Running a small business presents many challenges, which can draw your attention in multiple directions at once. Keeping track of your company’s finances is essential to its long-term success and growth. Unfortunately, far too many small business owners do not pay close enough attention to one or more critical financial issues. The following eight items are among the most common accounting mistakes that small businesses make, along with some tips on what you can do to avoid them.
Not Emphasizing Bookkeeping
With the pressures that come with small business ownership, it can be easy to overlook bookkeeping. Business accounting requires tracking of all transactions to make sure your business has accurate books. Common issues that may arise from inadequate bookkeeping may include:
- Failing to track income and expenses, which can lead to under-reporting income on a tax return or failing to take advantage of all possible deductions;
- Not reconciling bank statements and books; and
- Ignoring small transactions, like petty cash.
Accurate and thorough bookkeeping gives your business a snapshot of how it’s performing at any moment or over a month, quarter, or year. Without this information, you might not only miss signs of potential problems but also opportunities for growth.
Confusing Profits with Cash Flow
The amount of profit your business makes only tells part of the story. As a business owner, you also need to pay attention to when and how money is received. For example, a business might close a deal that will bring in $75,000 and require five months of work. It will need to spend $25,000 to complete the project. The company does not have a $50,000 profit the moment it closes the deal. It must account for possible delays, cost overruns and other problems that can interfere with the project and delay payment by the client. Booking the entire profit right away could overstate how well the business is doing.
Overlooking Accounts Payable and Accounts Receivable
Prompt payment of bills and invoices by your business and its customers is crucial. Failing to manage accounts payable effectively can harm relationships with vendors. If it goes on long enough, it can affect both the company’s and the owner’s credit rating. Without consistent attention to accounts receivable, your business might end up without enough cash flow to keep operating. Accounting software can be a good first step for tracking bills and invoices.
Not Distinguishing Between Contractors and Employees
If your business has employees, it may owe them a wide range of legal responsibilities. It is responsible for withholding federal income tax and taxes for Social Security and Medicare from employee paychecks. The business must also pay its own share of Social Security and Medicare taxes, as well as unemployment tax.
Independent contractors are responsible for handling their own payroll taxes. Misclassifying an employee as an independent contractor could face penalties, including fines payable to the government and damages owed to employees. Clear documentation of who is an employee and who is a contractor is essential.
Commingling Business and Personal Funds
It can be difficult for small business owners to separate business finances from their personal finances, but it is very important to do so. Blurring the lines between business and personal finances can have long-term adverse effects on both the business and its owner. From the moment you start a new business, you should keep business assets and liabilities separate. This means opening a new bank account in the company’s name and keeping business purchases separate from personal ones.
Insufficient Tax Planning
Business taxes are complicated no matter how small the company or its operations are. The manner of paying and reporting taxes will depend on the business structure. A corporation, for example, pays taxes on its income and files Form 1120 with the IRS. In a partnership or limited liability company (LLC), income passes through to the individual partners or members, who each pay tax on their share of the profits. Small business owners need to keep tax planning in mind from the beginning.
Not Backing up Digital Records
Many businesses are going paperless, which offers both benefits and risks. Large filing cabinets are no longer needed, but ensuring digital records are secure is a must. It’s a good idea to keep records related to business ownership, tax returns, employment, accounting and operations for at least seven years. You should also have a backup system to recover data that is lost or damaged.
Keeping All Bookkeeping and Accounting In-House
By now, it should be clear that small business accounting is a big job. One of the biggest mistakes you can make as a small business owner is trying to do it all yourself. Accountants and bookkeepers are there to help. Their services can be invaluable to the growth of your small business venture.
Your small business faces many challenges, and accounting can often be a neglected area. However, overlooking accounting can lead to financial problems and missed opportunities for growth. By avoiding these common accounting mistakes, you can ensure the long-term success and growth of your small business.
Peggy J. Rowe, CPA, CFE, is the partner-in-charge of accounting and advisory services at Dannible & McKee, LLP, a public accounting firm headquartered in Syracuse, New York. For more information on this topic or to learn more about how outsourced accounting could benefit your company, feel free to contact Peggy at (315) 472-9127 or prowe@dmcpas.com. To find out more about Dannible & McKee, visit www.dmcpas.com.
