Accounting Mistakes That Could Sink Your Business
Owning and operating a business can come with a steep learning curve, even if you have a degree or experience in the field. The hope is that you will learn quickly as you go so that you can manage your professional affairs adequately in order to keep your company afloat and eventually become a great success. However, there are a few major accounting errors that could derail the entire process. Here are some to watch out for.
- No budget. Operating without a budget is a big no-no in business. If you’re not tracking money coming and going you may as well be playing roulette with your finances. At the very least you’re probably suffering from waste, and at the worst you could find yourself facing a virtual firing squad if the IRS audits you.
- Mingling expenses. No, we’re not talking about the cost of wining and dining potential clients (which is a totally acceptable expense that shouldn’t get you into trouble as long as you avoid the Cristal and caviar). When you use your business accounts for personal expenses and vice versa you can get into some serious trouble, not only with managing your money, but also with the IRS. Such spending habits could lead to an audit and some hefty fines. So your best bet is to simply keep your personal and professional finances separate in order to avoid messy accounts and potential problems at tax time.
- Outdated software. You might not want to shell out for upgrades to your software every year since it can be a pretty pricy affair. But when you allow your system to become too outdated you will start to have problems interfacing with other software, which can lead to difficulties dealing with vendors, lenders, customers, and so on, and even end in file corruption. Luckily, there are a couple of solutions. For one thing, you don’t necessarily have to update your software annually, especially if you only use the basic features. Every two years is probably sufficient. Always compare accounting software features to find the best natural fit for your business needs. Further, you might want to look into open source software alternatives, which are free and may be upgraded frequently.
- Inadequate security. The average firewall might be enough for home use, but considering some of the sensitive data generated by your business, especially in the arena of accounting, you should definitely arrange for a suitable firewall, antivirus program, and possibly even encryption software to make sure that sensitive information (for both you and your clients) doesn’t fall into the wrong hands. A breach of this sort could not only lead to accounts being compromised; it could also land you in court facing costly lawsuits.
- Human error. This can account for so many mistakes in business, but your main area of concern should be payments, since this is where your company info can be seriously and detrimentally compromised. For example, suppose you use a payroll system to process payments, but your employees also write checks to pay bills. If they enter the bill into the payroll system but then pay the vendor via check, the payroll system will not see the payment and it may auto-generate a check or at least show the bill as still owing. This could lead to a major financial crisis if it goes unnoticed. And this is only one of many issues that could result from human error. However, many such problems can be negated by having a comprehensive policy for operations in place when it comes to accounting practices, as well as a system of checks and balances to catch simple data entry errors.