Following on from my previous article, here are 5 more common bookkeeping mistakes that small businesses typically make:
Cash flow and profit are different. Cash flow is the rate at which money comes into and goes out of your business (i.e. the availability of cash), whereas profit is the reason that we are in business!
If you own a small business, it may have a negative short-term cash flow but be profitable in the long term, due to you having to pay suppliers before you get paid by your clients. On the other hand it could have short-term positive cash flow but still be unprofitable – for example a restaurant that collects point-of-sale income and that pays its suppliers on 30 days terms.
Your bookkeeper’s monthly management accounts will give you an accurate picture of your company’s true financial position.
2. NOT USING A BOOKKEEPER
Time is money, but many business owners do not put enough value on their time. How you apply your valuable time to your business is extremely important to your business. Many business owners juggle several hats at once, including the bookkeeping hat. However bookkeeping is often very technical and business owners are usually better off hiring a specialist, rather than doing it themselves. The cost of outsourcing bookkeeping is usually saved several times over in terms of time saving (the value of your time) and the elimination of errors when meeting your obligations to SARS.
3. NOT SAVING RECEIPTS
Many business owners don’t save receipts, especially for small amounts. However many small amounts quickly add up and if there is no record of something being purchased, it is unlikely to be recorded in your books. This can result in over-stated profits and overpayment of tax to SARS, as well as you not being able to claim back VAT from SARS on purchases without receipts.
If proper checks are not in place, employees may have opportunities to steal or to commit fraud. This can have a significant impact on a small business. A third party bookkeeper often brings a fresh pair of eyes to a business and will suggest and implement solid internal financial controls.
5. INCORRECT CATEGORISING OF INCOME AND EXPENSES
You will encounter problems if the person doing your books does not implement formal bookkeeping practices. Recording income and expenses to the correct categories ensures that your profitability is being generated accurately. Knowing the different ways in which taxes are applied to the different income and expense categories can also result in tax savings.
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