficiency
Organization is key to having a successful accounting file, otherwise you’re just creating stress for yourself in the long run. Luckily, technology will organize your file for you. Automate tedious operations, such as bill pay and payroll, to increase business efficiency and save you time (and stress). Use the extra time to focus on the parts of your business that you love!
Taking advantage of technology and software integrations will make your job easier and unify the organization’s operational efficiency. Many programs offer affordable monthly options so you only pay for what you need. If you’re using multiple softwares, integrate them so that they work together for extra efficiency!
Not Using Set Deadlines And Due Dates
As a business owner, your day-to-day includes all parts of the business, from generating sales to building customer relationships and taking care of bills. It’s easy to miss a deadline or fall behind when your schedule is constantly changing. However, missing a deadline to pay bills or file taxes can lead to expensive late penalties and give your business a bad reputation. Plus, your credit rating could take a hit if you miss too many payments. Make sure to set deadlines and due dates in an organized calendar, or set reminders on your phone. Better yet, use a system that will track your deadlines and send you reminder notifications. No matter which type of system you choose, make sure you’re meeting all of your deadlines to ensure success.
Failing To Understand Key Accounting Metrics
Is your business successful? How well are you managing your resources? What are your outstanding debts? To answer these important questions, you must understand your business’ key accounting metrics. These include indicators such as gross margin percentage, monthly revenue, net margin, average cash burn, cash runway and year to date revenue. You need to understand these metrics so you can provide your investors or Board of Directors with accurate reports, answer the tough questions and maintain the financial health of the company.
Bottom line, don’t make bookkeeping mistakes that could cost you in the long run! Automate tedious bookkeeping tasks so you know they’re done right, on time and are properly organized. When in doubt, reach out to a CPA to ensure your accounting file is in tip-top shape.