While 71% of small businesses outsource at least one accounting function, 40% of small business owners say bookkeeping and taxes are the worst part of owning a business, according to a study by Score, a business education and mentorship organization.
Some of the biggest pain points for business owners fall under the financial umbrella. But bookkeeping doesn’t have to be a thorn in your shoe!
Here are the 6 most common bookkeeping issues and their solutions, so you can avoid costly mistakes and excel at your business.
1. Human error in data entry
In 2012, JP Morgan Chase took a $6.2 billion trading loss. An internal investigation revealed this was caused by a faulty risk model used by JP Morgan’s traders. The model operated through a series of Excel spreadsheets that had to be completed manually through a process of copying and pasting data from one spreadsheet to another.
Ultimately, it was a $6.2 billion loss caused by human error.
Over the past 30 years, the ability to catch mistakes has improved dramatically. Yet, inaccurate financial results are still common. More than a quarter of professionals (27.5%) reported that incorrect data had been manually input into an enterprise system at their firms, according to the software products team at Bloomberg BNA.
Errors can lead to extremely expensive bookkeeping issues, especially when they lead the company to make bad business decisions or issue an improper forecast.
Solution: Take a proactive approach
Human error is a fact of life, and all businesses make mistakes. But with increasing complexity in regulatory and compliance requirements and growing demand for access to all parts of a business, the potential for errors may rise. And unfortunately, the consequences for CFOs are also getting more severe.
Take a proactive approach to problem identification and resolution. Review your data and identify weak areas or past mistakes. Focus on these areas first, and then start to build a robust plan with checks and balances.
2. Undervaluing your own time
Many small business owners try to do their own bookkeeping. We’ve all heard the phrase “time is money,” but few business owners place enough value on their own time.
How much of your time is lost to payroll, bookkeeping, and issues surrounding them? This is time you could have spent training your employees, networking or building your business.
Not to mention, small bookkeeping mistakes result in big fines. And mistakes are easy to make when you do your own bookkeeping.
Solution: Leave the bookkeeping to the professionals
Leave the tedious time-consuming bookkeeping tasks to the professionals. Use your time for what you do best.
While it can be hard to put your trust in other people, especially when it’s something as sensitive as your company’s financials, a professional bookkeeper can save you time, money and headaches. Their services might cost you a bit up front, but they’re bound to save you money down the line.
3. Lack of accounting knowledge
Almost half of the companies surveyed around the world by PWC reported they had suffered one or more instances of economic crimes. The surveyed, which included 3000 executives of small and large businesses in 54 countries, also found that 88% of U.S. companies that reported some sort of fraud also reported declines in financial performance.
What’s more, 75% of the crimes against businesses in the U.S. were carried out by insiders.
Even if you have the resources to hire an accountant, a lack of accounting knowledge could allow an unethical accountant to commit fraud without being detected for quite some time. Small bookkeeping issues can turn out to be a huge red flag, in some cases. For small and mid-size businesses, fraud vulnerability is compounded. The often informal nature and fewer staff members can result in less oversight.
Solution: Educate yourself
While you shouldn’t feel the need to micromanage the books, it’s still important to have a foundational understanding of accounting.
Consider taking a class at the local community college, reading one of these books about accounting for business owners, or dedicating 15 minutes a day to relevant research.
If you’re going to self-educate, start with the basics:
- Learn common terminology – Not only will this help you understand what your accountant is talking about, you’ll get a strong foundation of accounting as you learn more terms.
- Study the four principal types of financial statements – Balance sheets, income statements, statement of retained earnings and cash flow statements will all play a vital role in your business plan and accounting norms.
- Research different types of accounting systems – The more you know about accounting systems, the better you can fine-tune your own to match the needs of your business.
4. Misprojecting cash flow
Cash flow is the amount of money going in and out of your business. Poor cash flow can spell doom for the future of your business. It’s important to predict your business’ cash flow so you know how much money you will earn, and in return can spend (on growing your business and beyond).
According to a survey by Insights West, nearly half of small business owners consider profit and cash flow their main source of stress. And according to a study by U.S. Bank, 82 percent of businesses fail due to cash flow mismanagement.
Solution: Regularly revisit your projections
Cash flow projections aren’t set in stone. Revisit them regularly to see where you stand. If you see major discrepancies in your forecasting, revisit the numbers and do some digging. Pinpointing these bookkeeping issues early on can help prevent major problems down the road.
Try not to project too far into the future because too many variables can come into play (e.g. a dip in the economy). The standard time period for cash flow projection is 12 months. You can delegate this task to your bookkeeper, or track cash flow with basic accounting software.
5. Improper record-keeping
All businesses must maintain proper documentation of their financial records. But it’s especially important for small businesses to keep a close eye on the documentation that substantiates the financial transactions recorded on their accounting books and records.
One of the main reasons small businesses fail to maintain proper records is because they simply don’t have the bandwidth or know which documents to track. Failing to maintain proper records becomes a much larger bookkeeping issue when tax season rolls around.
Solution: Track everything & stay organized
While you can’t always increase headcount or bandwidth, you can definitely make sure you’re prepared. Businesses often track these essential documents:
Cash flow – Any income that flows into your business should generate a receipt or invoice. Once you enter this info into your accounting system, keep a copy as confirmation.
All purchases and expenses – ALL costs must be filed for tax purposes. This includes purchases and expenses. Retain these documents for at last three years from the date you file your tax return.
Assets – Purchase, sale, and depreciation of business assets are important parts of financial record keeping. When your business sells an asset, your taxes may change depending on the financial gain or loss.
Employment tax records – These records should include all details on employees and payments. Document every last detail, including names, addresses, social security numbers, dates of employment, absences, and all income tax withholding allowance certificates.
Hard and electronic copies – Prioritize electronic copies whenever possible. While paper documents are tangible, they’re far more susceptible to natural hazards and human error. Documents in the cloud are available always, anytime and anywhere.
You should also have an airtight system in place for organizing all your documents. Establish a standard operating procedure (SOP) for ALL financial records that you track. If you’re unsure how to create an SOP, refer to this resource for help.
6. Outdated accounting system
Oftentimes business owners don’t realize they’re using outdated accounting software. They’re not cognizant of the fact that their system gradually (or rapidly) became antiquated.
While there are many signs your accounting system might be outdated, here are a few of the most common:
- Lack of an accounting system budget – Without a budget for your accounting system, it’ll be hard to keep your system and staff up to date.
- Repeated calculation errors – Repeat errors are a red flag for issues stemming from incorrect set-ups.
- Manual spreadsheets – If you’re system can’t immediately produce a report, it’s outdated.
Solution: Accounting software
Nostalgia is overrated when it comes to technology. You need a robust program that can help you accomplish daily accounting tasks, gives you insights into your business’ financial health and allows you to not worry about human bookkeeping issues.
While accounting software isn’t a new concept, the options and features have rapidly expanded over the past few years. Plus, there are many options specifically geared towards architect and accountant time and billing software. If you’re unsure where to start looking, here’s a checklist for choosing the right accounting software.
Finding the right software takes a little bit of work upfront, but it’s well worth the time, stress, and money you’ll save down the line.
If you’re ready to discover why thousands of users have made the switch to Core to manage their company financials more easily, start your 15-day free trial today by clicking below.