The 10 Biggest Cracks in Your Accounting System
The last thing most entrepreneurs want is for their hard-earned dollars to go down the drain because of a money leak in their business. Since so many entrepreneurs are working harder than ever before to earn their living, it just makes sense to shore up every profit leak possible. But you might not know where they are or what to look for.
Here are the ten biggest money leaks in your accounting system, along with tips to help you address them effectively.
1. NOT HAVING A DAILY CASH/REVENUE REPORT
The more you can stay on top of your daily receipts, the more information you will have at your fingertips to know what changes you need to make in your business. When you track and pay attention to daily trends, you will be alerted to shifts in the marketplace faster and can take action to speed cash flow.
Even if your business is very small, tracking cash daily will make you more aware of what you need to do to reach the numbers you want to achieve. Choose one or more accounting measures to track for this report: daily revenue billed, daily revenue collected, cash increase in your bank account, or another measure. Allocate just a few minutes at the end of each day to review the daily activity in your business. You’ll gain valuable insights into what actions are necessary to hit your financial targets and you can celebrate when you get there!
Pro Tip: Implementing a simple daily cash report can be as easy as setting up a spreadsheet or using an accounting software feature to automate this process. Consistency is key, so make sure this becomes a daily habit.
2. BILLING TOO SLOWLY
Many businesses suffer from slow billing, often because of a surprising source: fear of asking customers for money. Delays in billing not only postpone your cash flow but also increase the risk of non-payment as time passes.
Remember, you’re not a bank! The sooner you bill, the sooner you’ll get paid. Consider rearranging your terms to require a retainer or deposit before work begins. This ensures that you have some cash in hand to cover your expenses and reduces the stress associated with collecting payments.
Pro Tip: Use automated invoicing systems that allow you to set up reminders for clients. This not only speeds up the process but also helps in maintaining a professional image.
3. NOT BEING CAUGHT UP ON YOUR RECONCILIATIONS
Today’s online banking accessibility gives some entrepreneurs a false sense of security when it comes to estimating cash balances. Having online access to your cash accounts is not the same as performing a good old-fashioned reconciliation from source documents. Only a reconciliation will catch significant bank errors, such as a deposit that has failed to post to your account. If your reconciliations are not completed accurately, you could be losing thousands of dollars due to uncorrected errors.
Pro Tip: Schedule regular reconciliation sessions, at least monthly, to ensure that all accounts are accurate. Use accounting software that can assist in matching transactions and flagging discrepancies for quicker resolution.
4. NOT DOING ALL THE RECONCILIATIONS IN YOUR BUSINESS
Most business owners take care to reconcile their checking accounts each month. But what about all the other accounts that need reconciling? Make sure you have procedures in place to reconcile everything that needs to be reconciled.
Consider the following: inventory, accounts receivable, the cash drawer, merchant accounts, PayPal, your shopping cart, petty cash, accounts payable, credit card accounts, vendor statements, bank loans, mortgages or leases, equity accounts, prepaid and deferred accounts, and fixed assets, just to name a few of the most common ones.
Pro Tip: Create a reconciliation checklist that includes all relevant accounts and follow it diligently. Ensure that different people are responsible for various reconciliations to maintain internal controls and reduce the risk of errors or fraud.
5. DOING DOUBLE WORK
The days of having to do data entry manually are coming to an end. If you are manually entering data from one system into another, there may be a better way. Automate that process and free up staff time to do more important things.
Pro Tip: Invest in integrated software systems that can communicate with each other, reducing the need for redundant data entry. This not only saves time but also minimizes errors that can occur during manual data entry.
6. NOT BENEFITING FROM TIME TRACKING
Even if you don’t sell services or charge by the hour in your business, time tracking will help you discover where you and your staff are spending time so that you can manage it. You can’t manage what you don’t measure, and although most of us despise tracking our time, we need some way to know where our most valuable resource is going.
If the idea of time tracking turns your stomach but you know you need to measure results by employee, there are other ways. Set up your accounting system so that it tracks results by employee, whether it’s sales, customer service, or some other measure.
Pro Tip: Use time-tracking software that can be easily integrated with your accounting system. Many modern tools allow employees to log their hours with minimal effort, providing you with real-time data on productivity and resource allocation.
7. NOT MEASURING JOB OR CUSTOMER PROFITABILITY
Do you know which jobs, customers, or projects are more profitable than others? The first step is to be able to measure revenue and expenses at the job, customer, or project level. Then you can compute your profitability at a more detailed level than the enterprise-wide number on your Profit and Loss statement.
There’s huge power in knowing these detailed profit numbers because then you can go after jobs, customers, and projects that are more profitable and avoid the ones that are less profitable.
Pro Tip: Set up your accounting system to track expenses and revenues by job, customer, or project. Regularly review these reports to identify trends and make informed decisions about where to focus your efforts.
8. NOT UNDERSTANDING GOOD DEBT AND BAD DEBT
Bad debt means one thing to accountants, but here we mean something else. Bad debt is using credit cards and other high-interest rate debt for daily survival expenses such as food, rent, entertainment, and other consumable items with no resale value. Bad debt is to be avoided. If you don’t have enough cash to pay for these items once they become due, you may be overextended in your business and headed for big cash flow troubles.
Good debt is debt that can help you grow your business. Good debt includes items such as mortgages and building leases, college loans and other education to improve your skills, and automobile loans and other loans made to purchase equipment and other assets that will hold their value over time.
Pro Tip: Regularly review your balance sheet to distinguish between good and bad debt. Work with a financial advisor to develop a plan to reduce bad debt while strategically using good debt to grow your business.
9. POOR OR NONEXISTENT RECORDKEEPING
Even the top bookkeepers in their field can’t make up for a business owner that’s disorganized and chaotic in their recordkeeping. Some of the things we recommend avoiding include a checking account that’s used for both business and personal, losing receipts and therefore deductions, and failing to track mileage and other recordkeeping that the IRS requires. All of these things can cause more taxes to be paid than necessary.
Poor money habits add up to higher bookkeeping expenses, especially at tax time. The good news is there are easy fixes for most issues once you put some new habits in place.
Pro Tip: Use digital tools to organize and store your records. Apps that track receipts, mileage, and expenses can help keep everything in one place and make it easier to maintain accurate records throughout the year.
10. NOT BEING WILLING TO MAKE CHANGES TO YOUR ACCOUNTING SYSTEM
Most clients procrastinate making changes to the accounting system until the system is in chaos or is costing them an arm and a leg. Of course, it’s your business and you know your priorities better than anyone. Just be sure fear is not getting in the way of good priority-setting in your business.
The good news is, once you’ve made the changes, the savings can be huge, and the relief in stress that you feel is priceless. When you can move from reactive to proactive in any area of your business, you and your business benefit.
Pro Tip: Regularly review your accounting system and processes to identify areas for improvement. Don’t hesitate to upgrade software or implement new procedures if it means improving efficiency and accuracy.
Conclusion
When you can overcome these ten money leaks, your business accounting system will transform from a compliance headache to a powerful and effective tool to help you run your business better. Identifying and addressing these leaks early can lead to significant savings and allow you to focus more on growing your business.
Please give us a call at (818-243-3455) if we can help you with any of your accounting needs!
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