3 Critical Accounting Mistakes Small Businesses Must Avoid
When starting a small business or startup, mistakes may occur at times. However, these errors can help business owners in the future as one can learn important lessons from the experience that ultimately betters them and the business.
Although, that doesn’t always apply to the financial side of things, or in other words, the business’s accounting. Accounting handles one of the most important assets of a company, and any errors that occur in this process, no matter how big or small, can be consequential for a business.
To avoid such adversities or setbacks on the company, it is important to understand the three common yet critical accounting mistakes that small businesses must avoid.
Errors of Omission
In business, the inflow and outflow of cash resulting from various business activities such as collecting client payments and acquiring new stocks is an everyday occurrence. Often, however, due to busyness or other reasons, it becomes easy to forget to record the transactions of these exchanges. This mistake is what is commonly known as an error of omission.
A lack of accurate and complete records can lead to a number of issues down the line – such as when getting audited by an audit company in Singapore, and even result in missing favourable opportunities, like tax deduction. Since these issues can be easily avoided with a bit of diligence, make it a habit to always record every transaction the business makes, even those relatively small or insignificant day-to-day purchases using the company’s petty cash.
Lack of a proper budget
A business budget entails a future forecast of expected receipts and expenditures, and it serves as a tool that restricts the company’s spending to only the necessities. Setting a proper budget is critical for any business venture, and this is more pronounced for small businesses, who typically only have limited funds at the start.
Ideally, business owners should leverage the company’s previous accounting records and use them as a guide to create budgets that consist of future expenses, profits, and revenues on a project or yearly basis. To stick to the budget they’ve created, business owners must do all they can to reach the expected numbers, such as charging customers on time and maintaining a healthy profit margin.
In case of deviations such as lower revenue or higher costs, increasing sales through discounts and promotions and analysing recent expenditures to cut costs are only a few of the things business owners can do to keep the company’s trajectory back on track. Moreover, saving a cash cushion on the side is also highly recommended as an answer to unexpected situations that may arise at inopportune times.
Mistaking profits for cash flow
For the average person, profit and cash flow may mean the same thing. But in the business world, they are two financial parameters that are wholly different from each other. Simply put, profit is the cash that remains after deducting expenses from the revenue. In contrast, cash flow is the monetary resource used for the company’s present and near-term financial obligations.
A scenario in which it’s easy to mistake one for the other is when suppliers are looking to collect their dues as soon as possible, yet the customers have yet to pay theirs to the business. This situation results in a negative cash flow for the company, but it’s also far from being unprofitable.
When starting a small business, learning from the mistakes of those who came before is key to a smoother business journey. And in regards to accounting, studying up on the dos and don’ts is even more critical to stay afloat and eventually reach the point where the company finally earns some profit.
Since doing proper business accounting is too complex a subject to handle by yourself at the start, it’s best to outsource and rely on professionals first and seek a helping hand. At OneStop Professional Services, we provide expert accounting and bookkeeping services that handle all your accounting needs so you can put more focus on growing your business. Besides accounting, we also offer other services for your corporate needs, such as audit services, tax services, hiring of local directors in Singapore, and much more.