Accounting is more than bookkeeping for tax purposes. Over the years, Accounting has proven to be very important in saving money, identifying & preventing waste, and keeping a tight lid on fraud and theft.
As a business owner in Ghana, it is crucial to be in control of all aspects of your operation. However, you do not need to be an expert at everything, you just need to ensure that you have all the right tools to help you manage all aspects of your operation so that you do not drop the ball.
Business owners are more strategy & customer-relations inclined and most have a difficult time with the accounting side of the business.
Some accounting mistakes are minor, insignificant, and when they’re inevitably noticed by someone within your business, easy to correct. But others are more serious and could have a significant effect on your business’s financial health.
Over time, poor accounting practices can distort the reality of your company’s fiscal health. In severe cases, repeated accounting mistakes and bad accounting practices can lead your business toward insolvency or company administration.
This means, financial mistakes adversely impact your bottom line. It can clog cash flow, attract undue attention from the Ghana Revenue Authority, or hurt reputation with suppliers, customers, and staff.
To avoid those situations, listed below are 5 accounting mistakes business owners are prone to making and how they can create issues, both small and significant, for your business.
Working Without A Budget
Does your company start projects without assigning each one a clear budget?
Budgets are not only useful in curbing overspending but can be used to establish realistic, written financial objectives. Going into a project without a budget is a sure way to end up spending far more than you intended. Not assigning clear budgets to each project also makes it difficult for you to control a project that has clearly cost your company more than it should have. This can cause your company to spend its limited funds on projects that won’t produce a return on investment.
Budgets should always be grounded in reality, but you can certainly use your budget to set reasonable financial goals, whether it be increasing revenues or reducing operating expenses.
As your business becomes more established, you’ll be aware of how much your business needs to spend to continue operating. This makes it easy to set budgets for projects that are large enough to make success possible, but not excessive or wasteful.
Failing to Properly Categorize Income and Expenses
Quite a large number of small business owners are used to what is termed shoebox method of accounting where all sales receipts and expense receipts are put in a box and given to the bookkeeper at the end of the financial year to "figure out".
This is not a good choice for your business since all money coming in and going out of your business must be assigned to the appropriate category.
Business owners who stay on top of their accounting records do not run into mistakes. They will know who was billed, how much, and whether or not the customer has paid.
You will also find that your year-end tax preparation will be much smoother than trying to reassemble the records you need to prepare your business’s tax return right before the return is due.
Poor Understanding of Accounting Software
There is so much to accomplish when setting up a business, and in a rush to get the business set up, some business owners may not have spent the time to correctly learn the accounting software they have chosen. Not knowing what the accounting software is capable of achieving means you could certainly make a mistake or miss out on some powerful functionality. Not getting the right service provider to set up the software system properly could also lead to unused reporting capability and incomplete information that may result in bad business choices.
Combining Business and Personal Account
Do you normally mix your business and personal accounts together? It is very important to keep these two finances separate. If personal and business accounts are kept together, it will be impossible to calculate the profit generated from the investment. Business finances should be disjoint from personal finances so that you can see what resources are intended for the business only. It helps you paint a clear picture of the health of your business when you apply for funding. It also helps you separate and, track your business's cash flow needs on their own. Cash flow planning is the most important thing you can do for your business. To succeed, you'll need your finances separated.
Forgetting to record small transactions
How does your business manage its small transactions? It’s very easy to think of petty cash transactions as unimportant, but it’s essential that your business has a record of all of its spending, no matter how insignificant.
This is especially important in retail environments, where many transactions are cash-based. It’s also important to record small transactions like paying for the postal delivery, even if the cost is insignificant.
Stay on top of the small transactions and it becomes far easier to manage the bigger ones. By keeping a record of small transactions, you’ll be able to easily manage your books as your company grows in size and its number of transactions increases.
There are a number of accounting mistakes that can collapse your small business however if you ensure that you keep the above listed in check, it will go a long way to help.