A business is as good as the accounting practices it follows. If your business doesn’t have solid accounting rules, you will likely end up in debt soon. Bad accounting practices are known to create issues with cash flow. If you are not careful, you could be running a business that has no idea where its money is coming from and how exactly it is being spent.
Here are some common accounting mistakes you should avoid at all costs.
Considering cash flow as profit or vice versa
This accounting problem has more to do with your mindset than how to write your accounting books. Even some of the more enthusiastic entrepreneurs and experienced bookkeepers fall for this trap. Just because your company has profits, doesn’t mean your cash flow will increase. Also, just because your cash flow looks good, doesn’t mean your company is in great health.
If your company has recently received a new project that will bring in $30,000 profits, make way for this profit in your books but don’t get excited that you suddenly have cash flow. Maybe you take two months to finish that project. That money won’t be in your hands till the project is finished, so your cash flow won’t increase automatically just by landing a project.
Sometimes, businesses depend on funding and loans to get the cash they require to function. However, it is easy for business owners and bookkeepers to believe that their business has a lot of cash and spend it recklessly. Avoid doing this and keep your business finance in great health.
Not performing bank reconciliation
These days, accounting software and bank accounts are always linked together, which makes accounting simpler. However, this doesn’t mean that you shouldn’t perform a bank reconciliation manually too. Oftentimes, businesses lose their money simply because they rely too much on automated information. Your bank account could fall victim to this accounting practice.
Always ensure that you tally your bank statement against your own ledger every month. This will help you avoiding any leaks and even detect a scam right at the beginning.
Every project needs a budget
Whether you have started working for a new client or hosting an office Christmas party, you should create a budget for everything. A project that starts without a reliable budget is bound to create problems for you.
A business’ cash flow could be compromised when budgets are not made or followed. Therefore, it is essential to ensure that you know potential expenses in advance. When you create a budget, you create a better way to manage resources in your organization. This becomes a part of your work culture. If nothing else, at least cash flow problems can be tackled at the core.
The more you understand the value of good bookkeeping, the better it will be for you to handle your business finances. Remember, you have to record every single dollar that goes in and out of your business. Prudence helps you a lot.
What are you waiting for? Follow these tips and give your accounting books a makeover.
I set this blog up a couple of years ago now as a way to share my experience that I’ve gained through my school education and my real life education. It sounds geeky, but the economy is something that I’m really passionate about and it’s something that I am actually pretty talented in, so it’s great for me to share these experiences with those that may be struggling a little bit with finance and figuring out how to navigate the economy.