Accounting problems can have serious consequences for your business and are definitely worth avoiding. Here we outline six ways to solve the majority of your accounting issues.
1. Know the difference between profit and cash flow
If you’re a new business owner, it can be easy to spend money on growing your business rather than earning that money back again in profits. You may have a profitable business, but it can still become bankrupt by having all its money tied-up in assets, leaving you unable to pay its expenses.
The problem with growing too quickly is that you can end up in a lot of debt and with very little cash flow, even though your business may be making solid profits. You can only stay afloat using loans, credit cards and lines of credit for so long.
In order to avoid this situation, it’s important to understand the difference between profit and cash flow. Your profit is what you’ll be taxed on at the end of the financial year, whereas your cash flow is what’s actually in your bank (each month) as money comes in and goes out of your business.
It can be easy (particularly for a new business owner) to make a profit but have issues with cash flow. Keep track of what you’re spending and selling. You might have bought too much stock, drawn out too much money, or paid cash for assets that depreciate. Take a thorough look at your books before taking on expansion plans that could put your business at excessive risk.
2. Understand the impact of purchasing assets
If you decide to buy assets like machinery or office equipment with cash, it will reduce your cash reserves. And by doing so, you might be placing your business at risk.
You also won’t be able to claim the whole cost of the asset as an expense. Leasing could be a better option as it spreads the cost over time, meaning your cash lasts longer rather than being spent in one hit.
When you decide to make a major business purchase, such as a new vehicle, also think about taking out a short-term loan.
3. Take your bookkeeping seriously
As a small business owner, it’s vital you record and structure everything correctly when keeping the books.
For your sake, your accountant’s sanity, and to satisfy the tax department, you’ll want to build an accurate and reliable picture of your business’s health. Not only are there laws to be met, but you’ll be able to determine how well (or how poorly) your business performed over a certain period.
The advantages of keeping your books clean and up-to-date include:
- Paying your bills on time and gaining a good credit score.
- Less chance of becoming a victim of fraud – because you’ll be able to keep a close eye on stock levels and help prevent staff theft.
- Saving money – if your accounts are accurate when you meet your accountant at the end of the year.
These days, many small business owners use online accounting software like Receipt Bank to keep an electronic record of their receipts and invoices in the cloud. Take a look at the online accounting options that could enhance your bookkeeping accuracy.
4. Reconcile accounts with your bank feed
To reduce the chance of inaccuracies, it’s important you reconcile your business’s accounts with your bank feed regularly.
As a small business owner, online accounting software can be vitally helpful when it comes to reconciling your accounts. An online banking feed will help you ensure all transactions are accounted for. Reconciling accurately can save your business time and money.
Going through this process on a fairly regular basis will help you track your business’s financial situation. After all, with your mind mainly focused on the day-to-day running of your business, it’s possible that smaller expenses could get forgotten and go unrecorded.
5. Keep up-to-date with your accounting records
Keeping accurate records of all your business’s transactions (even the seemingly insignificant ones) is essential to running a successful business. Assigning a few minutes a day to sorting your invoices and receipts will help you avoid having to untangle a web of neglected records come tax time.
By staying on top of your smaller transactions, it will be a lot easier to manage the larger ones. You’ll be able to consistently manage your books and continue growing your business in confidence as the numbers of transactions increase.
6. Separate your business expenses from your personal ones
One of the most widespread accounting errors involves mixing up personal and business expenses. Keeping all your business finances in one place will make tax time much more bearable.
Ideally, you’ll want to be able to browse your business’s accounts at the end of each month and be sure no personal expenses are included. Some methods you can put in place to achieve this are:
- Using an online invoicing and billing system – where you can access the data from anywhere and record purchases with your phone while on the go.
- Getting a dedicated business credit card – to ensure all relevant purchases can easily be accounted for.
If you do get a business credit card, just remember to only use it for work expenses.
These six tips can go a long way to solving typical accounting problems. Keep on top of your records, reconcile often, and ensure your personal expenses are separate from your business ones.
- Talk to your accountant about how you’re going about record keeping.
- Speak to your bank manager about opening up a business bank account.