Accounting pitfalls and how to avoid them

Like most people, I always love a good horror story. Now, not a “real” horror story with lots of gore, scary clowns, and suspense that makes your palms sweaty as you wait to see what happens, but a horror story that has a happy ending. Like in accounting!! There are lots of small businesses that have some scary situations going on in their finances, but, with help, everything comes out well in the end! We are going to discuss a few of these issues that are easy to fall into as well as the tools you need to avoid them.

Accounting Pitfall #1

Having a chart of accounts that is too complex.

The chart of accounts is the listing of every account that is used to record transactions. This is then used to code purchases, sales, inventory, debt, and any other financial transaction that flows through your business. At first, this probably seems pretty straightforward, but the chart of accounts set-up is critical to the success of your accounting department. Too many times, we have worked with businesses that have a chart of accounts that is so complex and un-intuitive that transactions are coded improperly, the staff is not trained on how to properly use the codes, and the data in the system is not usable. This results in wasted time, data that is difficult to translate, and confusion within the team. Of course, there is always the flip side to this, and we have seen charts of accounts not set up with enough detail to extract information by location, revenue stream, or department.

There is always a “Goldilocks” area where your chart of accounts should fall. The best way to find the balance between simple and complex is to determine what data you use (or would like to use) on a regular basis. Maybe, you don’t care about the sales by location, but you really care about the sales by product line. Making this determination will help you decide how to best structure your accounting to be able to have this information available each month. In QuickBooks, the class option is really handy to make this distinction, but nearly all accounting systems allow for some allocation between department, location, or revenue type.

Accounting Pitfall #2

Reconciliations are performed yearly (or not at all).

When working in public accounting, it was not unusual for small businesses to bring in their information after year-end and request that we perform all of the accounting for the year and then prepare their tax return. There was always so much suspense when we put together the information for the business owners as it was always a surprise when they learned how much they would owe in taxes. By that point, they would need to scramble to come up with enough cash to pay their tax bill!

In addition to the tax issue, these business owners were also flying blind throughout the year and would make their decisions based on the cash balance in their bank account. They had no insight into profit margins, month-over-month revenue or expense changes, or any ability to predict what the next month, quarter, or year would look like as there was no data available.

Reconciling cash accounts, credit card accounts, and major balance sheet accounts (like inventory, accounts receivable, and accounts payable) is a practice that should be implemented to prevent these year-end surprises. We recommend that all cash accounts and credit card accounts be reconciled monthly, and then, depending on the size of your business, other balance sheets should be reconciled quarterly, at a minimum. Reconciliations will ensure that transactions are properly coded and applied to the correct account, but when they are performed timely, can catch recurring expenses or overcharges that might not be necessary.

Accounting Pitfall #3

Roles and processes are not clearly defined.

Have you ever worked at a place where the same work performed by one person is done very differently than another person? Or, where there are no clear assigned duties? These environments are very confusing and can result in bills not being paid, customers not being invoiced timely, or worse, employees becoming frustrated and burnt out from the lack of communication and understanding. Clarity around employee roles and consistent internal processes make onboarding new employees smoother, customer relationships stronger, and better workplace camaraderie.

Now, this is not something that can be easily done overnight. The first step to changing the process will be to identify what you want the process to look like in 6 months and then work backward from there. Next, identify the people or systems that will be involved and get them on board! After you have buy-in from the people (systems are generally easy to convince), schedule a time when all of the individuals involved can provide insight into where hang-ups or bottlenecks generally occur and make suggestions about how the process should flow. We have found that the folks closest to the process have a few ideas on how it can be done better, but have not had the bandwidth or the ability to effect change. Spend some time documenting the new process and the employee roles involved and then, finally, implement the process! Keep in mind that this will be an iterative process and can be tweaked until it flows as intended.

As much as we wish there were only three pitfalls in accounting, there are more. Accounting pitfalls are kind of like the sequels in the Scream series…. they just keep coming! We’ll bring you more over the next few months so be sure to connect with us on LinkedIn, so you get the latest updates from us. Accounting doesn’t have to be scary or suspenseful and can definitely have a happy ending!