Bad financial management has been cited as one of the main causes of small businesses failing in their first 5 years of operation. Many SMEs are making costly bookkeeping mistakes often by simply neglecting to keep them up to date as they go and thus losing track of both their cash flow and overall finances.
This can eventually to them totally losing control of their business and ultimately the business itself which ends up closing, often with a pile of debts. Here are some of the main bookkeeping errors made by those SMEs who have contributed to their own downfall.
Combining Business and Personal Finances
This is one of the fastest ways to make a mess of a business’ finances. Regardless of a company’s size, turnover or profits, personal finances should never mix with a business’ books. All business income should be deposited into a specialist business account, and expenses should never be drawn from personal funds. Employing a part-time accountancy firm to work alongside the business can help owners to device earnings management strategies, which specify how money can be removed from the business and how savings goals can be met. Cash flow, seasonal finance needs and large business expenses will all be considered, bolstering the long-term financial strategy of the business for the future.
Once a month, a business’ books should be reconciled and matched up with a business bank statement. This is a fundamental task that many businesses neglect, and it can not only help to keep on top of the incomings and outgoings, it can also spot the discrepancies most commonly associated with fraud. Accounting errors can also be corrected in a timely manner before they end up causing problems further down the line. If there is simply not enough time to fit these basic duties into a monthly schedule, consider outsourcing this task to an external accountancy service.
It is basic practice within many businesses to keep a certain amount of ‘petty cash’ that can be used to purchase everything from office supplies to vending machine snacks. However, it is very easy to get flippant and frivolous with petty cash. Many businesses get into a mindset where small amounts don’t need to be recorded in an official way. But small amounts add up to larger amounts and if a business isn’t keeping track of its petty cash, it can start to create discrepancies on the books.
The Difference Between Cash Flow and Profit
Cash flow and profit are two entirely different things. A business can be profitable with terrible cash flow, or have positive cash flow and still not be turning a profit. Businesses must not fall into the trap of assuming that just because they have a healthy cash flow, it means that their profits will be healthy too. Employing an experienced accountant to give detailed pictures of the company’s accounts at all times will help those running a business to see the true condition of their organisation.
Not Seeking Help
It can be tempted for so many small businesses to attempt to cut costs and try the DIY method of accounting and bookkeeping. However, without the expertise offered by a professional accountancy firm for small businesses, things can often go awry. Not knowing when to seek the assistance of an expert accountant is one of the leading causes of business failure across the UK; their know-how and experience can help to keep all finances in line and maintain a healthy and steady long-term strategy to prevent failure so soon after start-up.
For more information about accounting for small businesses from Magic Accounts, please visit www.magicaccounts.co.uk