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Keeping the books for your small business is not something you can just persevere through and then hope everything turns out alright. Accounting mistakes can have significant negative consequences. Those can include the complete failure of the business.
If you’re new to bookkeeping, especially, there’s a high likelihood you’ll make a few accounting mistakes. These are five of every small business owner should plan on and prepare for.
Failing to follow accounts receivable
Getting paid is exciting, and it is necessary to keep a business going strong. A business owner is so busy working with other facets of their business that accounts receivable is often neglected. Neglecting accounts receivable can lead to cash flow issues, as unpaid invoices pile up, leaving the business without the funds needed to cover daily expenses or reinvest in growth. Staying on top of your receivables is essential to ensuring positive cash flow and to knowing where your business stands each month financially. Consistently tracking receivables will also help at tax time so that you aren't trying to figure out which payments go to an invoice. Implement a reliable invoicing system and schedule regular follow-ups on outstanding payments to ensure timely cash flow.
Failing to employ a professional to prepare taxes
For many business owners, tax time can be a nightmare. You might be tempted to prepare your own business taxes to save money. However, you should consider using a professional tax preparer to ensure your taxes are correct. Tax laws and regulations can be complex and change frequently. Mistakes in tax filings can result in penalties, audits, or missed deductions that could save money. Although you will have to pay your accountant a fee for tax preparation, the benefits will outweigh those costs:
- Ensuring the latest tax laws are applied to your taxes, thus finding deductions you may have missed if you were to prepare your own taxes.
- Ensuring there are no discrepancies in your guesswork that may lead to an audit by the IRS.
The benefits of using a tax professional can potentially save you thousands of dollars. Be sure to keep good records so that when tax time arrives all you have to do is give those records to your accountant and they will take it from there. This saves you the worry and headache of preparing your taxes so you can focus on more important aspects of your business.
Mixing business and personal finances
The first step you should take when you start a business is to open up a business checking account. All money that the business makes should go into that account. Any expenses incurred by the business should be paid from that account. You should also consider using a credit card dedicated to the business.
Adhering to such practices will signal to the IRS that you are running a business and not a hobby. If you mix business and personal finances, the IRS may not make the distinction of a business versus a hobby. Mixing accounts complicates bookkeeping and can lead to inaccurate financial statements, making it difficult to gauge business performance or satisfy tax requirements. Additionally, keeping your business and personal finances separate will let you know exactly how much money your business is generating.
Failing to maintain expense receipts
You need to keep track of your expenses. The best way to do this is to keep all documentation for every transaction. You want to avoid the difficult challenge of scanning your bank statements while trying to remember what each charge was for. Without proper documentation, businesses may struggle to substantiate expenses during audits or tax preparation, leading to potential penalties or disallowed deductions.
For instance, if you buy supplies, keep the receipt, and make a notation on the receipt that the charge was specifically for supplies. A receipt contains valuable information, such as the items purchased, the date and the amount you paid. Having this information readily available at tax time will help you immensely. Organize your expenses by doing the following:
- Use a debit or credit card that is dedicated to business purchases.
- Keep your receipts in one convenient place, so they are easily accessible.
- Review your receipts weekly or monthly.
Not relying on an accounting professional
Accounting procedures can be confusing to someone who is unfamiliar with accounting. Therefore, it is always wise to stay in close contact with your CPA. They have the skills and training to help guide you through important business decisions. Your CPA will understand that your specialty is running your business. Therefore, it is okay if you don't understand accounting jargon. Always ask your CPA questions if you do not understand something. Keeping the lines of communication open will help you make sound business decisions.
Never underestimate the impact accounting mistakes can have on your business. Some accounting decisions can mean the difference between success and failure. So, always keep detailed accounting records and review those records periodically, so you know where your business stands financially. Don't let the accounting aspect of running your business intimidate you. Rely on accounting professionals to ensure you're making good business decisions for success.
For more information
For more information to help your small business, check out the BBB business news feed and the BizHQ.
Check out BBB's tax tips and resources.
Learn more about preparing your business for tax season.
BBB Great West + Pacific contributed to this article.