It’s no secret mastering your accounting is a key component to your business’s success. There are plenty of numbers being used in various ways, and all are equally important. However, these numbers and measures carry a lot of weight, and if a mistake is made it can largely affect your business.
The problem is, you may not even know you are making a mistake in your accounting. Some of these pitfalls are so hidden that you have to intentionally and actively avoid them. To help you know what to look for, we’ve compiled a list of seven hidden pitfalls that can ruin your accounting.
Security Issues
QuickBooks Online is an important tool for many businesses. However, if you don't have the proper security measures in place, you’re running the risk of a breach and potential backup problems.
QuickBooks Online assumes their clients will be operating under the Shared Responsibility Model which is explained in the graphic below:
The model shows that while QuickBooks Online does provide some platform infrastructure and security, the user is responsible for company and client data security. To help clients better combat this issue, Simply Financials has teamed up with Rewind. Rewind protects principally against operator error, sabotage, and information imported into QuickBooks Online software that ends up being wrong. Because there is no ability within QuickBooks Online to do a backup as you can with QuickBooks Desktop, Rewind offers the solution.
Reconciliation
Proper reconciliation sounds like a no-brainer, but a mistake in this area can cause major issues to your business in the long run. Reconciling your account simply means making sure the numbers in your bank account are reflective of the numbers on your general ledger. When these two things don’t match up, it can lead to wrongful charges, missed payments, and unaligned books.
As a side note, you should also be careful to assume bank statements are correct. Keeping track on your own and comparing that to what the bank says, is the best way to ensure your records are aligned and you don’t hit any of the roadblocks that come with a lack of reconciliation.
Equating cash flow with profit
As a business owner, one of the most important aspects of analyzing your finances is knowing how much money you have. To find this number, people typically turn to their cash flow or their profit. However, a common mistake is often made when business owners begin to view cash flow and profit as the same or similar.
While the outcome of these reports sound similar, they tell two different stories. Cash flow shows the money that is flowing in and out of your business during a given time frame. A positive cash flow is an indication of more money coming in than the cost of your expenses. Profit is the money left over after all expenses are paid. One is more fluid and shows growth or decline over time, while the latter is more firm.
It is important to remember that just because your cash flow is positive, there could be long-term expenses or other factors not being taken into account. It’s also possible to have a negative cash flow but a positive profit. Both of these are reasons why it is not ideal to equate cash flow and profit.
Not separating payroll employees and contractors
It is easy to place the people who are working for you into one category. While you may consider both payroll employees and contractors as employees, the IRS views them as two different types of workers.
Typically contractors are outsourced, meaning you do not have to withhold taxes or provide benefits to contractors like you would for employees. This is an appeal for many business owners. However, if you take this route, be sure you separate the contractors from your payroll employees to keep your costs in order. Clumping them can lead to tax issues and negatively affect your cash flow. There is also a possibility of fines if payroll employees and contractors are not properly identified.
Not keeping up with your budget
Your budget is incredibly useful for planning and ensuring your business is on track. Carefully following and keeping up with your budget can prevent you from overspending, can help you track progress in multiple areas of your business, and can act as a guide to help you make needed financial adjustments.
With so many benefits, it is shocking how many businesses don’t rely on their budget more than they do. Simply reviewing your budget each month, or at least each quarter can prevent overspending, misuse of funds, and show you areas where you under/over-budgeted.
Not using a P&L
A P&L is a snapshot of your revenue and expenses during a set period. They are an excellent way to compare previous time frames to determine growth or decline in your business.
Here are a few ways you can mine value from your P&L:
Go beyond monthly or quarterly check-ins
As mentioned above, P&L’s are great for comparing numbers for certain time frames. While businesses typically look at monthly and quarterly numbers, P&L’s can be made for an entire year or for a particular time frame. For example, the time since an employee started compared to the time they weren’t with your business can show you the scope of your employee’s impact.
Identify your fixed and variable costs
Fixed costs occur every month and variable costs are inconsistent and always changing. You can use your P&L to show you where your costs are. If you’re hoping to lower costs, this will provide a great overview as to where you may be able to trim down.
Understand the different types of profitability
Net profit, gross profit, and operating profit all provide different ways of measuring your bottom line. Each shows you where certain areas of your business can improve. All of the numbers needed for the different types of profitability are found in the P&L.
Start thinking about opportunity cost
Your P&L gives you everything you need to decide if the money you’re spending is giving you the most bang for your buck. Once you’ve found the places you can cut spending, you’re then able to begin finding other places to use that money.
Important: Not using your P&L in the ways listed above can lead to a misuse of funds and less awareness of ways you can improve spending.
Not working with an accountant
Working with an accountant is the best way to ensure you are not making any of these common mistakes. They will be able to explain what steps you need to take to correct any flaws in your accounting as well as explain how you can avoid these issues in the future.
If you are searching for an accountant to help you avoid the hidden pitfalls that can ruin your business, turn to Simply Financials. We provided customized accounting and bookkeeping solutions for your business.