How to avoid common accounting pitfalls

Why is this important?

Accounting is a critical business function whether you’re a start-up with less than 5 employees or a fully-fledged, growing business with more than 20 employees.

A common practice of most entrepreneurs when starting out with their own business is to wear different hats – including the bookkeeping hat. But since not everyone is skilled in, or keen on bookkeeping, several mistakes are made along the way, many of which turn out to be costly.

Sound bookkeeping practices are crucial for your business. They tell you the complete picture as to whether you are actually profitable or not

What to do

Bookkeeping doesn’t need to be a tedious and painful process. By avoiding the common pitfalls you can have a growing business without the usual stress associated with bookkeeping, and you will avoid falling in to the common accounting pitfalls most start-up entrepreneurs encounter:

1.    Keep personal and business finances separate

Your business is a separate entity from yourself – even if you are the sole owner of it. It is not a good practice to mix your business funds with your personal ones. What your business earns does not automatically translate to your personal earnings, and your personal expenses do not automatically qualify as your business’ expenses.

Regardless of the size of your business it is critical that personal and business finances are kept separate at all times.

Tip: Open a separate bank account for your business even before you start it, and use it for all the financial transactions of your business. All business income must go to this account and all business expenses must be charged to this account.

2. Receive a salary from the business

If you grasp the concept that your business is a separate entity from yourself, then it makes more sense that you should be paid a salary for the time you dedicate to it. Regardless of whatever job you do in your business, you must assign a monetary value for your efforts in running it. Unfortunately, many entrepreneurs fail to associate a monetary value to their time and energy, thinking that when the business profits, they profit too. But this is a crucial mistake. By paying yourself a fixed salary, you will get a clearer picture of whether your business is actually profitable or not. 

Tip: Determine your desired salary from the business commensurate to the time and effort you put in. Pay yourself monthly with this amount, moving it from your business funds to your personal funds.

2.    Understand the difference between profit and cash flow

Most small business owners make the costly mistake of not knowing the difference between cash flow and profit. Just because your business’ bank account has a lot of cash doesn’t mean your business is profitable. In fact, you may actually be on the verge of bankruptcy!

Cash flow pertains to the money flowing in and out of the business from financial activities, investments and other operations. Profit is what remains from the sales revenue after a company’s expenses are subtracted.

Tip: Always keep track of your expenses versus your sales. It is best to review your financial statements monthly to get a clearer picture of the exact situation of your business.

 3. Delegate to the experts

Entrepreneurs take pride in what they do. Their passion for their business is limitless and they can carry on wearing many hats at once, including the bookkeeping hat. However, accounting is a technical and complex process. It involves knowing countless taxation compliance rules and the process can be very time consuming. Although it might cost more at first, the money spent on a trained accountant will come back many times over in the form of time savings and costly mistakes avoided.

Tip: As a business owner, your time is valuable and your business needs your full attention for it to grow. The time you spend taking care of your own records and trying to figure out how to make sense of everything can be better-spent forging new networks or improving your product or service.

Source: David Hayes – Australian Business Development Manager – Vertaccount

Editor: Charisse Gray

Where to go for help

Vertaccount are an accounting and bookkeeping firm - trusted by over 200 clients, processing over 12,000 bills annually and managing $70 million in revenues - who partner with small and medium business in all aspects of their financial management, bringing success to their business and value to their lives. 

Phone: 02 8599 1760