Are bookkeeping errors (or errors of accounting management which doesn’t use a proper financial management system) catastrophic or not?

Are bookkeeping errors (or errors of accounting management which doesn’t use a proper financial management system) catastrophic or not?

discover | Thursday - 20 / 06 / 2024 - 8:09 am

Compared to large companies, small business owners have fewer resources at their disposal. This often means that they face numerous accounting challenges, particularly those related to bookkeeping.

Why bookkeeping specifically? Reply is as follows:

At first glance, it may seem like a simple matter, especially if you are familiar with best bookkeeping practices. But here is the unfortunate truth: there is a high likelihood of errors occurring, and some of these errors can be enough to destroy the success of your company!

Red flags that confirm the negative aspects of what is called “bookkeeping”:

Failure to Obtain Bank Financing:

This issue arises when financial records are not maintained properly, leading to an inability to provide the information required by banks. Additionally, due to a lack of financial clarity, your accountants may submit applications to multiple branches or fail to grasp the application instructions for obtaining financing or a loan.

Payroll Errors:

Accurately preparing payroll is one of the fundamental tasks of accounting management within companies. If you notice any shortcomings in this matter within your company, this is a clear indication of a problem with “bookkeeping”.

Recurring end-of-month closing issues:

These issues are particularly concerning when they occur regularly and manifest as errors in payroll, mixed expenses, unreconciled accounts, and other areas. Such recurring problems are a clear indication of deficiencies in so called “bookkeeping”.

Delayed Monthly Financial Reports:

When the late updating of financial data becomes part of your company’s bookkeeping practices, all your financial decisions will suffer due to the lack of financial data when it is needed.

Bookkeeping Management Loopholes That Can Cripple Your Entire Company!

A thorough understanding of a business’s financial health is the only way for any business owner to maintain a healthy cash flow. This understanding can only be achieved through accurate and up-to-date financial records. For this reason, we recommend paying attention to the following common bookkeeping problems:

Overlooking Small Purchases:

Business owners make sure to keep a record of every transaction, but they often neglect to record small purchases in their books. However, did you know that small purchases like new stationery or file cabinets can add up to a significant amount? … That’s why you shouldn’t treat small business expenses as personal expenses. Instead, keep a record of them and mark them down in your accounting books on the same day of the transaction. This will save you a lot of headaches down the road when it comes to your balance sheet.

Neglecting to Track Expenses Due:

These are expenses that you incur on behalf of your client. Since they are “deferred” expenses, business owners often forget to record them or set reminders in their records.

However, just like other expenses, these expenses must be reimbursed to the accounting books. Failure to do so can result in a loss of money. It may also contribute to your ineligibility for tax breaks. So, instead of ignoring these expenses, use a financial management system that allows you to track these expenses as they accrue. This will ensure that you are on the right track in case of a financial audit, and you can effectively monitor the financial health of your company.

Employee Misclassification:

Managing the different classifications of employees working on various projects is a common challenge faced by business owners, particularly in the real estate industry. The problem lies in the fact that misclassifying employees can expose you to legal troubles and even lead to tax penalties!

Don’t let this happen to you! Ensure accurate employee classification and sorting by implementing a reliable self-service system.

Neglecting Reconciliations:

Reconciling your accounts according to the latest bank statement is a crucial task that you must ensure you perform every month to gain insights into your financial health. It’s essential to do this accurately and consistently.

Through regular reconciliation, you’ll be able to determine the amount of money you have available at any given time. It will also allow you to detect any errors made by the bank before they become significant hurdles in your financial plan.

The Lack of Adequate Backups:

Cloud-based Enterprise Resource Planning (ERP) systems have made it easier for business owners to go paperless. These cloud systems have also made it easier for them to access their businesses from anywhere in the world. Data is now available 24/7, and there is no need to keep a paper copy of every aspect of your business.

However, there are some problems that you can run into if you decide to go completely paperless. For starters, technical errors occur frequently, and you could end up losing all of your records if this happens. In some scenarios, tax authorities also prefer to have a paper audit of all of your transactions.

While using ERP systems seems like the easier way to go, it is still necessary to keep a paper backup for at least 7 years.

Sales Tax Mismanagement:

With the rise of e-commerce, sales tax has become a complex issue for many small business owners. Initially, the only mistake was failing to deduct sales tax from the total sales amount (which would lead to a big surprise at tax time). However, with recent changes to digital sales tax rules, collecting taxes has become more complicated.

If your team includes a professional accountant, they will undoubtedly have up-to-date information on sales tax changes and will be able to guide you best. However, if you plan to handle the situation yourself, make sure you know the rules and then deal with the sales tax system to ensure compliance.

Mixing Personal and Business Accounts:

Many business owners make the grave mistake of not distinguishing between their personal and business finances. However, blurring the lines between the owner’s money and the company’s funds is the worst possible path for any business.

When personal and business accounts are mixed together, it becomes incredibly difficult to reconcile them for tax deductions and bank statements. Moreover, the business owner may end up using company funds to cover personal emergencies. Ultimately, this commingling will lead to significant issues for the company’s financial structure down the line.

Cash Flow Problems:

Numerous factors can contribute to cash flow issues. These include excessive receivables and loans, inaccurate sales targets, and a disregard for financial data. The person responsible for bookkeeping should be able to identify these problems and work towards finding solutions. Naturally, if an unqualified person is handling the accounts, they may overlook issues and even opportunities. Having adequate cash flow is essential for small business owners and their success. A lack of cash flow can lead to a company’s demise at any time.

Procrastination in Bookkeeping:

Bookkeeping is not an enjoyable part of any business venture. In fact, it can be a tedious task that many individuals try to avoid. However, it is essential to try to avoid it regularly and without delay. This will help keep your business records straight and will make you prepared for any potential risks that may arise in your financial data.

In Conclusion:

Businesses of all sizes need to exercise extra caution when it comes to bookkeeping, as many end up losing money due to seemingly small mistakes. Many of these issues can be avoided by using a system that helps you maintain regular bookkeeping practices.

Investing in a financial management system may seem like an additional expense. However, the long-term benefits will far outweigh the costs.