5 ACCOUNTING MISTAKES THAT COST SMALL BUSINESSES
Failing to have a firm grasp on your business’s financial status can significantly hamper your ability for growth. The vast majority of small businesses do one or more of the following:
- Handle all of their accounting and bookkeeping on their own;
- Hire an outside professional without the proper credentials;
- Intermingle personal and business expenses;
- Not adequately prepare for tax season.
When it comes to effectively managing and growing your business, few decisions can pay off as significantly as how well you set up the process, procedures, and oversight of your organization’s finances.
That’s typically the task for an accountant or bookkeeper, but many small business owners go it alone, attempting to balance the complex burden of managing their books with everything else they already do to keep their business going.
Only approximately one-third of small U.S. businesses employ a bookkeeper, and just under a quarter employ an accountant, according to Accounting Today. The same survey found that 66% of small business owners had no plans to hire an accountant.
A broad group of small business owners are tackling the myriad of tasks required to pay bills, invoice customers, cut checks to employees and contend with past-due accounts, among other accounting tasks. While that might work for VERY small businesses, it often leaves a vast amount of room for accounting mistakes to be made that can undermine your growth, siphon precious time and attention from other areas of your business, and disrupt your mental focus from other important areas.
Here are five accounting mistakes that can derail your business and how you can avoid them.
1. FAILING TO HIRE AN EXPERIENCED FINANCE PROFESSIONAL
Even experienced accountants can make mistakes, but let’s face it, we’re the financial professionals, and you might not be. Being exposed to a variety of industries, accounting software platforms, understanding Generally Accepted Accounting Principles (GAAP), and years of experience allows us to catch these mistakes more efficiently than you taking a moment to review your financial transactions under pressure from all of the other tasks you have while running your business.
And even if you are a financial professional, you’re time is a precious commodity that once spent, can’t be returned. At some point, you’ll need to ask yourself if your time is better valued generating revenue for your business or managing the responsibilities of recording and analyzing your financial transactions.
Hiring a professional will help minimize the potential for errors in key areas, such as expense tracking, paying vendors on a timely basis, balancing bank accounts, and staying on top of payroll.
Are you certain you’re handling employees’ withholding taxes properly? Are you keeping track of all your financial transactions, regardless of size? A few mistakes in these areas and, suddenly, you’re not really saving money by not bringing on qualified help.
Certified Public Accountants (CPAs) assist you with tax planning, however they’re not familiar with your day-to-day operations, which is key when recording your transactions appropriately so that you can see the bigger picture later on. It will also help your CPA determine the best tax strategy for your business in the long run.
If you can’t afford a full-time, in-house financial professional, other options are available. Hiring a freelance accountant who works either on-site one day a week or remotely is the best cost-saving technique that most small businesses utilize. You don’t have to worry about including them on payroll, the expense of payroll taxes, or even insurance liability costs; we have that covered for you.
2. NOT TRACKING BUSINESS COSTS ACCURATELY
Accounting loses its effectiveness when records are not kept accurately. When that happens, you leave your business vulnerable to losing money, being late on important bills, setting yourself up for headaches come tax season and more problems that can get in the way of your daily management and future growth.
It’s not just errors made when entering transactional data or failing to reflect on if you paid a particular vendor. Inaccurate financial tracking ultimately costs your business money and undermines your ability to plan for next month or beyond.
It’s essential that your accounting system – whether it’s just you and a spreadsheet or the person you hired to maintain your books – keeps track of every transaction so that you can accurately gauge the health of your business.
While it helps to have a financial professional handle your books, there is another opportunity to help you, or your accountant, do their job better: an integrated accounting system.
In an integrated system, the software connects various financial transactions – related functions that a business engages in – paying bills, tracking bank deposits and withdrawals, invoicing clients, cutting paychecks – so that all the transactions are tracked automatically.
One of the key benefits is a comprehensive capture of a business’s costs, which is essential to staying profitable and planning future growth.
