10 Common Business Finance Mistakes that Could Cost Your Business

Veljko Petrović

Writer

November 6, 2024

15 min read

One of the aspects in which businesses need to be perfect is accounting. Regardless of your income and size, the numbers must add up, or you’ll end up as one of the many businesses that failed because of accounting.

Keeping track of documentation, properly filing tax reports, and having accounting processes can protect your business now but also minimize any incidents as you continue to scale. This article will help you recognize and avoid common finance mistakes and maintain integrity.

1. Overstating revenue

One of the mistakes that led to the demise of many companies was overstating revenue. There are a number of examples in which CEOs, or other decision-makers, falsified their revenue in order to leave a false impression of success or to get a personal financial gain from this.

However, let’s not go for the most extreme examples. Overstating revenue is more often caused by not having a clear policy on what should be counted as revenue. You should avoid stating something as revenue before the deal is finalized.

For example, an e-commerce store sells a product and immediately recognizes it as revenue. But, three days later, the customer demanded a refund. If you don’t adequately record this chargeback, you can experience more problems down the line.

Some companies overstate their revenue because they’re looking to secure investments or meet certain requirements. While this could initially seem like your business is really successful, it’s actually illegal and can lead to financial and legal consequences.

2. Incorrect customer onboarding process leading to fraud

Not all customers are going to be good-willed. Some can even try to exploit the weaknesses in your processes, leading to financial losses. However, this could be prevented if you recognize vulnerabilities on time.

The onboarding process for customers should help you obtain sufficient information on them, but also adequately handle their permissions. A significant problem could be the lack of identity verification and KYC procedures.

The type of personal data that you collect from the customer depends on your business. For example, a healthcare provider and an eCommerce store won’t require the same data. Regardless of that, you should ensure that the customer’s identity is verified and real and that they aren’t using stolen data.

This could be achieved through face recognition verification, personal documents, and a background check on whether they’re found on blacklists.

The majority of potential exploits can be fixed with the implementation of tools using device intelligence and risk-scoring software.

Problems can also occur if you haven’t put proper authentication measures in place. Without a multi-factor authentication process, someone can easily access a customer’s account and use it for fraud.

3. Not leveraging cost-saving services

Depending on your region and local laws, adding expenses can lead to lowered taxes. For this reason, it’s common for businesses to bloat their expenses in order to pay less taxes. While we can talk about the legality and ethics of this practice, it’s more important to go over the importance of making your expenses count. Another consideration for cost-saving is evaluating LLC costs. Forming an LLC can entail state fees, annual filings, and operating costs, but it may also offer tax advantages and limited liability that reduce risks, saving money in the long term.

There are a number of online services, such as anti-virus and monitoring tools , which can save you a lot of money in the long run for a monthly fee. While an anti-fraud service can seem like a significant expense, becoming a victim of fraud can be much more costly.

Investing in services that save costs and boost productivity can provide long-term benefits. Platforms like Flowlu, with features for expense tracking, project budgeting, and customizable financial reports, allow businesses to maintain oversight on finances efficiently. Such tools also support automation, further reducing human errors and potential oversights.

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4. Not reconciling accounts regularly

Failing to reconcile your accounts regularly can have a significant negative impact on your business’s health. The process of account reconciliation includes comparing internal and external financial statements, ensuring that there aren’t any discrepancies.

The goal of this process is to provide you with an insight into any potential errors and financial management which can cause more problems down the road. Of course, this process can be resource and time consuming, but the more often you do it, the lower chances of mistakes there are.

Businesses often fail to reconcile accounts regularly because they’re understaffed and don’t work with accountants, rely on automated systems’s efficiency, and don’t have the necessary documentation.

Properly reconciling your accounts can lead to a lot of benefits. Mainly, you’re going to recognize fraud early on and improve compliance and your cash flow management.

The process can be achieved by setting the time for it in a schedule and then assigning responsibility to someone professional for this process.

5. Misclassifying expenses

Regardless of the industry, businesses have a diverse range of expenses. A transportation company can spend money on fuel and drivers as well as logistics teams. In the same manner, an IT company will pay software developers but also invest in traveling expenses for conferences.

In both cases, you must classify expenses as essential and non-essential, but also in terms of a number of other factors. Misclassifying expenses can lead to incorrect tax filings, and it can also lead to poor financial planning.

Businesses must standardize the way in which they classify expenses, but they also have to regularly review classifications and properly categorize new and unique expenses.

6. Mixing personal finances with business accounts

Entrepreneurs, especially those who aren’t financially educated, have blurred perspectives on personal and business finances. It’s problematic for the accounting process when transactions are made for business needs by business owners' personal accounts and vice versa.

