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Every business starts small and expands to bigger scale over time. The first few phases of development are also the learning grounds for business owners to hone their bookkeeping skills and eventually become better in leading their companies to financial accountability. It takes time to get good grasp of what a proper bookkeeping should be and figure out the profound effects that it can offer to the well-being of the business. Mistakes are not uncommon, but you can avoid a total mess right from the start by recognising things that can go wrong in small business accounting as follows.
- Accounts Receivable/Collections
There can be very complicated bookkeeping process between invoice and account receivables/collections. Most issues start from the delay between marking an invoice as “paid” and the actual time of receiving payment. When not checked and updated in timely manner, many points in your list get outdated pretty quickly and overly tangled by the time you need to review them. Sorting everything out can mean hours of work, and there is no guarantee that you will not make mistakes either. As a business owner, you must review list of accounts receivable/collections to determine revenues and calculate the amount of tax. When not done properly, this mess usually leads to overpaying tax and at the same time decreasing your revenues.
- Cash Flow
Some of the biggest problems in cash flow management start from mixing between personal and business finances. Too many small businesses use single account for both finances. Income and expenditure from two different accounts create tangled mess, and there is no way you can sort them out without having receipts for all purchases. You need to set clear boundaries to separate those two different entities. Do not make the purchase of the latest game console as business expense; or take the company’s money to fund your vacations. Mixing them up can cause major problems with taxation.
- Managing Paperwork
One of the most important things in the entire paperwork management paradigm in small business is keeping track of receipts. You probably maintain good habits of asking for receipts for all purchases, but the receipts are rendered useless if you fail to compile them in an organised way. Many parts of accounting rely heavily on tracking back receipts to document spending and deductions.
A smart method to prevent this issue is to use only credit or debit card for business expense. Even when you forget to ask for receipt, there is always a record for every expense. If you forget where you put the receipt, credit card record will still be there for you. Many credit card companies allow you to generate reports as needed, meaning you have one less thing to worry about in your bookkeeping.
- Closing the Books Each Month
An ideal period to make reports is at the end of every month. If you close the book too soon, your bookkeeping probably does not get the necessary information required for any effective business review. When it takes too long to close the book, the bookkeeping may need to use too many resources to make it simple. Closing the book each month allows you to think more about the business rather than fiddling with keeping records. Monthly report must convey information about all transactions including loan payments, value of business assets respective to deterioration, prepaid expenses, writing off bad-performing debts, and more. You will be able to measure your profit or loss on monthly basis and then you can combine them into quarterly or annual reports as well.
- Managing Payroll
As easy as it may seem, managing payroll is far from simple. Payroll is covered by complicated tax law; somewhere in the regulation, there are penalties for mistakes. In some cases, your small business must be properly audited, and the cost of an audit can really put the business out of the market. There are reasons why some insurance companies offer coverage for accounting cost. Payroll is not only about salary, but it includes benefits, student loans, bonuses, seniority, past employment, and more. If you get one of them wrong, chances are you also get everything wrong. In such situation, tax authorities will get themselves involved.
Accounting and bookkeeping have all the potentials to either boost your business or put you into early shut-down. With the right guidance and in the hands of professionals, however, every small business has all the chances to thrive and develop. Considering all the possible risks, an investment in bookkeeping professionals and accounting services is a small price to pay. At 360 Accounting, we provide a complete range of accounting services for your small business, customised to your needs.