Accounting can be a minefield for small business owners who often take on multiple roles. Even if it's not the most glamorous activity, ensuring your books are in great order is what drives your business forward. 

Mistakes in accounting can deplete your resources and also bring about legal complications. Let's look at the common accounting mistakes that small businesses should avoid and how their rectification will enhance DSOs.

Importance of Accurate Accounting

Accounting practices are the lifeblood of financial health. Proper bookkeeping provides you with a clear view of cash flow, profitability, and areas for improvement. 

For example, you can use metrics such as days sales outstanding—a key indicator of how long it takes to collect payments—to determine if your billing processes are effective or need to be overhauled.

 

1. Better Decision-Making

Accurate accounting provides you with reliable data for the decision-making process. For instance, you can determine whether to expand your product line or negotiate better terms with suppliers.

 

2. Improved Cash Flow Management

Keeping track of cash inflows and outflows will help you track better cash inflows and outflows. You will thus notice trends in cash flows such as seasonal fluctuations or customers who pay consistently late and therefore affect your days sales outstanding.

 

3. Streamlined Compliance

Keeping abreast of tax and industry regulations is much simpler when your financial records are accurate and well-organized. You will be able to file taxes on time, avoid penalties, and demonstrate transparency if audited.

 

4. Attracting Investors and Lenders

Potential investors or lenders want to see precise financial data before committing funds to your business. Accurate accounting ensures that you can have a clear, compelling picture of finances to gain that trust from them.

 

5. Finding Fraud or Errors

Accurate and consistent bookkeeping helps to uncover discrepancies, whether due to human error or fraudulent activity. For instance, if an invoice payment isn't recorded and your DSO increases unexpectedly, accurate records can help pinpoint the issue quickly.

 

Common Accounting Mistakes

Here are a number of the most common accounting mistakes that could put your small business at risk:

1. Blur lines between personal and business funds

The most common mistake small business owners make is to keep their personal and business finances jumbled together. It is convenient to take a business debit card for personal expenses or vice versa, but it causes a bookkeeping nightmare.

Ways to cure it:

• Open a business-specific bank account.
• Use business credit cards only for operational expenses.
• Utilize accounting software to track every penny spent.
• When personal and business finances are commingled, metrics such as days sales outstanding lose their accuracy, making it difficult to measure financial performance.

2. Inadequate Record Keeping

Another trap is poor record keeping. Without keeping organized and updated records, missing receipts or unrecorded transactions can lead to inaccurate tax filings or missed deductions.

Some actionable steps are:

• Keep all receipts digitally through apps like Expensify.
• Reconcile bank statements with your accounting software weekly.
• Audit your books quarterly to catch discrepancies early.

For example, if your days sales outstanding are unexpectedly high, poor recordkeeping might delay accurate invoicing and payment collection.

3. Failure to Monitor Days Sales Outstanding (DSO)

Failure to track DSOs is a common mistake for small businesses that depend heavily on cash flows. The higher the DSO, the longer it is taking your customers to pay, hence straining your wallet.

Method for improving DSO

• Provide an early payment discount to motivate the clients to pay early.
• Automate your invoicing process using software such as QuickBooks.
• Follow up on the outstanding payments from clients promptly.

For example, a small IT services company decreased its DSO by 15 days by sending automated payment reminders.

4. Overlooking Tax Due Dates

Missing tax due dates can result in huge penalties and unwanted attention from the IRS. However, most small businesses fall into this trap because of poor planning or lack of knowledge.

• Ways to avoid tax problems
• Prepare a tax calendar of important due dates.
• Reserve a percentage of revenues for tax liabilities.
• Engage a CPA to ensure compliance.

In addition, managing tax deadlines can be used to have an easy cash flow forecast and good management of days sales outstanding.

5. Payroll Compliance

Overlooked payroll errors in terms of incorrect withholdings or delayed payments can lead to employee dissatisfaction and penalties.

Some of the best practices are: 

• Payroll software such as Gusto or Paychex is used to automate compliance.
• Regularly review payroll tax regulations in your jurisdiction.
• Double-check employee classifications (e.g., full-time vs. contractor).

When payroll runs smoothly, you can allocate more time to optimizing DSO and improving your business’s financial health.

6. Failing to Budget Properly

Operating without a budget is like driving blindfolded—you’re bound to hit obstacles. Without a clear budget, overspending becomes easy, leading to cash flow crunches.

A few budgeting tips are:

• Utilize tools such as Microsoft Excel or specific applications like YNAB (You Need a Budget) to generate monthly budgets.
• Compare actual expenses with budgeted ones to determine variations.
• Maintain a fund for emergencies to cater to unexpected expenses.

A properly managed budget will expose inefficiencies, such as high days sales outstanding, that should be addressed promptly.

7. Not Reconciling Accounts Frequently

Reconciling the bank accounts is a simple yet easily overlooked process. When missed, errors, frauds, and oversights can be quite difficult to notice.

Methods to reconcile efficiently are:

• Compare bank statements with your books on a monthly basis.
• Review and address discrepancies immediately.
• Take advantage of reconciliation capabilities within accounting software such as Xero.

Reconciling regularly does not only keep the accounts in balance but also ensures metrics such as days sales outstanding are based on data that is accurate.

8. Missing Depreciation

Most small business owners do not consider depreciation for assets such as vehicles, machinery, or office equipment. This often results in overstated profits and false financial reporting.

To avoid any issues, one should:

• Record all fixed assets.
• Use accounting software to automatically calculate depreciation.
• Consult a CPA to adjust the method of depreciation in order to meet tax requirements.

Including depreciation in your accounting can free up funds for critical areas, such as reducing days sales outstanding.

How to Avoid These Mistakes

Addressing common accounting mistakes is less difficult than thought. Here is how you may turn things around:

1. Invest in Accounting Software

QuickBooks, FreshBooks, or Wave is very helpful for the generation of invoices, expense tracking, account reconciliation, and report on metric days sales outstanding that reflect your financial health more directly.

 

2. Work with a Professional

Though it may save money initially, DIY accounting usually ends up being costlier in the long run. Hiring a CPA or bookkeeper ensures compliance and accuracy when doing other things, such as growing your business.

 

3. Review Financial Statements on a Regular Basis

Take one hour every month to study your income statement, balance sheet, and cash flow statement. These statements will shine a light on problem areas and highlight high days sales outstanding.

 

4. Educate Yourself

Knowing the simple concepts will make a huge difference. Going through online courses or books helps one understand financial jargon and metrics.