10 Common Accounting Mistakes CEOs Make and How to Avoid Them

9 min read

CEOs are supposed to be creative visionaries with specialized knowledge in their industries, and that's great for carving out a niche and unique value proposition for your business

It does mean, however, that most CEOs are starting and leading businesses without the financial expertise that formal training in bookkeeping, accounting, and financial management provides.

As a result, leaders of small and medium-sized businesses typically struggle to keep their back offices in order because they don't have the time or know-how to handle it all themselves and/or they cannot yet afford to staff a comprehensive in-house, bookkeeping and accounting team. This means that a lot of business owners tend to manage their own back offices, and this can result in some common (and avoidable) accounting and financial management mistakes. 

10 Common Accounting Mistakes in Business

1. Disorganized Record Keeping

Whether you use a paper filing system or digitize your receipts, keeping accurate records can be challenging. It's easy to fall behind or lose records of business transactions. Keeping close track of your receipts, however, is essential to proper bookkeeping and accounting.

Keeping track of your receipts is the only way to truly know your costs for financial management purposes and carry out a thorough financial management strategy. Additionally, tracking these expenses reduces your tax costs through deductions and is also necessary for proving the expenses you report on your tax filings. If the IRS knocks on your door for an audit, the burden of proof is on you. If you don't have the records to back up the numbers on your tax returns, then you could be subject to paying exorbitant penalties. 

There is a wide array of tools, software, and applications that can streamline your record-keeping and receipt-filing processes. You need a system designed to capture, file, and backup your receipts. Take some time to research these tools and find out what works best for you and your business's bookkeeping and accounting system. 

Read More: How Much Do Outsourced CFO Services Cost?

2. Improper Checks and Balances

Businesses with fewer than 100 employees are at a higher risk of fraud than businesses with more than 100 employees. Most small and medium-sized businesses are left vulnerable to fraud due to a lack of internal checks and balances. Every bookkeeping and accounting department requires at least three individuals to ensure adequate separation of duties and powers to improve accuracy and reduce internal fraud risks. 

One of the most affordable and effective solutions to fraud risk in an SMB is outsourced accounting. Outsourced accounting services can provide your business with a complete back-office team to ensure your company is adequately protected from fraud - without you having to cover the cost of three, in-house employee salaries and benefits. 

3. Inaccurate Expense Categorization

It's not only necessary to keep track of your expense receipts, but it is also vital that you properly track and categorize these expenses. This requires bookkeeping, accounting, and tax filing knowledge to be aware of the proper expense categories. This will help you track your operating and production costs to measure profitability and help you save on taxes, as well. 

Getting advice from an experienced accounting professional when establishing your bookkeeping and accounting system can help ensure that you have the proper expense categories established and understand which costs should be recorded under which categories. 

4. Improper Revenue Recording

Revenue recording can be tricky in business, and there are two common mistakes that business owners make.

The first is overstating revenue, which can occur when revenue is recorded when it is earned and when it is received. Overstated revenue can result in paying taxes on more revenue than your business actually has. It can also cloud the picture of your financial health, making it look like you're having an excellent year when your revenue is actually lower than it appears. This problem can be avoided by setting up your accounting system so that received payments are posted against open invoices, rather than directly to revenue. 

The second common revenue mistake is having undeposited funds reflected in your books. This occurs when you've recorded a deposit in your books but haven't actually taken the deposit to the bank yet. It can also happen if your bank puts a hold on any of your deposited funds for any reason. Just like overstated revenue, undeposited funds can result in higher-than-necessary tax bills in addition to cash flow problems. 

Both of these problems can be avoided by ensuring you have proper workflows and processes in place for recording revenue and handling bank deposits. 

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5. Mixing Up the Balance Sheet and Income Statement

If your bookkeeper doesn't have thorough accounting knowledge, then some items could get mixed up between your company's balance sheet and income (profit and loss) statement. Most frequently, items such as liability payments, owner's draws, shareholder distributions, or asset purchases can end up recorded as expenses. Conversely, loans might end up recorded as income. 

