There are several common accounting mistakes that we see many businesses make without even realising it.
Without addressing these missteps, it can impact the profitability of the business, opportunities may be missed, or your business may be leaving money on the table
Here are the top 5 mistakes businesses make in their accounting and how to address them:
1. Financial governance is unsophisticated
In business, having a transparent, sophisticated view of your finances is essential to make key business decisions, especially in times of global crisis and economic volatility. Business owners need a detailed understanding of their finances beyond just their P&L. This may include forecasting sales and profitability, budgeting, and cash flow management. Basic accounting won’t deliver this level of insight. Through more sophisticated accounting, better financial results and revenue outcomes will follow.
2. Cash management is poor
Cash flow is one of the biggest challenges for business owners, and if it is not managed effectively, things can turn bad quite quickly.
Anticipating potential cash flow bottlenecks is essential to avoid getting caught out. Creating a cash flow forecast will help you forecast and track cash coming in and going out. This will arm you with the information you need to determine the best times to spend or save.
Another challenge with cash management which businesses may also overlook is lumpy cash flow. When the amount of cash coming in and out each month varies significantly, it makes it more difficult to handle cash flow. Ways to address this include adding a recurring revenue stream, shifting expense payments to monthly instead of yearly or moving clients onto a retainer.
Other cash flow issues include not holding a cash reserve or factoring in all liabilities. This means that the business will have to go into debt to cover cash flow pressures including covering all liabilities like wages, leave entitlements, superannuation, tax or money owed to suppliers, rather than having a buffer to draw on.
3. Profitability isn’t well understood
Without a good understanding of profitability, your business can’t possibly thrive. Detailed profitably reporting will enable you to understand the profit margin on every product or service in your business.
By not understanding profitability properly, business owners are practically flying blind, as they won’t be able to make informed decisions about where to expand or what products to discontinue. Not to mention, they may risk missing out on financial opportunities or may lose money unknowingly.
4. Costs aren’t optimised
By not optimising costs, you are likely to find too much money is moving out of the business each month which will impact cash flow and profitability. .
A good way to approach this is to cut costs in line with strategic objectives. If you begin to cut costs by targeting the items in the budget which cost the most, you’ve missed a critical step: aligning cost optimisation with the business strategy. You should begin by forming an overarching strategy and thinking about what constitutes a ‘good cost’ versus a ‘bad cost’ in your business.
Optimising headcount is a crucial part of cost optimisation. You should start by assessing strategic goals and identifying if cutting headcount makes sense. Then you have the option to leave vacant positions unfilled, restructure, consolidate roles where people are underutilised, and move on underperformers.
Another mistake in relation to costs is when businesses fail to outsource. Outsourcing is one of the most effective ways to improve productivity and reduce the time taken or money spent on labour intensive tasks.
Moreover, businesses may be putting money towards late fees and non-essential expenses – both of which can be easily avoided. By paying bills early, securing discounts by switching to an annual rather than a monthly fee and reducing non-essential costs such as entertainment or gifts, costs can be optimised.
5. Debt isn’t kept under control
By not keeping your debt under control, serious consequences can occur such as the threat of legal action by debtors.
To help control your debts and avoid unpleasant surprises, you should have a real-time and detailed view of your debts and your progress in paying them. You can also consolidate business loans to reduce the total debt owed or seek short-term funding to pay off creditors. You may also try to negotiate more flexible payment terms or payment plans with suppliers, or to quickly raise funds, you could liquidate assets or boost short-term revenue.
Want to avoid these common mistakes? Take your accounting to the next level with Keeping Company. Contact us today.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice, and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
Ryan Miller is the founder of Keeping Company, May 2011 – Present. A tie-loathing, people person with an entrepreneurial spirit. Ryan’s drive to modernize the accounting industry coupled with his desire to help people succeed saw the birth of Keeping Company. Focusing on the SME space, KeepingCo. empowers business owners by providing high-quality end-to-end accounting and business advisory services.
Ryan took his first Accounting role working at KPMG. He went onto further refine his skills as a Chartered Accountant taking the role of Director of a Chartered Accounting firm in Erskineville.
Ryan is a fully qualified Chartered Accountant and a member of the Institute for Chartered Accountants Australia and New Zealand. He is also a Registered Tax Agent and holds a Bachelor of Commerce from the University of South Australia.