Common Bookkeeping Errors Made by Small Business Owners
Many small business owners often opt to do their own accounting in an effort to save money. Unfortunately, a lack of accounting and bookkeeping expertise can cost you a lot in profitability and success.
In an article published on Entrepreneur.com, Lisa Girard shares "Three Common Accounting Mistakes" of which most small-business owners are unaware. Consider your business as you read the following. Do any of these sound familiar?
1. Treating sales as revenue before product or service is delivered.
Until the service is complete, don't count payments as income. Girard, after talking with certified public accountant at Kroner Gamble &Co., explains, "Great sales in a month that will be delivered to the customer later, but are improperly posted as revenue for the current period, can give a company a false sense of profitability."
2. Not considering the financial ramifications of a large purchase.
Many small businesses invest in costly equipment that can impact their business significantly, for good and bad. When costly items are purchased using cash, business owners can depreciate the equipment over time; however, they are unable to claim them as a one-time expense on their taxes. When taxes are due, these individuals are unable to claim the expense to offset profits requiring a larger tax payment. One possibility is to secure a short-term loan in order to purchase big-ticket items, a method which doesn't deplete cash flow.
3. Confusing profits for cash flow.
Many businesses mistakenly reinvest earnings back into their business, leaving them little to no cash flow. To combat this tendency, Girard suggests, "Always track what you're spending versus selling and take a long, hard look at your financials before moving ahead with expansion plans that would put your business too far into debt."
Enlisting the help of a freelance accountant will ensure you don't continually make these same mistakes. You should: 1) Learn which of your financial measurements needs improvement. 2) Identify action steps that will make your company stronger and more valuable. 3) Train your managers to take action based on performance results. 4) Position your company more favorably for financing. Call us to learn other ways we can help you manage your finances. (601) 291-0768
Girard, Lisa. 27 April 2011 Entrepreneur.com