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As an entrepreneur, your overall goal is success.
And more specifically, financial success.
But financial success cannot be achieved when your company fails to handle its accounting paperwork, or handle it properly.
Ninety percent of small businesses that fail do so because of poor cash flow, the result of bookkeeping mistakes and mismanagement.
Having sound financial management is a key to a successful business. Here are four common bookkeeping mistakes you should avoid:
1. Using the Wrong Accounting Methods
There are two methods that are most popular for accounting: cash and accrual. Cash accounting is a simpler method because it is based on the physical flow of cash into and out of a business. This method is often used by sole proprietors. Accrual accounting records the income and expenses as soon as they occur, regardless of whether cash changed hands. As businesses become more complex, they often make the jump to accrual because it can accurately match expenses and revenue.
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2. Combining Personal and Business Finances
Another mistake made is combining personal finances and business finances, whether on purpose or accident. This is a common mistake made by small businesses starting off, but it is a costly one. Personal and business finances should be viewed as religion and politics: the two should never mix. Regardless of whether your business starts out with one person or one hundred people, it is imperative that personal and business finances remain separate at all times. That is why new business owners, even sole proprietors, need to open a business bank account immediately upon starting the company and ensure all business income is deposited into that account. With the help of an accountant, entrepreneurs can devise a strategy for earnings management that dictates how cash can be removed from the business account to meet expenses and investment goals. The earnings in this management strategy are drive by things such as timing of payments for your company expenses, cyclical cash flow needs, and how much of the company profits should be re-invested into the company.
3. Not Conducting Basic Account Reconciliation
Reconciling business account books with bank statements each month is one of the fundamental jobs of an accountant. If you are not equipped to do it yourself, then you absolutely must hire a professional to handle it. This process is relatively simple in theory: you compare your company books with your monthly statements and ensure that discrepancies do not arise. If there are any discrepancies you must contact the bank immediately in order to rectify it. Doing this monthly will ensure that any accounting errors are caught immediately and resolved before they grow into an even bigger financial problem for the company.
4. Not Understanding the Difference between Cash Flow and Profits
Businesses can have positive cash flow, for the short term, and still not turn a profit. On the other hand, a business can have a negative cash flow, for the short term, and be profitable in the long haul. The first example takes place when businesses pay suppliers prior to receiving payment from their customers and the second example often takes place with cash-based businesses that pay vendors on terms. It is important to know the difference between these two and handle them accordingly.
So in conclusion, all of these mistakes can be avoided when you hire a virtual accounting service to handle all of your bookkeeping needs. With Xero certified bookkeepers using the newest accounting software, you can rest assured that all of your monthly bookkeeping needs will be met.
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