TOP 10 BOOKKEEPING MISTAKES SMALL BUSINESS OWNERS MAKE
Keeping accurate financial records is very essential to a business because the end product of a business still boil down to numbers and figures.
According to the Advance English Dictionary, bookkeeping is the activity of recording business transactions. It is the recording of financial transactions, and is part of the process of accounting in business, according to Wikipedia. Simply put, bookkeeping is the day to day recording of all the financial transactions of a business.
Research has shown that 90 percent of small businesses fail because of lack of proper financial management. A sound financial record is very essential for a small business. Below are some of the reasons why a business owner must have a sound and efficient financial record for his/ her business:
- Bookkeeping helps to manage finances: When a business owner keeps accurate records, it helps in financial management. It shows you your revenue, how you spend money, your cash inflow, outflow, whether you are running on a profit or loss. It simply shows the financial position or wellbeing of your business.
- It helps to track growth and profit : Growth is one of the important thing that a business owner should pursue, it is very essential to a small business as it is not good enough for a business to be stagnant. Bookkeeping is a very useful tool that that can be used to check if the business is growing or not. It accumulates data for various years and by comparing this data, a business can track its growth.
One of the financial statements prepared in bookkeeping is the income statement, formerly called profit and loss, which shows the profitability of the business. A business can track its profit through this.
- It helps in good decision making : Another importance of bookkeeping is that it helps the business owner to make good decisions because it provides relevant financial information to back it up. Without necessary financial information, bad decisions which can bring down the business can be taken.
- It helps in planning and strategizing: A common saying goes thus “ Proper planning prevents poor performance” and another says “ He who fails to plan is planning to fail”. A business owner should and must have plans for his or her business to grow and increase. An old adage says that “Experience is the best teacher’. For a business owner to make plans for his or her business, he must have a good understanding of the past and bookkeeping makes that possible as it keeps record of past financial performance of the company.
It also help the company or business to compare past financial records and strategize on ways to improve its finances, sales and the overall business.
- It makes report to investors easy : Bookkeeping provides information about the financial performance of your business to investors, as they need it to measure the value of their investment. Note that the end product of bookkeeping is financial statements. The income statement, cash flow statement, statement of financial position of your business all reflect the value of your business to investors and this will assist them in making decisions.
Also, it is not only for current investors to know the value of your business, it is for future investors too. Investors are more likely to invest in your business when you have proper and organized financial information.
- It makes audit easier : Keeping organized financial records makes it easier for auditors to audit your business account. When a business fail to keep proper record of books, it prolongs the auditing process and it makes it difficult for the auditor which could attract penalties or, and additional fees.
- Budget preparation : Bookkeeping also help a business to prepare budget, it shows the revenue available to a business, the expenses incurred and it helps them to adjust their expenses if there is a need for it and also plan for future expenses.
- Another importance of bookkeeping is that is helps a business owner to plan and prepare his or her tax. With preparation of financial statement, you know how much your business earns, and you can easily file your tax towards that earnings.
- It also help in organization of the business :If as a business owner, there is no proper financial record of your business or company, it portrays you as an unorganized and unserious fellow. Organization is a skill every business owner must have. Keeping your financial records organized makes it easier to find and present to appropriate parties like investors, customers, employees e.t. when the need calls for it.
- Lastly, keeping of financial record for your business, as long as it is registered is a legal requirement in Nigeria, the law requires you to keep a separate financial record for your business different from your personal expenses.
TOP TEN BOOKKEEPING MISTAKES SMALL BUSINESS OWNERS MAKE
We have seen from the points above that it is important for a small business owner to have a sound and efficient bookkeeping culture, Some small businesses hire professional accountants or bookkeepers to help with the keeping of financial record.
Below are some of the mistakes small business owners make when recording their financial information;
- Combination of Business and Personal Finance : This mistake is very common particularly to small business owners, most believe that their firm is not big enough to keep record for. No matter the size of your business or firm, it is always advisable to keep separate books of accounts for your business and personal expenses. That is why one of the things to do before starting a business is to create a business account where all the money goes to. This helps you to be accountable to the business.
When business and personal finances are combined together as one, it becomes difficult to know and locate where your income or expense is coming from, the bookkeeper or accountant will find it hard to distinguish between personal and business related transactions.
