3 Common Accounting Mistakes that Most Business Owners Make
Some accounting mistakes seem minor and insignificant and may not be noticed easily. However, these accounting mistakes could result in incorrect financial reports that could further affect your company’s financial health. With time, mistakes made during the bookkeeping process (See how our bookkeeping services can help you) can distort the reality of your business’s financial status. In severe cases, repeated incorrect accounting can lead your company towards insolvency. Here are the common mistakes that you should avoid.
Treating sales as revenue before the product is delivered
When your company makes sales, you shouldn’t record it as income until you deliver the product to the client. Recording sales as revenue before delivering a product to the client can give you false state of profitability. Since most decisions regarding business expansion are based on a business’s financial records, the chances are that you will make business decisions based on wrong data.
Failure to consider financial ramifications of a big purchase like heavy equipment
When you purchase equipment, you can consider spreading the payments over time by using either finance or operating lease. This can help you to save from costly mistakes when the cash reserves run dry. However, experts warn that dipping too far into your business cash reserve can expose your business to financial risk in various ways.
You should understand that making a capital expenditure on property, plant and equipment will deplete your cash reserve in the short-run and will also affect the cash reserve during tax time. Therefore, if you intend to make a large purchase, consider a loan if the purchase is likely to have serious impacts on your business cash flow. Also, getting a bank loan is an alternative, especially if the equipment you want to purchase requires periodic updates or you need to use it for a short time.
Assuming all profits are cash flows
Profits and cash flow are both crucial aspects for every business. But business owner shouldn’t confuse profits for cash flow. Note that cash flow is simply the inflow and outflow money from your business. It is essential for taxes, daily operations, buying inventory, and financing other operations in a business. On the other hand, profit is what remains after deducting all expenses from revenue.
If you treat profit as cash flow, the chances are that at one point, your business financial records will show huge profits but your business has no cash to finance its daily operations. Therefore, you should keenly track your sales and revenue separately.
These three accounting mistakes can have serious impacts on your business financial health. Therefore, it is advisable to review your accounting practices or use a professional accounting service in Singapore to ensure that you are not exposing your business to financial risks.