Thanks to the increase in different accounting software, it has become easy to keep accurate books of accounts for most small and medium businesses. Accountants and entrepreneurs are now reliant on technology for accounting and generating reports. Despite this great milestone, there are a few errors and mistakes that we commonly make – as simple as posting a transaction in the wrong place. Some errors are minor, noticeable by someone in the organization, while others are significant, and can affect the financial health of your organization. Accounting practices need close attention in any business. A miss in this area can create a bad image of your brand and may lead to the insolvency of your business. Accounting is a vital part of any organization and it requires an intentional investment of resources (e.g. time, skilled personnel, and training) and setting structures. This does not leave out the startup businesses. In any case, the very new businesses are in the best place to put in place great accounting structures with little to no adjustments & disruptions.
This article will discuss the most common accounting mistakes that any small and medium business can make. We will also explain how each can affect your business.
Malik made a pitching presentation to a client and closed a deal of Ksh. 200,000. In his mind, he estimated the cost of serving the client to be Ksh. 50,000. The work is supposed to take him three months, and so make a profit of Ksh. 150,000. He goes ahead to update his books of accounts, recording the profit of Ksh. 150,000. Has malik made any accounting mistakes?
Absolutely. Malik will have counted his eggs before they hatch. What happens if the project takes longer than three months and is probably paid a year later? Or the nature of work gets tedious and requires him to get extra staff, hence spend more? It is an accounting mistake to update the books before payment is made or before the work is delivered. Malik should have initiated a record of the deal upon signing the project and thereafter update the books on all expenses incurred in relation to the project. Finally, upon payment, he can accurately calculate his profit.
1. Not taking accounting seriously
Every transaction no matter how small it is should be properly recorded. For example, company money spent to buy a client coffee over business matters. Many SMEs will argue that they are very small and have few transactions therefore they can afford to hire an accountant. Keeping proper books of account starts with the birth of your business.
2. Handling accounts by yourself
This may look like a shortcut to reducing your expenses but may later be very costly. Keeping books of accounts requires a trained professional. Additionally, having someone else manage the accounts promotes accountability in the business. If you like – prevent the business from yourself.
3. Lack of proper reconciliation of bank transactions
As a small-medium enterprise, your account balance matters a lot because it shows your growth level. Many entrepreneurs just care about how much their banks hold and forget to confirm with their books. It is important to check if what your ban reads is what your books of account show.
4. Using personal bank accounts for business
When starting a business, it is important to separate your personal bank accounts from your business bank account. Some people ask, ‘But why and all the money belongs to me anyway?’ This makes it possible to track the expenses incurred for the business independent of your expenses. It saves you from the temptation of buying a cup of coffee for your friends with the company’s money.
5. Failing to record ‘small’ transactions
Every business has very small transactions that include cash charges and Ksh.50.00 paid to a boda-boda rider. It is easy to forget or not record such expenses in your accounting. This results in incorrect accounts, where the profit margin in the books could be more than the cash at hand. To solve this, you can avoid using cash payment methods and start using other payment platforms like mobile money or bank transfer so that you can generate statements when updating your accounts.
Does your business have employees?
If your business has employees, it is important to specify if they are on contract or permanent terms. Keep a breakdown of the specific amounts: basic pay, bonuses/allowances, deductions and record the net pay for each. Payroll management is key in ensuring payments are in line with the terms of employment.
Every entrepreneur needs to understand the basic principles of accounting and work closely with a qualified accountant for professional guidance. Accounting is a vital department in any organization that when perfected, the focus can fully be on the business’s core work.
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