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What common accounting mistakes businesses should avoid

Common errors and accounting mistakes are likely to happen, it may be small and are easy to fix, but some of them can be serious and could hurt your business's finances in a big way.


Over time, bad accounting practices can make your company's financial health look worse than it really is. Repeated accounting mistakes and bad accounting practices can cause your business to go bankrupt or be taken over by the government.


In this article, we'll look at 8 of the most common accounting mistakes made by small businesses and explain how they can cause both small and big problems for your business.



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Here are 8 Common Accounting Mistakes Every Business Should Avoid



1. Assuming profits mean cash flow all the time


You just closed a deal worth $50,000 that will take your business three months to complete. The project will cost your business $20,000 to fund, so you make a $30,000 profit on the deal even though you haven't delivered anything yet.


Big mistake. What happens if the deal takes longer than three months because of a problem that adds another three months? What is the change in your costs that makes the $20,000 estimate wrong?


It's tempting to write down each sale as income when it happens. After all, it's new money for your business. But doing so can make your business look better than it really is and give you a skewed picture of its real health.


2. Not taking bookkeeping seriously enough


Keeping track of everything is the key to good accounting. It's important to make sure that everything, from small transactions to big payments from customers and clients, is recorded and put in the right place in your accounts.

Taking accounting seriously, no matter how small your business is, gives you an accurate, reliable picture of your business's health and lets you know exactly how well (or badly) you've done in a given period.


Setting up a serious bookkeeping and accounting system for your business is the key to keeping it financially stable. This means doing things like correctly categorizing different types of assets and liabilities and checking your books and accounts every month.



3. Not specifying who is an employee and who is a contractor


Is your business run by people? If so, are they part of your business or have you hired them on a contract basis? There is a big difference between an employee and a contractor, and you'll need to take that into account.

It's important for your business to know the difference between an employee and a contractor, as well as what this means in terms of accounting, so that it doesn't make mistakes when keeping its books.



4. Doing all of your own accounting


Do you do all of your accounting and bookkeeping on your own? When you run a very small business with not much money coming in, it can be tempting to do your own accounting to save money.


Taking care of your accounting yourself might seem like a great way to save money, but it could actually be costing your business money. Getting an accountant will cost you more than doing your own books, but it will also save you money.


When you do all of your own accounting, you miss out on ways to save money, like tax deductions you didn't know about or mistakes that are hard to spot but easy for an expert to spot.



5. Not matching up the books with the bank accounts


It's important that your business does account reconciliations often. Reconciling is the process of making sure that the account balance on your books matches the real balance in your bank account.


Small costs and expenses that you might not think about at the time might not always get written down. Reconciling your accounts, from your business's cash in the bank to its accounts payable, lets you keep a close eye on its finances.


Small businesses should always reconcile their books at the end of every month to make sure that all of their transactions are recorded correctly and that their books don't get out of sync with how their accounts are really doing.


6. Forgetting to record small transactions


How do you handle small transactions in your business? It's easy to think that small cash transactions don't matter, but it's important for your business to keep track of everything it spends, no matter how small.


This is especially important in stores where a lot of transactions are done with cash. Even if the cost is small, it's important to keep track of small transactions like paying for a letter to be sent by mail.


If you keep up with the small transactions, it will be much easier to handle the big ones. If you keep track of small transactions, it will be easy to keep track of your books as your business grows and the number of transactions goes up.



7. You don't communicate to your bookkeeper enough


Does your bookkeeper know how your business is doing? It's important for your business to keep track of all of its transactions, and it's even more important for bookkeeping to understand what these transactions are.

Small mistakes, like buying products or services, especially ones with monthly costs that you don't tell your bookkeeper about, can lead to big problems and a lot of extra work in the future.

As well as talking to your bookkeeper clearly, keeping a paper record of all of your transactions, whether they are digital or not, makes it easier to keep track of all of your income and expenses.


7. Not assigning each project a clear budget


Does your business start projects without a clear budget for each one? If you start a project without knowing how much it might cost your business, it's easy to end up spending a lot more than you planned.


If you don't make a good budget, it will be hard to stop a project that has cost your company more than it should have. This can cause your company to spend its limited funds on projects that won't bring a return on investment.


As your business grows, you'll know how much it costs to keep it going. This makes it easy to set budgets for projects that are big enough to make success possible but not too big or wasteful.


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Save yourself the hassle and avoid potential mistakes by hiring a professional accountant instead of tackling everything on your own.


For any assistance do not hesitate to reach out to us at info@lyndengroup.com.au or dial (03) 8548 1843.

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