Small Business Accounting Mistakes

to Avoid in 2016

Small Business Accounting Mistakes to Avoid in 2016

If your business’s New Year’s Resolution is to improve your accounting, or you just feel like you could be doing a better job of managing your company’s finances, then you’ve come to the right place.

The health of your business is only as strong as the health of its finances. Without proper tracking and monitoring, its easy to lose sight of how much money your business has coming in and how much it has going out. This information is imperative to running a business that’s fiscally fit and is prepared to maximize profit.

While technology and accounting softwares have made some aspects of accounting management for small businesses easier, many small businesses are still prone

to some major, and minor accounting mistakes. Accounting problems can range from fraud and errors, to misplaced financial records and more.

When these accounting issues occur, they can spell big trouble for businesses of any size. Inaccurate books, over-reported profit, and numerous other accounting mistakes can cause businesses to lose sight of and control over their business’s financial well being. If these issues go without attention, they

can have long-term consequences, such as needing to downsize or even go out of business. It’s best to be aware of the most common business accounting problems so you know what not to do, and how to bounce back from these issues if your business runs into trouble.

Common Accounting Mistakes & How to Avoid ThemSome accounting problems are so common that we’re nearly all guilty of making them. As a small business with limited resources, it’s easy to get caught up in the day to day operations of your company and not put the appropriate amount of focus into your financials. This is an all-too-common story for small businesses today, but it’s a dangerous one. Even seemingly small accounting mishaps can wreak havoc on a business. That’s why it’s best to correct them before you let these accounting mistakes create unnecessary damage.

Mistake # 1: Forgoing regular audits

Many accounting errors are small oversights that could be easily caught and amended during a manual audit. However, many small businesses don’t catch them because they’re too reliant on their accounting software. Even small businesses need to perform regular financial audits to check for accounting errors in their spreadsheets, and to make sure their accounting software hasn’t allowed any errors to go undetected. The sooner your business realizes that not all errors will be detected by an accounting software, the more likely you’ll be able to prevent errors.

Mistake #2: Not being aware of your business’s financial well-being

As a business owner, it’s important that you always know the financial health of your business, whether you manage your own accounting and books or not. In order to do this, you’ll need a basic understanding of how bookkeeping and accounting work, as well as how to determine your business’s financial health. If you don’t understand your numbers, you won’t be able to make smart decisions for your business. You should always be aware of where your cash, assets and liabilities

stand. A big mistake many business owners make is assuming that because they have money in the bank, they’re doing well. However, if you don’t compare the money in your accounts to your liabilities, you may think your business is healthy financially when it’s actually not.

Mistake # 3: Forgetting to save financial records

There are numerous reasons for businesses to safely store their financial records. Should they lose accounting information, they can find the appropriate records to fill in the blanks. It’s also important to have financial records on hand if your business is audited by the IRS. The IRS can audit your return for up to three years from your filing date, so your business should hang onto them for at least that long. However, if the IRS suspects you’ve underreported your gross income by 25% or more, they have up to six years to challenge your return. As a rule of thumb, your business should always maintain records pertaining to your earnings and deductions for a minimum of seven years to protect your business during an audit.

Mistake #4: Not backing up financial record storage

Many businesses make the mistake of storing their financial statements in one place only, whether that place is a filing cabinet, local computer, or external hard drive. What they don’t consider is the possibility for accidental deletion, data loss, destroyed paperwork, or hardware errors that render their financial records impossible to recover. It’s important to determine how your business will safely store all financial records, while preparing for the possibility of data loss. Smart businesses store their data in more than one location, typically using an off-site cloud backup provider. Cloud backup is the only way to completely thwart the possibility of data loss. By storing your data in the cloud, it’s made easily retrievable at all times, from anywhere with an internet connection, so you can restore the data to the same device or a new one, should your data ever go missing.

To thoroughly safe-guard your data and prevent data loss for good, look for a cloud backup provider that continuously backups your data, recording new and changed files as you make them. Your provider should also offer unlimited previous file versioning, so you’re able to revert to any document in a previous state. This is extremely useful if your business data and financial records are ever encrypted by a virus, or you realize too late that you’ve made an accounting error you need to amend. Nordic Backup is

a leading provider of cloud backup solutions for small businesses, offering automatic, continuous cloud backup, unlimited previous file versioning, unbreakable encryption, unlimited storage, and more.

