7 common accounting practices you should stop using for your business

The number one thing you should get help with when starting a business is setting up financial systems, according to a recent QuickBooks survey of 965 seasoned small business owners. They recommend bringing in an expert to ensure your systems are set up correctly and efficiently from the start.

And yet, more than a third of future business owners (38%) who plan to start a business in the next year say they’ll be setting up their financial systems on their own. Without expert input. Another 9% aren’t sure whether they’ll be asking for help or not.

But current business owners warn that accounting mistakes stemming from improper financial systems can have a negative impact on your business:

  • Correcting accounting errors is time-consuming. Common accounting mistakes can be avoided, if you have better systems in place.
  • Accounting errors may result in interest costs, penalties and fines. If you submit a tax return to the IRS that isn’t correct, it may cost you.
  • Stakeholders, including investors, creditors and regulators, rely on the accuracy of your financial statements. If the financial data isn’t accurate, stakeholders will lose confidence in your business.

Most importantly, you can’t make informed business decisions if your accounting system produces bad data. You can’t evaluate the financial health of your business if your financial systems aren’t operating correctly, and that can have serious consequences.

So make the effort to improve your accounting procedures and get your financial systems right from the start. Here are seven common accounting mistakes (posturing as accounting best practices), and how you can fix them.

Small business accounting starts with the chart of accounts.

#1: Not updating the chart of accounts

The chart of accounts is the listing of each account and the description, and many businesses don’t create enough account categories to produce meaningful accounting reports. If you don’t frequently review and update your chart of accounts, you’ll produce inaccurate accounting records.

Assume, for example, that you operate a hardware store using seven departments. Each of your accounts can have a subaccount for each department. If company-wide revenue is account #5000, for example, the revenue outdoor department can be account #5100, and the revenue lumber department can be account #5200.

Using subaccounts allows you to generate relevant financial reports by department, which helps your firm manage profit and expenses at a more specific level.

Keep your chart of accounts updated. Accounting software is a great tool to streamline your accounting methods and do more work in less time.

#2: Not using technology for accounting tasks

Accounting software has a number of features that make life easier for an accounting professional:

  • The software reduces the risk of data entry errors. If you try to post an accounting entry that is not in balance, the software will give you an error message.
  • You can link your accounting software to your bank account and your credit card accounts. Accountants can upload a bank statement into the software, and perform the bank reconciliation in far less time.
  • A bookkeeper can scan receipts into the accounting software, which eliminates the need to keep paper files. You can also scan receipts using a mobile device.

Use accounting software for your bookkeeping and accounting tasks, and minimize the use of spreadsheets.

Why spreadsheets are a bad idea

Using spreadsheets requires far more time, and the risk of error is much higher. Here’s why:

  • Spreadsheet tabs may not be properly linked.
  • You may not use the current version of a particular spreadsheet.
  • Spreadsheets can’t be integrated with bank statements, credit card reporting or payroll records.
  • Training is more difficult because using spreadsheets requires more steps and input work.

As your business grows, the number of small transactions increases, and so does your accounting work. If you’re posting more transactions each month, spreadsheet data entry makes accounting more difficult.

Technology can also improve your invoicing process.

Automated invoicing

You need timely payments from your customers, in order to maintain positive cash flow in your business. One way to improve your business finances is to automate your invoicing process.

Most of the invoice data for repeat customers stays the same, and using technology for automation can sharply reduce the processing time.

You can use the QuickBooks to set up recurring invoices for clients who place the same orders each month. The invoicing application will fill in the customer’s name, billing address and email address when the client’s name is typed into an invoice template. The template will also input products and services, based on the customer’s last order.

Once the template loads, you can verify that the customer information is the same, and make adjustments to the items and amounts listed on the invoice.

Mistakes happen when you fall behind. You get a big week of customer orders and new business, but you don’t get to that bank reconciliation. If your company is growing and you can’t keep up, hire people to help you with your business needs.

#3: Working without qualified accounting staff

The people responsible for managing your accounting process will change dramatically as your company grows.

When a business is formed, the owner may take on all the accounting responsibilities. As the number of accounting transactions increases, the owner typically hires a bookkeeper and keeps responsibility for the accountant’s role.

Finally, company growth may require the owner to hire a CPA to build out an accounting department or supervise the bookkeeper and take on the other accounting tasks.

Here are the differences between the bookkeeping role and the responsibilities assigned to an accountant:

Bookkeeping responsibilities

Bookkeeping refers to the recording of financial transactions in an accounting system. Business owners hire bookkeepers to post customer sales transactions, inventory purchases and business expenses into the accounting software. Using the services of a bookkeeper frees up the owner’s time for more important tasks.

Accountant’s role

An accountant can use the transactions prepared by a bookkeeper, along with payroll data and other records, to generate monthly financial statements, including the balance sheet and income statement.

Accountants use their higher level of training to make decisions and judgment calls that bookkeepers don’t address:

  • Transaction review: The accountant reviews the bookkeeper’s work, and your accountant may take responsibility for posting more complicated transactions.
  • Adjustments: Accountants post the adjusting entries for depreciation expense, interest earned on bank balances and other transactions.
  • Financial statements: The accountant generates the balance sheet and income statement, along with any other reports that management uses to make decisions.

As your business grows, you may be hesitant to hire an in-house bookkeeper. It’s a common small business problem because hiring a full-time employee is a big expense. Make this necessary investment in order to grow your business.

