Avoid Common Financial Mistakes Made By Small Business Owners

I’ve compiled a list of some top financial mistakes that small business owners make that I have found through some research. Many business owners do these without even realizing it. I want to take some time and shed some light on these topics and help provide some guidance.

I’ll start by giving the list and then going a bit more in depth on each topic.

  1. Having sloppy, tardy, or inaccurate financial statements

  2. Lack of understanding of what the financial statements are saying

  3. Not paying attention (Ostrich syndrome)

  4. Use of cash basis to report

  5. Making decisions based on tax implications only

  6. Not using budgets, benchmarking, or forecasting

  7. Over-reliance on debt

  8. Ineffectiveness; trying to do too much (getting away from core business)

  9. Inefficiency due to lack of (or poor) systems

  10. Poor advisory team


1. Having sloppy, tardy, or inaccurate financial statements


Do you look at your balance sheets, income statement, statement of cash flows or any other financial report and can’t make any sense of the numbers? Even worse is having no statements at all!

These reports answer common questions like how the business is doing, what the business owns, what it owes, who owes your business, what profit there is, and how the cash flow is doing.

How do you know that those numbers are accurate? Or do you just look at the bottom line to see what your profit is? You can’t make sound financial decisions with inaccurate (or no) financial statements.

Lutz Bookkeeping Solutions can help! We have monthly consultations with our clients to review the statements and go over those numbers.


2. Lack of understanding of what the financial statements are saying

This falls in line with the first point. Financial statements take a look at the history or what has happened up to a point in time. These are things that have happened, you can’t change it.

What my business does is take these statements, through interpretation, and advice, and analysis and inform my clients. The goal is to educate the clients over time. This isn’t something that is learned over night.


3. Not paying attention (Ostrich syndrome)

What I mean by not paying attention, or “sticking your head in the sand,” is saying to yourself, "Hey, as long as I sell stuff here in my business, as long as I do the service or sell the product, everything is fine. I don't need to pay attention to those pesky financial statements." Not true! Bookkeeping is the language of business.

You want to be able to look at the numbers and see where you are spending too much, areas you can save money, etc. Working with a bookkeeper consistently, and one who understands what is happening in your company, is invaluable to you.


4. Use of cash basis to report

Did you know that there are multiple ways to look at your financial statements?

The most common, and is standard practice for GAAP (Generally Accepted Accounting Principles) is the accrual basis. The cash basis does not show you the whole financial picture; it only reports cash as it is received.

If you have accounts receivable and/or accounts payable, you need to make sure that you are reporting correctly. There are businesses out there with no receivables or payables out there, and working in the cash basis is fine for them, but most businesses have some form of accounts receivable or payable. So you should be viewing your reports in the accrual basis.


5. Making decisions based on tax implications only

Let me tell you a little story I heard from one of my teachers:

Every December, toward the end of the month, I would get people calling me left and right going,

"Hey, I'm here at the car lot, and I'm thinking about buying this new $60,000 truck because I'm going to save on my taxes."

I'd be like, "All right, let me ask you this. Do you need that truck?"

"No, my other one's running fine. But I need to save on taxes."

I'm like, "Okay, let's think about this. Let's say that you save 40% on taxes. Let's just say. So that means you save $24,000 by buying that truck. 60 grand times 40%, 24,000 tax savings. So that means, higher math says 60,000 minus 24,000 means that you're still out $36,000. Is that truck going to make you any additional money?"

"No, but it's going to save me on taxes."

"Well it's going to help you to lose $36,000."

-Ben Robinson, CPA, Bookkeeper Business Launch

Long story short, just because something may have tax-saving implications, it doesn’t mean it is the smartest decision for you and your business.


6. Not using budgets, benchmarking, or forecasting

This is very important for many businesses. Not just for using them or just setting them up, but monitoring them, and making adjustments based upon them.

Budgeting helps you as a business stay on top of where money is being spent. It takes a look over a period of time to see how you are doing.

Benchmarking is taking a budget to the next level. Basically, this will show you how you are spending against the industry average. Maybe you are doing better than others, maybe you are spending well over what others do. You want to look into why that is.

Forecasting is looking into the future. You use historical data to make informed estimates that will help to determine the direction of future trends.

Use them as a strategic tool to get what you want. To achieve the financial goals that you have in your business.

Do you have any of these in place? Do you look at it? If you don’t, I recommend getting one in place so you can see where that money is going!


7. Over-reliance on debt

Seems pretty basic, right? The real reason that people have to rely on debt is that they don't have the cash. If your debt is greater than your profit, it may be indicative of other things.

Maybe the business owner is taking out too much money, or there is too much money tied up in staff/payroll, or there is just, plain and simple, too little gross profit. You want to try and avoid as much debt as possible!

Having too much debt and not enough income, can result in the business shutting down. Easy solution, don’t spend what you don’t have (as much as you can avoid).


8. Ineffectiveness; trying to do too much (getting away from core business)

If you are being effective, most likely you are doing right thing. There are businesses that are successful and instead of doubling down on what they're successful on, they go over to some shiny object.

It doesn't mean that you shouldn't chase other things, but it should mean that you get all that you can out of all that you have.

Focus on what you are doing right and how that is helping making money, don’t stray away from it.


9. Inefficiency due to lack of (or poor) systems


Efficiency is doing the right thing and doing it well. So this is due to a lack, poor, or having no systems. You need to have those systems. Technology is constantly changing and making business like easier. There is pretty much a system for everything.

In regards to bookkeeping, there are systems that deals with money, budgeting, forecasting, bill pay, those things.

You want to work smarter, not harder. Using these systems can help you save time so you can focus on your business and go back to making more money.


10. Poor advisory team

Finally, having a poor advisory team. These would be professionals such as a bookkeeper, CPA, tax pro, commercial banker, insurance agent, business attorney, etc.

