The idea of starting your own business can be liberating, yet notoriously risky. There are so many things to consider when you first start out. It may be tempting to treat accounting as a low priority in the early stages, however, this would be a big mistake.

Good accounting is crucial to the financial health of your business. Mistakes can be devastating, especially in the early days. It is important to know which mistakes to avoid to ensure your small business thrives in the years ahead.

1. Poor Bookkeeping

New business owners are often overwhelmed and see bookkeeping as a time-consuming chore. They tend to neglect this vital component of their business' ‘well being’. Underestimating the importance of maintaining accurate, up-to-date information means they are missing out on the most valuable tool at their disposal to help them make the right business decisions at the right time.

Meticulous bookkeeping allows business owners to spot trends, understand their spending and examine which practices generate the largest return on investment (ROI).

Staying on top of your finances allows you to stay one step ahead and put out fires before they start.

2. Confusing Cash Flow and Profit

Many a small business owner thinks cash equals profit, however, this is not the case.

$200,000 of sales revenue might sound great. However, if you need to spend $150,000 on stock purchases, payroll, rent, insurance and IT, your profit drops to $50,000. On top of this, you need to pay income tax which means your net profit after tax will be even less.

Not only is it critical to understand how much money is coming into your business, it is just as important to know how much is going out. Focusing on revenue alone is a common mistake that new business owners make. It is important to stay grounded and know how much you are really making so that you don’t overcommit.

3. Using Outdated Practices

As a business owner in the 21st century, your accounting practices should reflect current day practices. Online accounting and bookkeeping software applications are faster, easier and dramatically more efficient than the manual cashbook and spreadsheet system.

Online accounting software is easy to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means you are much less likely to make mistakes when it comes to financial reporting and tax compliance. It also reduces the risk of making poor business decisions due to inaccurate information.

With this type of software, you won’t have to spend hours updating and organising your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. It may be more expensive than the do it yourself (DIY) approach in the beginning, however, using online software will save you many hours in the long term.

It is important to remember the accuracy of your accounting records is only as good as the quality of information entered into your accounting software.

4. DIY Accounting 

Accounting is complicated. There is a reason why it takes years for a professional accountant to become fully qualified. Trying to manage your accounts all by yourself is a sure-fire way to waste time and add to the stress and responsibilities you take on as a business owner.

Unless you have extensive financial knowledge, it is unlikely you will be able to save a significant amount of money when it comes to tax time.

Furthermore, you could face penalties for making even a minor mistake with your tax obligations. This could lead to financial problems and place your business and personal reputation at risk.

Summary

Your bookkeeping numbers feed into all your financial systems and reports. It simply must be accurate because any decisions made on inaccurate data undermine your goals and chances of success.

Many an organisation has failed because they simply did not invest enough time to ensure their financials were in order. Every aspect of your bookkeeping offers insights into your business health and provides opportunities to improve efficiencies across all areas of operation.

The Bonitas team considers your accounting the eyes and ears of your business, using bookkeeping to create a strong foundation for sound business decision-making focused on success.