Keeping your bookkeeping pristine will help you make informed financial decisions—and maybe more importantly, it'll help you avoid possible mishaps that can hurt your business's financial health.
As a Certified Management Accountant, CMA coach, and the founder of CMA Exam Academy, I've encountered—and made—more than my share of common bookkeeping gaffes. Here are the four accounting blunders I've seen the most—and how to avoid them.
1. Not properly documenting receipts
You've probably been hit over the head with this advice, but that's because it's so crucial: save your receipts. Everything from office supply purchases to customer order shipments need to be recorded, and not just because you might get an audit:
It will help you keep track of all of the expenses that you can write off during the next tax season. Every little bit counts.
Receipts are also an internal control mechanism that ensures all expenses are business-related and not personal.
If possible, every business expense should include a backup receipt that the accounting team can store for record-keeping purposes in the case of an audit.
2. Not doing monthly reviews of your statements
First, a quick definition review:
A profit and loss statement (P&L) provides a snapshot of a company's sales, expenses, and profit for a given accounting period.
A balance sheet statement reports the ending balance of a company's assets, liabilities, and equity for a given accounting period.
These statements provide an outlook on your business's financial health, so you need to make sure that you check them regularly to ensure that all of the entries were documented accurately.
Because there's a lot of manual work involved in accounting, it's easy for expenses or sales to be miscategorized or otherwise incorrect—that's why double-checking things isn't optional. Financial statement analysis should be done on a regular basis to ensure all expenses have been categorized accurately and account balances have been reconciled.
You'll also want to do monthly bank reconciliations, during which an accountant compares the recorded transactions in the general ledger to the bank statement's transactions to be sure they match. These are especially important in order to be sure all cash transactions have been accounted for.
Up-to-date financial statements provide a snapshot of how your company performed the previous month, which in turn provides actionable critical information to you and other key decision-makers in your business. If financial statements aren't closed each month, you'll be making decisions based on bad data.
3. Not finalizing accrual and deferral journal entries
It's not news that you need to document every single expense, customer payment, and other transaction as an entry in your accounting books, but it's easy to forget to finalize accrual and deferral entries. If your company holds product inventory, you also need to book the cost of goods from the balance sheet to the P&L as an expense for each sale made. Otherwise, you'll report a higher profit margin than you really have.
I've made this mistake myself, and only on reviewing my company's P&L did I realize that we hadn't adjusted journal entries to record the cost of inventory. These are easy mistakes to make, but they can lead to a false picture of your company's finances.
4. Not analyzing budget vs. actual expenses
A budget is a great start—but only if you stick to it. To help executives navigate financial decisions, a budget versus actual expense analysis should be performed at the end of each month and quarter to be sure the company is adhering to the budget.
Sure, a small overage or underage here or there isn't the end of the world, but if you don't do this kind of analysis, you might overlook huge variances that require corrective action. This kind of analysis also helps you find spots where you can cut back: for example, subscriptions for apps you no longer use or unused cloud storage space that you're paying for.
Bookkeeping is one of those things that can't be "good enough." It needs to be flawless. And not just so you don't make any mistakes come tax time: having accurate books allows you to make informed decisions that will help improve your bottom line.
This was a guest post by Nathan Liao, the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. The unique review framework in CMA Exam Academy has proven to be the key to his students' outstanding success in attaining their dream of earning the Certified Management Accountant certification. CMA Exam Academy is trusted by employees from first-rate corporations like Oracle, Nestle, and IBM, as well as the United States of America Department of State. Nathan educates business owners on the finance fundamentals for a successful enterprise, accounting dos and don'ts, how to boost a business's bottom line, and more. https://cmaexamacademy.com/
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