Accounting today has evolved into a strategic function within the organizational fabric of a business. This is because accountants today are not just bookkeepers, but strategists with useful business and financial insights. Accounting is a complex and sensitive process, and needs perfection even in its simplest forms, such as receivables and payables management. Not recognizing this can have negative repercussions for your business. Therefore, it is imperative that business owners realize the importance of accounting and take measures to mitigate the risk of fraud and error in their accounting and bookkeeping functions.
Even a small accounting mistake can end up snowballing into a huge problem. Being on the lookout for such mistakes and assessing your own practices to weed them out can greatly boost the success rate of your business. Here are six common mistakes we believe entrepreneurs should be aware of and take steps to avoid:
1) Not Hiring an Accountant
New entrepreneurs often believe that they can handle their accounting by themselves. As noted by Fit Small Business, 64% of small business owners opt to do their bookkeeping and accounting by themselves. This may seem like a good idea at first, but it isn’t a great idea in the long run.
The biggest reason given for not hiring an accountant is money. Hiring and maintaining an accounting service can cost a pretty penny, especially at the start. Business owners become habitual of doing their own accounting from the early days of the business, and fail to realize the need to hire an accountant when the business scales.
This leaves the business with an owner burdened by all the core responsibilities as well as the accounting, which can greatly increase the risk of errors in the books of accounts. For example, one extra zero accidentally added on the books can lead to a massive fiasco for the business. Therefore, it is prudent for entrepreneurs to recognize their own capabilities, and as soon as it is feasible, hire an accountant or a professional accounting service to mitigate this risk.
2) Not Acknowledging your Limits
Another common mistake entrepreneurs make is failing to recognize their own lack of accounting knowledge. GoRemotely reports that 60% of business owners admit they are not knowledgeable when it comes to accounting. Realistically, it is not possible for a layman to be proficient with the intricacies of accounting. Businesses need professional accountants to deal with the complexities of the accounting function.
Think of it this way: Your financial records are like a map that can help you navigate through the treacherous business landscape. If you are unable to read this map, then no matter how accurate the map is, it is useless.
The first step to fixing this issue is to acknowledge that despite being the business owner, you do not have the accounting expertise, and then hiring a competent accountant who can be your navigator and chart the best possible course for your business.
3) Not Backing Up Data
Life is unpredictable and things may not always go as planned. This is especially true when it comes to technology. Many businesses make the mistake of not backing up their data. This poses an enormous risk to the business, as one technological failure/lapse can lead to a complete loss of financial data.
Even more dangerous is the risk of a cyberattack. Cyberattacks can leave your sensitive data at the mercy of a third party, who can use it to leverage a hefty ransom for its return. At times like these, having concrete backup and protection for your data can save the business from a major catastrophe.
The importance of backing up your data cannot be emphasized enough. Every business owner must always maintain an external backup for the data. Equally important is that the business has data protection mechanisms in place to avert possible cyberattacks.
4) Not Adopting Cloud Accounting
Pen and paper and a simple Excel Sheet are a relic of the past in the accounting world. Cloud accounting is the future of accounting, with 67% of respondents in the Sage Practice of Now 2020 reporting a shift to cloud accounting. The fact remains that traditional bookkeeping and accounting is a mundane task and prone to human error. Even Microsoft Excel, as powerful as it is, cannot serve as the full accounting module of an organization’s ERP. Switching to cloud accounting and making use of AI to help maintain your books and advanced functions, such as FP&A, can drastically reduce the risk of error.
It is time that companies start leveraging cloud accounting to their advantage.
5) Not segregating business finances from personal finances
The first thing a business should do when starting out is creating a dedicated business bank account. All business-related transactions must go through this account to ensure that finances remain separate between personal and business heads. This is especially true for family-owned businesses or startups. The simple mistake of not segregating your personal transactions from your business ones can culminate into messed up financial records and a lack of visibility and transparency in your financial data.
Many entrepreneurs starting out with a business use their personal bank accounts for business purposes.
6) Taking the Cheapest Way Out
Businesses tend to maximize profits, which means they have an inherent tendency to minimize expenses or in other words optimize costs. Some expenses are unavoidable, and the cost of an accountant or an in-house accounting function is one of them.
Although, professional accountants do not come cheap, and cheap accounting services are mostly not of a satisfactory quality, high-quality staff augmentation specialists such as Expertise Accelerated provide competent professional accountants at a fraction of the US cost. EA’s remote professional accountants cost just 40 percent of their US counterparts, thus, delivering comparable professional expertise along with 60 percent payroll savings to the clients they serve.
Accounting is one of the most important functions in any business and awareness of these six common pitfalls that lay on the road to success is a great boon for any entrepreneur. The bottom line is that business owners must employ professional resources to ensure an intact accounting function within their organization. Business today can leverage high-quality staff augmentation specialists, such as the Expertise Accelerated to get access to quality-assured yet affordable accounting professionals and services.