Most business owners want to save money. Unfortunately, this is not an area in which you want to save money. You want value. You want trusted advisors to help make solid business and financial decisions.


If you found this information helpful, please take a look at the rest of the site, and feel free to sign up for more articles about bookkeeping tips and needs for small businesses! 

Thank you,


Cloud-based vs. Desktop Accounting Software: What is right for you and your business?

Thinking about making a change in your accounting software? Or perhaps you find yourself wondering what benefits are there to having cloud-based accounting versus the traditional desktop version. Please read on to increase your knowledge on this topic and help guide you in the right direction.


What is the cloud?

The cloud is basically a platform to make data and software accessible online anytime, anywhere, from any device. In a desktop application, your hard drive is the central location of your data. Using the cloud, your hard drive is no longer the central hub. It is automatically updated and backed up so you will not lose your data. Cloud accounting software is becoming more and more popular to use in business, and you can be sure your data is protected through “bank level” encryption used in the software.


Your accounting software shouldn’t be a hassle to use

Accounting software that is not on the cloud can make business more strenuous than it needs to be. Desktop software can take up far too much of your time and effort, and doesn't add value. Cloud accounting software can save your company time and money.

Online accounting means business owners can stay connected to both their data and accountants. There are a bunch of add-ons that can integrate with the software to help make your business more efficient. There are always new add-ons coming out too! In the cloud, there’s no need to install and run applications like on desktop software. Instead, you pay for the software by monthly subscription.


Security on the cloud

As a small business owner, you are probably concerned about the cloud storing your data. Believe it or not, the cloud is actually one of the most secure ways to store information.

Here are two scenarios where cloud accounting can save your information:

  1. If your laptop is stolen and you are using cloud software, your data cannot be accessed unless they have a login to the online account. If your data was on your desktop, your data is stored on your hard drive and can be accessed by the thief.

  2. If your laptop or computer crashes or is destroyed, you don’t need to worry about your information. Since it is stored on the cloud, you can just access your account through a different computer. Whereas on a desktop, you lost any data that you did not back up onto an external drive.

If you use online banking, you are actually accessing a type of cloud software. Cloud accounting software can link up to your online accounts and automatically sync your data, thus saving you time and effort to make sure all of your transactions on the bank statement are reflected in your accounting software.

There are many similarities between the two, and there are many different software providers and versions to consider. Below is a table comparing cloud-based software and desktop software:

Desktop and Cloud Software Comparisons:


The business world is going online, whether you like it or not, so you might as well upgrade to cloud-based software. I wouldn’t be surprised that if in a few years, the desktop software is completely obsolete. Having a cloud-based system in place gives you the benefit of anytime, anywhere access. You will have automatic backups of your data, and developers are always updating and creating new and helpful things to make businesses run more efficiently. The key here is to work smarter, not harder!

This is even more important for new businesses or businesses that do not have an accounting system in place.


Some objections to using online accounting software that I’ve heard about or read about include:

  • I don’t trust my business data/information online

Some of your data is probably online already. If you have any online banking, your financial information is online. Unless you are very knowledgeable with computers and know how to and understand how to protect data properly, chances are that your business data is more insecure on your desktop or laptop than it is online using accounting software. The online software has bank-level encryption software. Many of the softwares let you use dual verification methods, where they send your phone a text with a number to verify that you are who you say you are.

  • I don’t want to go online. If I lose my internet connection or don’t have it, I lose access to my software!

Most accounting softwares have a mobile app that you can log into as well so you will be able to access your data using your phone. You can enter your data into the mobile app and sync the software from there.  

Nowadays, people’s access to the internet is usually up 99% of the time. The same can be said for the online accounting software providers. Sure it can go down and may be inaccessible for a period of time, but that’s an exception.

On the flip side of this, what are you more likely to encounter? A situation where you don’t have an internet connection, or a situation where you’re not in front of your desktop (or laptop) computer for desktop users? Being on your desktop, there is always a risk that your laptop runs out of battery, your software crashes, or needs to be updated. That’s down time as well.

  • Desktop applications run faster than online applications

It can be true that online applications are slower in general than desktop applications, but the gap between the two today is very slim. The gap in speed is considered negligible. I believe the trade-off for the occasional slowness or lagging of the product to have your information anytime and anywhere is worth it.


Accounting software to consider for your business

Freshbooks is best for small businesses when:

  • It is only a one person operation
  • Owner’s sole focus is saving money
  • Needs basic simple financial reports
  • Who enjoy having control over everything themselves and have free time to learn the software

Xero Accounting Online or QuickBooks Online is best for small businesses when:

  • When it is run like a small business
  • Owner’s primary focus is making money
  • Needs better management of their financial reports
  • Needs to invoice and email it promptly or on-the-spot
  • Owner can use smartphone technology
  • Owner does not have free time to learn new software
  • Owner is looking to outsource their bookkeeping needs

QuickBooks Desktop version or other accounting desktop software is best for small businesses when:

  • When it is run like an emerging small business
  • Owner is looking to keep all accounting in-house
  • No need to access accounts or data outside of desktop/laptop location
  • No need to invoice and/or email on-the-spot
  • Owner is looking to do it all themselves or hire a dedicated individual in-house


Work smarter, not harder!

Cloud accounting software gives you the flexibility to run your business from work, home, or on-the-go. No matter where you are, you can get up-to-date information on your business.

Software updates are being developed and delivered faster, too. The cloud automatically installs these, so you don’t need to worry about installing the latest version. You also have the option to run your business remotely and from anywhere in the world with cloud accounting software.


If you found this information helpful, please take a look at the rest of the site, and feel free to sign up for more articles about bookkeeping tips and needs for small businesses!

Thank you,