Accuracy is critical in accounting. From basic bookkeeping to financial reporting, accurate and timely entries are essential practices for any business. Adherence to disciplined accounting practices enables businesses to accurately monitor the financial health of their company.
In addition to accounting accuracy, businesses also need to ensure that they have an understanding of key functions such as cash flow planning and management.
Following are some accounting pitfalls to avoid, particularly for small businesses, where resources and budgets are often rationed.
Missing entries and untracked expenses
It is easy to forget about recording an expense once the transaction is complete. Once an entry is missed, it may go unnoticed until tax time. Not only does this result in inaccurate accounting and finances, it can also erode profits, as expenses which are smaller than those stipulated by the IRS guidelines remain unrecorded by business owners. However, these small expenses accumulate and could be beneficial to track for tax purposes. Even small expenses can add up to help you qualify for effective tax deductions.
Mismanaging cash flow
Cash flow management helps you monitor income and expenses. Poor cash flow management can lead to the illusion that there is enough cash, whereas in reality, the income no longer matches the expense. You may feel that there is enough cash reserve, while in reality the expense has already exceeded income. This can happen with your petty cash reserves, as well as with the company’s overall finances. With small cash reserves, this problem may be compounded, since it is easy to lose track of money withdrawn.
Not managing the cash flow can result in cash crunches when you least expect or need them, eating into investment opportunities or derailing plans for expansion which may need some initial expenses.
Delaying account reconciliation
Account reconciliation is a critical step in the bookkeeping process. For business owners performing this function themselves, it is often relegated as a task to complete later. However, this opens the door for small errors to snowball into larger accounting mistakes. Further, like poor cash flow management, this can also give you a false sense of liquidity.
Using manual accounting
Manual accounting is not a pitfall in itself, but it can lead to significant errors, especially if your company is growing. Accounting software can assist in regulating your bookkeeping, ensuring more accurate books, and eventually, dependable financial reports. Using software to automate accounting can help your business in several ways:
- Automated systems track and update records of funds withdrawn; they also balance the remaining reserves, thus providing the correct measure of liquidity.
- Automation reduces dependency on human beings, therefore reducing opportunities for human error or fraud.
- Automation helps create updated reports and, more importantly, accounts that are tracked and contain recorded data. In contrast to manual bookkeeping, automation can generate reliable audit trails and ensure accurate financial data.
These are just some of the accounting pitfalls that companies should attempt to avoid in an effort to maintain accurate financial records.
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