Mistake #5: Not taking your business’s financial standing into account

Even if you’re operating your business’s accounting and bookkeeping perfectly, it won’t do your business any good if you don’t pay attention to what the numbers are telling

you. Successful business owners don’t make any business decisions blindly. They analyze their business’s financial standing and use what they derive to decide which steps to take next. They also assign specific budgets to every new project they invest in, and they stick to those budgets. Without taking these steps, it’s easy for a business to spend too much money on a software or project that is more costly to their company than it is beneficial.

Mistake #6: Updating costs and income infrequently

When you put off recording your business’s earnings and expenses, it’s easy for errors to find their way in. It’s also how smaller transactions get forgotten. No matter what the expense or income, your should make it a point to record all entries as soon as possible in order to prevent the risk of unrecorded financial data. If you don’t, those small errors can add up. Left unchecked, your business may under-report profits or deductions -- neither of which is good for your taxes or ability to make data driven decisions for your business.

Mistake #7: Underreporting your income

If you’ve made it a point to keep a record of all of your business’s income and have saved your receipts, you’ll be able to report your business’s earnings as accurately as possible. However, if you fall into the trap of Mistake #6: Updating costs and income

infrequently, you may be at risk for underreporting your earnings come tax season. The last thing you want to get in the mail is a letter from the IRS for a Notification of Possible Income Underreporting. Not to mention the interest charges and fines associated with underreporting.

To properly calculate your income, you should keep a record of the following information. Be sure to back it up as well and keep it saved for at least 7 years to protect your business in the event of an audit.

• Receipts from sales or services • Sales records • Returns and allowances • Business checking/savings account interest (1099-INT or statement) • Other income

Mistake #8: Underreporting your deductions

This mistake is another great reason to get your accounting process organized in the New Year. When calculating your business deductions, you’ll want to maximize as many business expenses as possible. If you record your deductions infrequently, you may be hurting your tax return. Because of this, it’s especially important to keep an ongoing record of all of your business costs throughout the year so that you know you’re writing off all of your business expenses.

Your business can list deductions for the following, however, be sure to store these records and back them up for a minimum of 7 years to protect your business in the event of an audit.

• Rent and office supplies • Employee wages • Software and subscriptions • Computer, internet and other technology expenses • Advertising costs • Phones (landlines, fax or cell phones related to business) • Transportation and travel expenses • Depreciation of assets • Business insurance

• Interest expense (business loan interest, mortgage etc) • Professional fees (legal counsel, consulting, etc) • And any additional expenses

Being aware of these common accounting problems will allow you to avoid them before they lead to trouble. However, you should also make moves to improve your accounting processes in the New Year so you can minimize the potential for mistakes even further.

Steps to Improve your Accounting ProcessOwning up to the accounting mistakes your business has made in the past is just the start. If you want to improve your accounting and bookkeeping processes in 2016, you need to make sure your business is prepared to handle its accounting procedures properly.

Many small businesses, or businesses that process only a handful of transactions each month, will opt to manage their accounting internally. This can be done via an in-house accountant, or even by the business owner themselves. In either case, there are some bookkeeping basics your business should address to get your accounting procedures in order so they work for you in the New Year, rather than against you.

1. Implement a system -- While traditional, paper accounting is an option, technology can help you streamline your bookkeeping and improve organization of your financial documents. Some accounting softwares, like Quickbooks, will even help you automate your sales and expense tracking while integrating with payroll and payment processing so that you get a full picture of your bottomline. If your business has a lot of expenses, or you receive at least two bills a day, it’s a good idea to use an accounting software rather than relying on a traditional spreadsheet (which can be prone to error). Whatever system you decided to use, it’s important that you use it to

store all bills, transactions and receipts.

