Common accounting mistakes that could ruin your business
It's important that small-business owners know how valuable it is to seek professional accounting advice.
BDO accountant and North Queensland Manager Fiona Bishop says there are 10 common mistakes.
“Let's face it, we are human, and humans make mistakes,” she said.
“As accounting advisers, BDO sees people make all kind of accounting mistakes.
“Usually, we can spot them before they cause too much trouble, but if left uncorrected, some accounting mistakes can have a significant effect on your organisation's financial health.”
The following are the top 10 common accounting mistakes that BDO sees small-business owners make.
1. Budgets: Failing to prepare one, measure performance and update assumptions accordingly
How do you know how the business is performing if you've got nothing to compare it to? Not only is it important to have a budget, but you need to compare your actual results to your plans on a regular basis.
2. Failing to properly reconcile accounts
Bank accounts, payroll and both accounts receivable and payable and should be reconciled monthly at the very least. This cross-check ensures all transactions are recorded accurately and completely.
3. Miscoding transactions, or makings judgement errors
Some common errors of judgement include:
• Classifying fixed assets as expenses (and vice versa) - This impacts the balance sheet and profit and loss statement, and could mean your tax is incorrect
• Not amortising business start-up costs - The Australian Taxation Office has strict rules concerning the deductibility of preliminary business start-up costs
• Misclassifying current liabilities as non-current - Incorrectly classified liabilities affect your ratios which might impact your banking covenants. It might also mean you are reporting an inflated working capital position
• Getting GST wrong - This includes claiming or charging GST when you shouldn't, not claiming it when you should and not splitting transactions when only part of the transaction is taxable.
4. Mixing personal with business funds
Business owners should set up separate bank accounts and credit cards for the business and only use them for business-specific transactions.
5. Not tracking accounts receivables
It is important that businesses have a policy to review accounts receivables and to follow up overdue debts. This is important for maintaining a healthy cash flow position.
6. Not seeking professional accounting and legal advice
Before starting a business, approach your accountant and/or lawyer to find out which structure is most suitable, including the best way to minimise tax.
7. Doing it all yourself
Employing a competent bookkeeper will free up your time and allow you to focus on the day-to-day managerial aspects of the business and the long-term strategic decisions.
8. Misunderstanding employee compliance concerns
This could be an entire article on its own, but the most common errors we see are:
• Not understanding superannuation requirements for contractors
• Not accounting for long service leave, particularly with casual employees
• Misunderstanding salary sacrifice arrangements
• Failing to recognise fringe benefits and register for Fringe Benefits Tax
• Paying employees under the wrong award
• Miscalculating overtime and time worked on public holidays
• Incorrectly calculating Superannuation on time other than ordinary time earnings.
9. Not embracing a cloud-based accounting system
The 'cloud' is here, and businesses should be making the most of it. The key features of cloud accounting are automated bank feeds, automatically recorded recurring transactions, multi-user access so that your bookkeeper and accountant have real-time access, and a better chance of recovering information if your on-site system is compromised.
10. Inconsistent or irregular reporting of financial data
The accounts business owners provide to decision-makers should be as accurate and up-to-date as possible. Often accounting adjustments are posted at year end, which results in the interim accounts not showing the full picture. As well as improving the financial basis for decision-making, having accurate accounts can make it easier to detect fraud.
If you think you might be making any of these mistakes in your business, feel free to contact the team of advisors at BDO (Nth Qld) today. We can assess your situation and help get things back under control before it’s too late. You can also tune in to our webinar as we discuss these points and more, including real world examples of the impact on businesses.
Join BDO’s James Gaustad and Michele McSherry for the June 14 CCIQ Webinar: Common accounting mistakes that could ruin your business