Not only does this activity lead to chaotic records and problems with tax filings, but it can also be illegal. Common reasons for this include convenience, lack of knowledge, and unclear financial boundaries. On some occasions, owners can resort to this method because of cash flow issues.

Mixing personal and business accounts can lead to all kinds of problems, although it can seem like an easier solution at first. However, separating them can not only help you avoid these problems but also bring a number of benefits.

7. Commonly making data entry errors

Just like small improvements can make your business significantly better in the long run, small mistakes made regularly can cause all kinds of problems. But this is especially the case when it comes to accounting.

Data entry errors are commonly caused by human mistakes. Their cause can be negligence or ignorance on the part of the individual taking care of data entry. Regardless of the reason, there needs to be a clear process of ensuring that financial data is correct and up-to-date.

Some issues regarding human mistakes can be solved with the implementation of AI and automation tools. Other causes of data entry errors can be solved by training your personnel, standardizing data entry practices, and double-checking entries.

The previously mentioned account reconciliation can help with spotting data entry mistakes early on.

For example, an SEO agency has a team of freelance writers who do their own invoicing. They calculate their monthly word count and rate and send the invoice to your financial department. While it’s great to be completely trustworthy, they can make mistakes by accident.

So, before the invoice reaches the accounting team, their editor confirms that the data in the invoice is accurate, according to their observation.

8. Untrained personnel for accounting and finance software

With the latest accounting and finance software, many individuals can think that they don’t even need an accountant. While this software makes everything in terms of filing tax reports much easier, there’s a lot that those who aren’t educated in this field can miss.

These tools are effective and useful for the individuals handling them. One significant accounting mistake can lead to your whole business crumbling down. Untrained personnel can cause problems in everything, starting from expenses to compliance.

Even if we don’t take a look at the worst-case scenario, which is breaking the law, there’s a lot more that an educated accountant can do for your business. Most importantly, they can help you with cost-saving opportunities.

The previously mentioned human error with data entry can easily occur in this process if you have untrained personnel for accounting. They might enter incorrect data, do it in the wrong field, or fail to classify an expense properly.

The best solution for this is to either invest in training programs for your accounting department and upskill them to know how to use the latest accounting software or find experts for the software you aim to use.

9. Misclassifying employees

One of the most common yet serious problems companies face is failing to properly classify employees. This problem arises when a business incorrectly classifies an employee as an independent contractor or employee.

This classification is an important part of tax filings, as their status determines their rights, benefits, and eligibility for labor law protections. Failing to properly classify them can also lead to financial, tax, and legal consequences.

The reason why this problem happens is a lack of knowledge of legal definitions of contractors and employees. With remote work on the rise, companies need to understand the rights and complexities of having workers from different countries working as contractors.

An over-reliance on contractor agreements can lead to various accounting problems, but it can also strain management and relations with the workers. The solution for misclassifying employees is to write clear contracts and understand the criteria for contractors and full-time employees.

10. Going paperless without a proper strategy

Going paperless is one of the steps that many companies have made in recent years. The reasons for this include better efficiency, reduced paper costs, and it’s more ecological. However, making this step is more complex than it might seem initially.

Before going paperless, it’s important that you properly gather all the documentation you’ve collected over the years and digitize it. Furthermore, it’s essential that you understand all the different documents and processes that you must replace in the digital world.

For each process, you need to find an alternative way to achieve it digitally. The digital records must be organized and stored in a clear and consistent digital filing structure. This way, individuals in accounting can easily access them and handle the necessary tasks.

However, it’s also important that you’re storing your digital documents in a secure way that guarantees integrity, availability, and confidentiality. Before you go paperless, you must ensure that this switch is compliant with your local laws and regulations.

The negative consequences of a failed transition to paperless are:

• Loss of financial data: During the transition process, you can lose significant financial documents that are irreplaceable.

• Inaccurate tax filings: Without proper data on specific periods, it’s impossible to file taxes.

• Operational inefficiencies: The transitional period can be quite inefficient, and you’ll have to train staff on new software and make replacements for all the traditional processes you won’t have anymore.

Accounting mistakes led to the bankruptcy of many businesses

Whether you’re a freelancer or a leader of a small business, you’ll have to understand accounting. Of course, you don’t have to be an accountant yourself, as you’ll either have an in-house team or outsource accounting services.

However, you should understand your responsibilities when it comes to filing reports and making financial decisions. This list of common mistakes is far from complete, but it will help you recognize common yet impactful problems a business can experience.

There are a lot of accounting mistakes that depend on the industry you’re operating in and the services you’re providing.

Furthermore, don’t neglect modern solutions for accounting problems. Explore new software and find individuals who are keeping up with the latest trends and technology.