Key Mistakes Business Owners Make with their Accounting
I’ve been working with business owners since 2005 on their accounting. I’ve noticed some common mistakes over the years - read on to find out how to avoid doing these.
Many business owners think that the biggest mistake they make is hiring an unqualified bookkeeper. As you can see in the diagram above - the foundation is actually their own mindset on money, and real world processes of how their business operates.
Unfortunately, each culture has its own pitfalls around money. A lot of people only know about money to the degree they observed or learned from their parents. If their parents weren’t business owners, they are left with even less knowledge. A lot of women are left out of conversation. A lot of men only talk to their male peers.
In the US, most business owners think that a part time bookkeeper will keep their company afloat - and then don’t understand why they have to close up shop, or are working 80 hour weeks. What they don’t realize is a bookkeeper is only doing some maintenance functions after the activity has already happened. Paying a bill, reconciling a transaction that already occurred, etc. This does not help them plan and prepare for the future.
The first key mistake here is they didn’t know that they didn’t know. Their mindset was closed off, they didn’t take steps to learn what good financial habits were for a business.
Next mistake I’ve seen a lot is not using software, or using the wrong ones. Modern day apps made for SMBs integrate with each other, or use Zapier to. Any business can build a highly functioning, integrated back office system. When they don’t - you’ll see errors due to relying on a human to transcribe information from one place to another, always riddled with mistakes, or not done at all.
Let’s talk bookkeeping. Accurate and timely bookkeeping is imperative. Transactions are now downloaded into accounting software the day it posts. Bills can automatically get paid. Invoices can have additional automations applied to them. With accurate bookkeeping comes accurate reporting and metrics - see next:
This is the other mistake I see with businesses. Not realizing, or caring (back to mindset there), about financial planning and advisory work. This means someone looking out for your business for the future. What is your runway? Can you hire? Are you profitable, or only apparently so because you’re paying old bills with current income?
Some businesses are so flush with income that they can skate by for years without ever having accurate accounting. They never make a budget, or see if their cash flow is positive. This leads to bad habits and laziness. Every business owner should know within a few minutes how much is owed to the business, how much it owes to others (payroll, bills, loans, etc.), the cash flow and the runway. Bookkeeping alone won’t cut it.
Lastly, the other mistake I see with businesses is they ignore most of the above but focus their attention annually on filing their taxes. This is necessary - but - if your accounting is not accurate, if your bookkeeper doesn’t know what an asset it, or how to recognize your revenue per GAAP standards (because that is usually above their pay grade) - you are leaving money on the table. You probably are paying more than you need to be, or accidentally committing fraud. Either way, your CPA does not have time to double check all this (below his pay grade) - so you’re out of luck.
Accounting serves two different functions - and the expertise on this is usually by different roles:
For the purpose of running the company well and growing it
Annual compliance to the federal and state government tax authorities
You can’t do the second well without the first, and the first will keep your business alive - so you might as well invest in this area. My best advice is to hire people that have financial expertise, will get you on the right path, and will help teach you things like how to read a balance sheet - and why that’s important. The day to day work will help you make timely business decisions, and in turn make your tax filing a breeze. (And of course contact us if we can be of any help on any of this!)