It's important for these items to be reflected on the proper documents. Otherwise, the purpose of these financial reports becomes clouded. Your balance sheet should contain a summary of what your company owns and owes (assets and liabilities). The profit and loss statement should reflect revenue and expenses over a set period of time. 

To prevent this problem from occurring, you need a bookkeeper who understands the basics of accounting. You should also work with an experienced accountant to establish bookkeeping best practices in your office that ensure these items are reflected, recorded, and reported correctly. 

6. Incorrectly Classifying Employees and Contractors

Most business owners operate with a combination of employees and independent contractors. It's vital that you classify these individuals correctly within your bookkeeping system. They require different forms, documentation, and reporting. Additionally, employees require payroll tax, while money paid to contractors is usually a deductible operating expense that can lower your tax bill.

Check with an accountant to ensure you have contractors and employees complete the correct IRS forms (Form W-9 or Form W-2, respectively). Also, make sure you're generating and distributing the correct tax forms to your employees or contractors at the end of the year. 

7. Failing to Automate or Relying Too Heavily on Automation

The most common mistake that business owners make is using too many manual processes in their bookkeeping and accounting systems. Manual processes waste time and result in a higher frequency of errors, leading to inaccurate and outdated financial reports. 

Conversely, some business owners rely too heavily on automation, failing to double-check the records that their automated systems are keeping. While automation is an excellent tool, human-based checks and balances should be put in place to ensure the automated systems are operating properly. 

8. Not Using Your Accounting Software Correctly

Modern bookkeeping and accounting software offers a myriad of dynamic tools, features, and capabilities. This allows business owners to leverage their data in the most incredible ways. Unfortunately, it also makes the software more difficult and complicated to use properly. If your software isn't set up in a way that's tailored to your business's unique needs, then it might actually be getting in your way. 

Read More: What Accounting System Is Best for My Service Business?

It's essential that your bookkeeper truly understands how to operate your company's accounting software, leverage its customizable tools, and make the most of it for your business. 

9. Making Changes to a Closed Period

When an accounting period is closed, all records and forms generated for that period are considered complete and accurate. Changes should not be made to closed accounting periods. Changing records within closed periods can result in inaccurate financial statements and also problems with your tax filings (if the period was closed and included in your previous tax period). 

If you do find an error with a closed accounting period, you can amend it but the entire closing process will need to be repeated to ensure all of your forms and records are correct. If the error occurred prior to your most recent tax filing, then you might also need to submit an amendment to the IRS.

Unfortunately, changes can accidentally be made to closed accounting periods when dates are entered incorrectly in your accounting software. You can prevent accidental changes from occurring by requiring a closing password on these records. Most accounting software systems include this feature, requiring you to enter a password before making changes to closed periods. Be sure you have enabled the closing password in your system. 

10. Not Basing Financial Decision-Making on Your Numbers

Your accounting system should be set up in a way that not only maintains compliance with required financial reports but also helps you run your business with management reports. Your back office should be an asset to your business and leadership - not a drain on your time and energy. With a properly established system, you can gather essential data, generate management reports, and track the metrics that will help you keep tabs on your company's financial health and make data-driven decisions to improve your operation. 

Read More: The Most Common Mistakes of Business Leaders (And What To Do Instead)

Avoid These Common Financial Mistakes of CEOs With Outsourced Accounting for Business

While a complete in-house back-office team is often a pipe dream for SMB owners, working with a reputable outsourced accounting service provider is not. This affordable and effective option helps your business access the full potential of a complete in-house team without the exorbitant price tag. With outsourced accounting, you'll benefit from a system that is established by experienced professionals, guidance to help you learn how to run your business with financially-based decisions, and a team in place to prevent you from making any of the costly mistakes listed above.