2. Track key accounts -- As a business owner, you need to be able to see how and how much money is flowing through and out of your organization. In order to do this, you’ll need to familiarize yourself with your key accounts. These accounts include:

• Accounts Receivable - the money your clients owe • Accounts Payable - the money you owe to your vendors • Purchases - the money you spend on tools/supplies to run your business • Payroll - the money you owe to your employees • Sales - the revenue your business generates • Retained Earnings - your business’ profit

You should record transactions in each account weekly by entering them into your spreadsheet or accounting software. Some accounts, such as Sales, may need to be updated more frequently depending on how the amount of activity they have.

3. Balance your books monthly -- Equally as important as tracking activity in your accounts is balancing your books. If you’re using an accounting software, this part should be automated as you plug in your numbers. However, it’s still good to understand how balancing your books works so that you can pinpoint any errors that arise. Even if you hire an accountant to manage this for you, you should make it a habit to keep an eye on the bottom line at the end of each month, or quarterly at a minimum.

To achieve balanced books, you’ll need to follow the equation: Equity = Assets - Liabilities.

Generally speaking, your Assets include Accounts Receivable, Liabilities include Accounts Payable and the other costs of running your business, and Equity includes your Retained Earnings. Every business is different, and you may need to take more categories (like inventory, payroll, sales tax payable, etc) into account as you balance your books. For a complete look at all the Accounts your business should take into consideration when balancing your books, review this tutorial on the ways to create a balance sheet.

It’s also important that you learn how to create and read an income statement, as well as how to create and read a cash flow statement, so that you’re aware of the health of your business’s financial state over time -- quarterly or by annual comparison

depending on the level of insight you want to derive.

4. Fortify your records against data loss -- Keeping a record of your financial statements and tracking your numbers is important, but you also need to ensure that these records are always available. Many businesses forget to create redundancy as they save their financial information -- and the repercussions can be devastating. Every year businesses come face to face with hardware failure, natural disaster, viruses, human error and more that lead to lost financial records that can

never be restored. As a result, these businesses must spend extra time and resources trying to recover any data they can in order to restore their financial insights for themselves, for taxes, and for their investors.

By taking one simple step, you can ensure the security and retrievability of your financial data no matter what so that it will always be at your fingertips. Whether you’re using an accounting software, like

Quickbooks, or a spreadsheet to maintain your accounting data, cloud backup is the solution your business needs to safeguard all of its financial information. Cloud backup should always be used in favor of a local backup as many data disasters compromise all local data and do not provide adequate disaster recovery solutions, like previous file versioning.

A secure, automatic and continuous cloud backup software, like Nordic Backup, is the perfect choice for businesses looking to improve the redundancy of their accounting assets.

Nordic Backup supports backing up Intuit QuickBooks, Sage One and Peachtree, Microsoft Money, Quicken and TurboTax, and backs up these apps continuously and automatically as they are modified and as new files are created. This ensures no file or file change is ever lost and gives users the option to revert to previous file versions if an accidental change ever creates an error in your accounting records.

5. Schedule payments -- Paying your vendors on time is the best way to avoid past due fees and maintain good relationships with them. To stay on top of your payments, start by making a list of all of your vendors and their payment terms. Some vendors may require payment within 30 days of billing, while others may offer 60 to 90 day windows. Make a note of any vendors that offer incentives, in the form of discounts, for early payments.

When you can, opt to automate your bills so you’ll be less likely to incur late fees. By keeping a record of which vendors have 60 to 90 day payment windows, you’ll also be aware of which payments you can send in later if you’re having a tight month.

Keep copies of both your incoming and outgoing invoices and receipts in your local system and in your cloud backup so that you have a complete record of your payments and billing.

Being thorough and keeping backups of your backups is the best way to keep your business’s financial standing in the best possible shape. By following these basic bookkeeping and accounting tips, and avoiding common mistakes, you’ll always know where your bottom line stands and your business will be ready to take 2016 by storm.

To instantly improve your business’s ability to manage your bookkeeping with ease, backup your data now with secure, automatic cloud backup. With one simple step, you can create redundancy for your financial records and manage this data with the peace of mind that no matter what happens, you’ll always be able to retrieve current, and previous, copies of your financial records when you need them most.

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