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Top 5 Accounting Pitfalls Every Small Business Should Avoid

Categories: Small Business Bankruptcy

My friend Rachel Hester is a Quickbooks Ninja!  She has helped straighten out my own books and I think she’s just great at what she does.  Today, she spoke to our group about the pitfalls that small business owners need to avoid or lest they land in my office seeking bankruptcy advice.  With her permission, I provide you with a bookkeeper’s advice:

#5: Not tracking inventory
This is for those businesses who sell stuff, whether retail, or even a service business where you’re also selling items. For example, I saw a client who has a driving school, and provides traffic school services. But she’s also selling the books that are required to teach the traffic school. However, she doesn’t track the sale of these books, which is actually a very profitable revenue stream for her. Who among you sells some sort of inventory for your business and are you tracking it?
 

#4: Not keeping personal accounts separate from business accounts
We’ve been guilty of this at some point or the other in the course of our businesses. But a couple of reasons why this is important is for IRS purposes as well as when applying for business credit cards or loans.
 

#3: Confusing profits for cash flow
Who among you think that profits should be part of cash flow or working capital?
The answer is yes and no. It partly depends on 1) if you had any profits from your operations, and 2) whether your sales are on credit or not. If you get cash right away, then yes, this forms part of your cash flow, but if you provide credit terms to your clients, then no, not until you actually receive payment for your services do you consider it as part of your cash flow. In the meantime, you have to find other means for working capital until you receive payments from clients. In other words, cash flow has a lot of different sources and profits are just part of it.
 

#2: Lack of internal controls
One of the first rules of internal control is to always separate the holder of the asset from the person responsible for the record keeping. The person handling the cash is not the same person in charge of the books.
In a small business, it is difficult to do this because you may only have one or two employees. When it comes to internal theft, it is often a trusted employee that has embezzled the company’s funds so you need to keep a constant watch on your money.
I recommend that the owner is the first person to open the bank statement and, if possible, it should be mailed to the owner’s home. All checks must be reviewed and signed by the owner.

The checkbook should be reconciled every month. Your bills should be paid by invoice not by statements. Every business owner needs to review their monthly cash receipts and cash disbursements and compare with their budget to check for deviations. At the very least, know your bank balance!
 

#1: Not getting the right accountant for your business
This is true! It may sound self-serving, but honestly, 90% of the people that I see at the SBDC are there either because they don’t know what their accountants are doing, or their accountants messed up their books. It is very important to find the right accountant who has the credentials and the education to back up their skills.

It’s important to treat even the smallest business like a business because when you can manage it in the beginning, you’ll have the right accounting habits in place when it grows.  I would also like to say that if land in any of these pitfalls you could wind up losing your business or even face bankruptcy.

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