3. MIXING PERSONAL FINANCES WITH BUSINESS ACCOUNTS
Small business owners often blur the line between their individual personal finances and those of their business. It’s understandable, especially when a business is just beginning to find its footing.
An example of what we see most are business owners who receive phone calls from a vendor looking for payment on a bill that’s past due; the business owner knows that there isn’t enough in the operating account to cover the bill so they use they’re personal credit card to satisfy the past due amount. Or, how about running out to the store for a few office supplies but, while you’re there, you see something you need for home? Knowing how to record these transactions appropriately is key to ensuring the success of your business.
But it goes beyond combining business and personal items on a single receipt. More than one-quarter of small business owners and managers don’t have a separate bank account for their business, according to Clutch.
That’s not a good move. Mixing up financial accounts can make it tougher to sort out your personal from business transactions, which could be a big headache when tax time comes around. This has the potential to cause you to miss an expense that you could list as a business deduction.
It could also be a problem when you apply for a loan or a line of credit, as lenders want a complete and accurate snapshot of your business’s finances when they consider your loan application.
If you’ve been using your business and personal bank account interchangeably, wean yourself off the habit. Open a separate business account. You’ll likely get some incentives to do so from the bank where you have your personal account and you can easily transfer funds from your personal account to the business account to cover those expenses that the business might not have cash for at the time.
If you’re still using your own personal credit card for business purchases, apply for a business credit card. Major banks like JPMorgan Chase have cards that cater to small business owners and offer cash-back bonuses on purchases.
If you find that you’re in a bind and don’t have any choice, separate business and personal purchases so you can set aside business receipts.
4. INEFFICIENTLY MANAGING BILLING
Cash is king! Cash flow is essential to keeping a business operating from one day to the next. Billing or invoicing customers efficiently goes a long way toward ensuring that your revenue comes in on a timely basis so that you can tap into it for expenses, payroll, and other needs.
But sometimes businesses that don’t have a good handle on the accounting end of their operations and can fall well short of this. Invoicing gets delayed and, naturally, it takes that much longer for customers to pay, which may leave your business stretched thin to cover its own bills.
That doesn’t just raise the possibility of being late on your own bills; it inevitably leads to the dreaded cash-crunch that most small businesses often face. Some 82% of U.S. Business fail because of cash flow problems, according to Visual Capitalist. Another 29% fail because they run out of cash altogether.
To tune up your billing management, begin by invoicing your customers immediately after you’ve fulfilled your end of the transaction.
Emailing an invoice is clearly an improvement over sending a bill by snail mail. For a quicker, more seamless process there’s also software that can send invoices to your customer automatically.
5. NOT PROPERLY PLANNING FOR TAX SEASON
Do-it-yourself tax software may be good for preparing a simple tax return, which could be a tempting solution for small businesses looking to save money on an accountant or other tax specialist.
Even those tackling their small business tax filing using the DIY approach can stumble if they haven’t taken the steps along the way to properly document their company’s finances.
No one enjoys struggling to piece together all manner of receipts and documents required to file an accurate tax return in April because they made the mistake of not being organized the other 11 months of the year. And that goes double for businesses, which must navigate a more complicated route to be in compliance with Uncle Sam’s increasingly complex tax laws.
It’s not surprising that while more than 93% of small businesses say they are very or somewhat confident in their ability to file their taxes accurately, nearly one-third also say they believe they end up paying too much come tax time, according to a survey by Clutch.
Everyone gets complacent about receipts and records now and again. The best approach is to minimize errors and oversights by ensuring that your business is using an accounting system that seamlessly tracks company expenses, payroll, and other basic components of your business’s profit and loss statement.
Enlisting a qualified tax professional to check in periodically and do tax-related organizing sweeps of your business can also help spot potential savings or even things that your business could be doing differently well before the tax year is over.
Remember, if you are a Sole Proprietor, Single-Member LLC, or an S-Corp, your business taxes WILL affect your individual taxes; we would highly recommend using the same tax professional for both of your returns so that they can help you implement an appropriate tax strategy.