If you take charge of your accounting, you can put better controls in place to prevent fraud.

#4: Not segregating duties

You can reduce the risk of theft by segregating duties between different employees.

Now, this should make logical sense: the less responsibility any one worker has, the less likely it is that theft can occur. Let’s think about your company’s cash account as an example.

Whenever possible, these three specific duties should be kept separate:

  • Custody of assets: The person who has physical custody of the checkbook should not have any other duties related to cash processing. Let’s assume that the administrative assistant has the checkbook in his desk.
  • Authority: Who has authority to sign a check? If you own a restaurant, for example, your manager may have authority to sign checks for purchases of food received at the restaurant. That same manager should not have access to the company checkbook.
  • Recordkeeping: This duty refers to posting accounting entries and reconciling the bank account. The role of the accountant must be segregated from the other duties, and the accountant should never have the ability to sign checks.

If you use a petty cash account, you need to monitor the account balance closely to prevent theft. Accounts receivable is another account that presents a risk of theft.

For a very small business, it may not be possible to segregate these duties. Maybe the owner handles two, or even all three, of these tasks. A growing business, however, needs to separate these duties. Consistent internal auditing helps prevent theft.

Payroll is often the most time-consuming task for a business.

#5: Not outsourcing payroll processing

Outsource the payroll function to free up your time and ensure that the process goes smoothly.

Five steps for payroll processing

A small business must complete five steps to calculate payroll tax obligations and submit tax payments:

  1. Data collection: When an employee is hired, you need to collect withholding tax information on Form W-4. Employers must withhold federal income tax, and may withhold dollars to pay for company-provided benefits. If, for example, you offer a retirement plan, a worker may want payroll dollars withheld and invested in the plan.
  2. Calculating net pay: The net amount of employee pay is the gross pay less tax withholdings, less any benefit payment withholdings. You’ll also calculate withholdings for Medicare tax and Social Security tax.
  3. Payments: You must pay the employee’s wages by check, or via direct deposit to a bank account.
  4. Reporting: A tax filing for federal tax and state tax withholdings must be submitted to the IRS and the state department of revenue. Retirement plan contributions, state unemployment payments, Medicare taxes and Social Security taxes are reported to other entities.
  5. Withholding payments: All of the tax and benefit payments must be forwarded to the taxing authorities, retirement plan firms and other benefits providers.

Keep in mind that your business must address changes to payroll, which complicates the process and requires more time. Tax laws may also change the amount of taxes you must withhold from pay.

Every year, employees may be added, promoted or let go. Workers also may change the tax and benefit withholdings, based on salary changes or family changes. The tax due for a particular employee can change frequently over time.

Outsource the payroll process to a third-party firm. A payroll company can make adjustments for changes in the tax law, and add or subtract employees, as needed.

All of your accounting processes should be documented in a manual.

#6: Operating without a procedures manual

Every routine task you perform should be documented in a procedures manual.

Your manual should list each routine task, how the task is performed and who is responsible for completing the work. A procedures manual clarifies how you do business, and reduces confusion about your operation. The manual is also a great training tool for your staff.

Finally, every business should operate using a budget.

#7: Starting the fiscal year without a budget

This may be the toughest habit to change.

Savvy business owners create a budget before the start of each calendar year. When you create a budget, you’re forced to consider a number of variables in your business. By taking on your business challenges in the budgeting process, you’re more likely to make better decisions.

Once the bullets start flying in the New Year, you’ll be busy and distracted. Without a budget, you may make some poor decisions.

It starts with cash management.

Cash flow management

No business can operate without sufficient cash inflows each month, and many firms do a poor job of forecasting expected cash flows. Here are several factors that impact the amount of cash a company will have to operate:

  • Accounts receivable: The dollar amount of credit sales that are not collected in cash, and the average amount of time it takes to collect the receivables in cash.
  • Inventory: The dollar amount of inventory needed to fill customer orders over the next several months.
  • Debt payments: Interest payments and any repayments of principal due in the next few months.

These factors help determine the amount of cash required to operate. If cash inflows are insufficient, the firm may have to access a line of credit, or raise more capital through a stock or bond offering.

Create a customized report to project your cash flow for each new month.

Your firm may invest a large amount of cash into inventory.

Forecasting inventory purchases

Create a budget for inventory purchases, based on your projected sales for the year.

Every company should plan for an ending balance in inventory at month end, which allows the business to fill customer orders in the first few days of the next month.

The formula for ending inventory is: (beginning inventory + purchases – sales = ending inventory), and ending inventory is often based on a percentage of monthly sales.

Assume, for example, that a hardware store’s beginning inventory balance of lawn mowers is 50 units, and that the company forecasts 300 mower sales for the month.

If the business wants 30 mowers (10% of expected sales) in ending inventory, the number of mowers purchased should be (300 projected sales + 30 ending inventory – 50 beginning inventory = 280 purchased).

Use the ending inventory formula to ensure that you maintain a sufficient amount of inventory.

You’ll put in a lot of time and effort to change your accounting practices, and the work will pay off.

Next year can be better

Successful business owners make continuous improvements.

Changing accounting practices will improve any business, regardless of the firm’s life cycle stage. Newly formed businesses, mid-size firms, and large companies all have room to improve.

Use these tips to reduce errors, save time, and streamline your business. Next year can be better, and you can make it happen now.

More from QuickBooks:

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

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