Accounting is a necessary function within any business type. Efficient accounting helps business owners ensure they can pay their staff, cover overhead costs, satisfy their customers, and invest in the growth and development of their company. When accounting is not done correctly, however, it can quickly lead to the demise of an organization. Whether you frequently consult with an accountant or do bookkeeping on your own, there is always the potential for a mistake.

Below we’ll discuss a few common accounting mistakes made by small business owners and ways to avoid them in the future:

1. Data Entry Errors

With accounting, numbers are everything. Placing a number, decimal point, or comma in the wrong place could throw things completely out of whack. Even a simple mistake such as transposing numbers within a budget can throw you off for some time to come.

Prevention: The best way to prevent or minimize the potential of this happening within your organization would be to double check all entries to ensure they’re correct. Reconciling your accounts with your bank statements every month is another solution. Last but certainly not least, remember to create digital copies of all financial documents and receipts to cross-reference later on.

2. Payables and Receivables Gaps

Accounts payable essentially are accounts that you’re responsible to pay (vendors, lenders, service providers, etc.), whereas accounts receivable are accounts or funds that you intend to receive (customer invoices). Many small business owners don’t take the time to align their accounts payable payment terms with their receivables. This leads to unbalanced books and the potential to fall into debt.

Prevention: Review the repayment terms you’ve agreed to with your vendors, lenders, or service providers and compare it to the terms you have set up with your customers. The idea is to ensure that you actually have money in your accounts receivable to pay the outstanding accounts payable balance. For instance, if you’re expected to pay your vendors within 30 days but you’ve given your customers 60 days to pay you, then you need to consider renegotiating terms in the future so that the accounts align.

3. Not Having an Iron Clad Invoicing System

Sending a bill in the mail and crossing your fingers that your customer will pay it on time is inefficient and can leave you penniless. Many small business owners generate invoices, but do not set up stipulations, terms, and agreements that their customers are to oblige by. As a result, customers pay the balance if and when they see fit, leaving businesses scrounging for other sources to generate cash flow.

Prevention: The best form of prevention would be to establish clear guidelines and repayment terms that your customer must review and agree to prior to you providing the product or service. You should also have an invoicing system in place that will send out reminders, provide them with efficient methods of payment, and so on. However, in the event that your customers are simply dragging their feet, small business factoring is another solution that could help you to maintain cash flow when funds are low.

4. Giving Financial Control to One Person

It’s understandable that a small business owner on a tight budget would opt to complete accounting themselves or assign one person to complete in-house. Though this may be feasible in the beginning, it can lead to issues down the line. When one person is managing the accounts, it leaves a lot of room for human errors, fraud, and/or theft.

Prevention: To prevent this from happening in your business it is imperative to have several people assigned to accounting tasks. Whether this means you complete the tasks and have another key person to double check, or you delegate responsibilities to more than one employee, it is imperative to have more than one set of eyes.

5. Failure to Specify Employees From Contractors

There is a fine line between employees and contractors and if you’re not careful you could run into serious accounting issues. Unlike employees who are entitled to employer benefits and so forth, contractors are supposed to be responsible for their own taxes, medical expenses, and whatever else is necessary to carry out the job. When it comes time for you to file company taxes, if you don’t have a clear understanding of who your employees are and who your contractors are, you could risk being audited or owing more money in taxes.

Prevention: Learn the differences between employees and contractors from an accounting standpoint. Once you have, it is important for you to establish clear guidelines in your contracts and employee applications so that the distinction is easy to identify.

Accounting is a very specialized area of business that requires attention to detail and a certain level of skill. While many business owners have completed accounting on their own or have someone on the payroll to complete the accounting for them, it is important to pay attention to the risks. By utilizing each of these prevention tips and working with an accountant on a regular basis, your company finances will improve.