While technology and accounting software have made some aspects of accounting management for small businesses easier, many small businesses are still prone to some major, and minor accounting mistakes. Accounting problems can range from fraud and errors, to misplaced financial records and more.
When these accounting issues occur, they can spell big trouble for businesses of any size. Inaccurate books, over-reported profit, and numerous other accounting mistakes can cause businesses to lose sight of and control over their business’s financial well being. If these issues go without attention and remain uncorrected, they can have long-term consequences, such as needing to downsize or even go out of business. It’s best to be aware of the most common business accounting problems so you know what not to do, and how to bounce back from these issues if your business runs into trouble.
Problem # 1: Relying too heavily on an accounting software
Many accounting errors are small oversights that could be easily caught and amended during a manual audit. However, many small businesses don’t catch them because they’re too dependant on their accounting software. Even small businesses need to perform regular financial audits to check for accounting errors in their spreadsheets, or for errors that their software may have missed. The sooner your business realizes that not all errors will be detected by an accounting software, the more likely you’ll be able to prevent errors.
Problem #2: Not being aware of your business’s financial well-being
As a business owner, it’s important that you always know the financial health of your business, whether you manage your own accounting and books or not. In order to do this, you’ll need a basic understanding of how bookkeeping and accounting work, as well as how to determine your business’s financial health. If you don’t understand your numbers, you won’t be able to make smart decisions for your business. You should always be aware of where your cash, assets and liabilities stand. A big mistake many business owners make is assuming that they’re doing well just because they have money in the bank. However, if you don’t compare the money in your accounts to your liabilities, you may think your business is healthy financially when it’s actually not.
Problem # 3: Forgetting to save financial records
There are numerous reasons for businesses to safely store their financial records. Should they lose accounting information, they can find the appropriate records to fill in the blanks. It’s also important to have financial records on hand if your business is audited by the IRS. The IRS can audit your return for up to three years from your filing date, so your business should hang onto them for at least that long. However, if the IRS suspects you’ve underreported your gross income by 25% or more, they have up to six years to challenge your return. As a rule of thumb, your business should always maintain records pertaining to your earnings and deductions for a minimum of seven years to protect your business during an audit.
Problem #4: Not backing up financial record storage
Many businesses make the mistake of storing their financial statements in one place only, whether that place is a filing cabinet, local computer, or external hard drive. What they don’t consider is the possibility for accidental deletion, data loss, destroyed paperwork, or hardware errors that render their financial records impossible to recover. It’s important to determine how your business will safely store all financial records, while preparing for the possibility of data loss. Smart businesses store their data in more than one location, typically using an off-site cloud backup provider. Cloud backup is the only way to completely thwart the possibility of data loss. By storing your data in the cloud, it’s made easily retrievable at all times, from anywhere with an internet connection, so you can restore the data to the same device or a new one, should your data ever go missing.
To thoroughly safe-guard your data and prevent data loss for good, look for a cloud backup provider that continuously backups your data, recording new and changed files as you make them. Your provider should also offer unlimited previous file versioning, so you’re able to revert to any document in a previous state. This is extremely useful if your business data and financial records are ever encrypted by a virus, or you realize too late that you’ve made an accounting error you need to amend.
Problem #5: Not referencing your business’s financial health
Even if you’re operating your business’s accounting and bookkeeping perfectly, it won’t do your business any good if you don’t pay attention to what the numbers are telling you. Successful business owners don’t make any business decisions blindly. They analyze their business’s financial standing and use what they derive to decide which steps they should take next. They also assign specific budgets to every new project they invest in, and they stick to it. Without taking these steps, it’s easy for a business to spend too much money on a software or project that is more costly than it is beneficial.
Problem #6: Updating costs and income infrequently
When you put off recording your business’s earnings and expenses, it’s easy for errors to find their way in. It’s also how smaller transactions get forgotten. No matter what the expense or income, your should make it a point to record the numbers as soon as possible in order to prevent unrecorded financial data. If you don’t, small errors can add up. Left unchecked, your business may under-report profits or deductions — neither of which is good for your taxes or for your ability to make data driven decisions for your business.
Being aware of these common accounting problems will allow you to avoid them before they lead to trouble. You can immediately help your business avoid misplaced, lost, and deleted financial records by backing up your data.