- Not keeping written records of financial transactions: Most small businesses today have decided to operate paperless records to reduce expenses and for other reasons. They don’t keep written record of all their financial transactions.
However, there is nothing like paperless policy in accounting and bookkeeping as there has not been any substitute for paper documentation. Many businesses even keep financial record in soft copies without providing back up for it and if anything go wrong, they end up losing all their financial information.
- Not saving receipts for small purchases : Many small businesses are guilty of this, most of them don’t keep receipts for some purchases, many throw them away because they believe they are small and they don’t matter. Those receipts can serve as a backup for proper documentation. It is advisable for business owners to keep receipts for any purchase made no matter how small it is because it is useful when it is time to sit with your accountant or bookkeeper for review.
- Using the wrong accounting method : Accounting methods are simply the rules a company follows in reporting revenues and expenses. There are two basic accounting methods; cash accounting and accrual accounting.
Cash accounting makes record of revenue and expenses as they are received and paid while accrual records revenue and expense as they are earned and incurred.
For a small business, cash accounting is the best method to use because of its simplicity. In this method, transactions are only recorded when cash is spent or received, for example, Taiwo bought goods worth 2000 naira and paid in cash and Kenny purchased goods of 3000 naira on credit. Under cash accounting method, the only transaction that would be recorded is that of Taiwo because cash is involved. As the business expands, it could switch to the accrual method because it gets easier to accurately match revenue with expenses.
- Failure to reconcile basic accounts : One of the fundamental accounting duty to maintain a good financial record reconciling your business book with your bank statement. This involves comparing your books with your bank statement every month to ensure that there are no discrepancies. In the case of discrepancies, you should contact your bank so that it would be looked into. This helps to make sure that errors are corrected before it develop into a major problem.
- Not keeping proper records of petty cash : Many small business owners don’t keep proper record of petty cash expenses e.g postage stamp, taxi fees because they believe the amount is small and it should not be accounted for properly. A business owner should make provision for preparing a petty cash book where all petty expenses will be recorded.
- Not knowing the difference between cash flow and profits : A business owner must know the difference between profits and cash flow so as not to mistake them for each other. Profit is the amount gotten when expenses is deducted from revenue, it can also be called net income, while cash flow refer to the inflow and outflow of cash for a business, it is the amount flowing or going in and out of the business at a particular time.
A business can have a positive cash flow in the short term and yet not profitable, also, it can have a negative cash flow in the short term but still be profitable in the long run. Scenario one is mostly common to small businesses and most small businesses mistake positive cash flow for profit.
For example, let us assume you doughnuts and you have one customer. In January, you make 100 doughnuts at a cost of 4000 naira. You sell the doughnuts for 5,500 naira and the customer did not pay you until February. In accounting, January is a profitable month for you because your projected income is greater than your costs. But note that, your cash flow for January is negative because the customer has not paid for the goods he or she bought.
- Employing the “Do it yourself” (DIY ) method of bookkeeping : Most business owners like to be in charge of everything pertaining to their business, though this is not a bad idea if they can handle everything which is almost impossible. Many small business owners usually think they can handle their financial records by themselves without hiring an accountant or a bookkeeper. But they end up messing everything up because keeping financial record can get very complex and technical . In order to avoid stories that touch, it is always advisable for a business owner to hire a professional accountant or bookkeeper that will be in charge of the financial records of the business.
- Not enforcing adequate internal control : Most small business owners after employing a bookkeeper or an accountant just sit back and relax without enforcing or implementing solid financial control. This gives the bookkeeper or accountant the opportunity to commit fraud and embezzle money which could destroy a business or make it go bankrupt. The best way to avoid this is to implement a solid financial control which include separating financial duties so that no employee has untied control of any aspect of the business’s finances, for example, the person making payments should not be the one to record the transaction. No matter how close your employees are to you or no matter how much you trust your employees, do make sure you always implement internal control to prevent theft.
- Wrong classification of workers : Most business owners misclassify workers. There are different category of workers, we have full time workers, part time workers, independent contractors e.g consultants and freelancers, temporary workers. A business owner must understand the different class of workers to make it easy to determine who is qualified for employee benefits and to make proper record for it. It is also useful to know the amount of salary to pay the different category of workers.
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