Are You Making These Small Business Accounting Mistakes?
Large businesses can afford teams of accountants and bookkeepers for their accounting needs. Small businesses aren’t so lucky.
With fewer resources available, small business entrepreneurs often do their own accounting to cut costs.
Unfortunately, this leads to a higher likelihood of mistakes occurring. Tracking everything isn’t easy as is — but when you have a business to run, errors can go unnoticed for a long time and lead to costly consequences.
With that in mind, make sure you avoid these small business accounting mistakes.
1. Not Following a Strict Accounting Schedule
You have a million things to do in your small business. You want to focus on activities that generate revenue. Accounting isn’t one of them — so you might let it fall by the wayside.
But following a regular accounting schedule ensures you have the right financial data at the right times.
You won’t be scrambling at the last minute to ensure your finances are up-to-date if you set a regular time to input your transactions. You’ll be able to make better business decisions with more confidence.
Entering transactions weekly should suffice, but daily is best if you can do so.
2. Failing to Collect Sales Tax
Sales tax compliance is one of those things that slips by while you attempt to manage all the other areas of your business.
However, failing to collect sales tax can lead to substantial penalties down the line. You run a higher risk of being audited. Plus, you’ll be forced to pay all the unpaid sales tax plus hefty fines.
Additionally, failing to collect sales taxes could cost you a lot of profit should you ever decide to sell your business. The buyer will be at risk, and will thus pay a lot less for your business.
One great option for making sure you are tax compliant is to work with an outsourced accounting service like FinancePal. They’re expert teams will work with you to make sure you’re ready when tax season comes along.
3. Failing to Record Small, Out-of-Pocket Expenses
It’s convenient and easy to pay for a ream of paper, a stapler, or a pack of pencils out of pocket and not keep records of them.
Think about how often you might make these small purchases. They can add up to a significant chunk of change. You could be missing out on plenty of business expense write-offs.
If you do record them as business expenses, you’re running the risk of big trouble in case of an IRS audit. You need a receipt for every business expense, no matter the size.
And even if the IRS never comes down on you, you’re building a bad habit. Lazy recordkeeping habits could creep into other areas of your business — areas that could hurt you a lot more than failing to record a few small transactions.
Lastly, failing to record these small expenses provides faulty data on which to make decisions. You’re making these purchases for your business, yet not recording them in your business’s financials. Your business will look more profitable than it is, even though more money is coming out of your pocket.
No matter what, be vigilant about your recordkeeping.
4. Mixing Business and Personal Finances
Many small and independent businesses — especially newer companies — mix business and personal finances.
It’s easy to see why. Having all your money go through one bank account keeps your finances simple. You minimize potential bank fees and declutter your finances.
But mixing business and personal funds is a terrible mistake for many reasons.
First of all, tracking your business’s performance becomes much more challenging. You have to sift through your transactions to determine which expenses were incurred for business or personal use.
This makes tax time a huge headache, because, as mentioned, the IRS requires proof of every business expense. Keeping things separate makes it much easier to identify which expenses you’ll write off.
There’s also the issue of business structure. Formal business structures like LLCs and S-Corps limit your liability to your business assets if you have financial obligations. For example, if your LLC is sued, your personal assets cannot be seized to pay the amount owed.
But if you don’t maintain a clear separation between personal and business matters — such as financials — courts can “pierce the corporate veil”. This means they’ll hold you personally liable for whatever your business financial obligation might be.
Beyond legal issues, you’ll have trouble obtaining business financing should you seek it. Lenders need to distinguish your business income from your personal, and having everything on one bank statement complicates that process.
Keeping things separate is easier than it sounds. Just open a business checking account to run your business earnings through. You can then write yourself a check or transfer money to your personal account as your personal income.
5. Not Using Accounting Software
Managing your business’s finances by hand or with spreadsheets is possible at first. However, it’s best to invest in accounting software like Quickbooks early. At some point, you’ll have more financial transactions to handle, yet less time to deal with them — leaving less time to work on what matters in your business.
And when you have less time to do more work, your chances of making costly errors increases dramatically.
Accounting software saves you hours each week — hours you can put back into business growth. Plus, you can go a little longer before hiring a bookkeeper for your business.
6. Failing to Plan For Taxes
Small businesses quickly grow to a point where working with a tax accountant brings a considerable return on investment for two reasons.
First of all, tax law is complicated — especially for businesses. Staying in compliance with business taxes will save you a lot of money in fines and headache in legal trouble.
Additionally, as your business grows, minimizing your tax bill becomes a vital way to save money. Tax accountants can assist with tax planning by helping you pick a business structure and allocate your funds in ways that keep your tax bill low.
When you’re handling your own books, it’s vital to check regularly for mistakes. Errors gone unnoticed could leave you with bad data — and lead to bad business decisions.
Hopefully, your business grows profitable enough to afford an in-house or outsourced bookkeeper. For now, however, stay vigilant with your accounting and avoid the above mistakes