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3 Common Small Business Accounting Lessons

By May 2, 2019 No Comments

Small business owners typically start as a one-person show. It’s not until you hit that point of rapid growth, when you realize the true need to bring in other resources to help you scale.

Are you making bookkeeping mistakes that can hurt your business without even realizing it? Discover the 3 common lessons that small business owners should know at the start of their entrepreneurial journey.

1. Profit Does Not Always Mean Cash Flow

Imagine receiving your monthly financial statements—what’s the first item you look for? Are your eyes focused on the bottom line of the income statement, then comparing it to the cash account on the balance sheet or cash in the bank simply to wonder, “How do I have so little cash despite having made a profit”?

One important bookkeeping item to remember is that profit and cash flow are not the same thing. A positive profit and a not-so positive cash flow in one month is essentially an accounting issue. Instead of yanking your hair out in frustration, a good starting point is to learn the difference between the two including how each are calculated, then move on to investigate the three common areas that affect cash flow (operations, investments, and financing).  

2. Mixing Business and Personal

If you don’t already have your business and personal finances separated, it’s important to do so now. We get it—running a business has become a large part of your life (if not all). However, you still need to treat your business as an extension of your life—it should to be two separate entities.

Besides keeping your books in good order to avoid red flags from the CRA, separating personal and business finances such as your bank accounts and credit cards will help you investigate which expenses are business-related, and which are personal.

Once you have that figured out, you can take advantage of any tax deductions, including writing off business expenses to potentially help you keep some dollars in your pocket.

3. Doing Bookkeeping, But Without a Bank Connection

Once you have your business bank account all set up, you should thank yourself! Bookkeeping just got a whole lot easier since you can now use your bank data to accurately track both your income and expenses. Don’t get caught up manually entering your bank data: there is far too much room for human error. When it comes to numbers, you want to be as accurate as possible.

There are also other issues caused by human error from manual entry like missing bill payments or mis-managing payments from your customers, which will eventually affect your cash flow.

Using an accounting software like Kashoo allows you to connect your accounts to your bank, which eliminates the bulk of manual entry and increases efficiencies for tracking sales and expenses. If you are still using an Excel spreadsheet to manage your cash flow, then it’s time to upgrade to the cloud. Not only will it save you time, but as your business scales, you will reap the benefits of seeing (and understanding) the larger picture of your small business financials.