When it comes to starting and growing your business, how well you set up the management and oversight of your finances is one of the most important decisions you will make. Having worked with small businesses on their bookkeeping, accounting, budgeting/planning, and tax planning/preparation, we’ve seen it all. While many business accounting mistakes are insignificant and easy to correct, others can be costly and risky to your business’s financial health.
Here are six common small business accounting mistakes you may be making today:
- Not taking bookkeeping seriously enough – Allowing months to rapidly pass without making any entries in the books, not reconciling your books with bank or credit card statements, sales tax accounts, or other financial accounts, and not setting up and maintaining an organized chart of accounts will make it challenging for you to make timely business decisions. Having a clean chart of accounts and reconciling your books on a monthly basis will provide a clear picture of where your money is going and how much money you have on hand at any given time. It will also allow you to discover bank errors before they become major problems.
- Forgetting to record small transactions – Accounting and bookkeeping are not effective when accurate records are not kept. It’s essential to keep track of every transaction–and related receipts–or you may be leaving money on the table come tax time. Small transactions add up quickly. The longer you go with tracking them, the more likely the transactions will become overlooked. Staying on top of small transactions also makes it far easier to manage the bigger ones. By getting in the habit of maintaining a record of small transactions when you start out, you’ll be able to easily manage your books as your company grows in size and number of transactions.
- Not assigning budgets to investment projects – Failing to effectively plan and budget your investment projects makes it impossible for you to reign in a project that may be costing far more than you intended. Assigning a clear budget before your company takes on a new project will avoid this problem. It will also allow you to track ROI once the project is complete. As your business becomes more established, this will be essential data for understanding how much your business needs to spend to continue operating. It also makes it easier to set more accurate future budgets for projects to be successful and not wasteful or excessive. Here are helpful tips for creating a budget using QuickBooks.
- Failing to classify employees v. contractors – Today’s small businesses often rely on a combination of employees, freelancers, independent contractors, and/or gig economy workers. Misclassifying employees can result in significant consequences such as tax penalties and lawsuits. If federal and state governments miss out on payroll taxes, the penalties could be substantial. You may unknowingly be on the hook for payroll, Social Security, unemployment and Medicare taxes for misclassified employees. Knowing the difference between an employee and a contractor, as well as the accounting consequences of each, is vital to recording your accounts accurately.
- Mixing personal and business banking and credit card transactions – While tempting when you’re first starting out, blurring the lines between personal and business finances can lead to major headaches. When tax time comes around, going back over your bank and credit card account and trying to remember which transactions were personal and which were business can lead to many mistakes and missed deductions. It’s also a huge waste of time that could be better spent planning for the growth of your business. Even more detrimental to your success, you could face an array of legal problems should your business be audited. Open a separate business banking account and credit card to eliminate the temptation to use one for both.
- Inefficiently managing billing – Delaying or falling short on your invoicing process can lead to cash flow issues, which is essential for making sure your business is operational from one day to the next. Stay on top of your billing management by invoicing your customers immediately after you’ve fulfilled your end of the transaction. This will help ensure your customers pay on time and you’re not late paying your own bills. Electronic invoicing is more efficient and seamless than traditional mail. It also gives your clients an opportunity to quickly pay online.
Taking accounting seriously from the onset of your business and hiring professional help will allow you to focus on business growth instead of dealing with these costly small business accounting mistakes.
We are happy to discuss how our team can help minimize the potential for accounting errors, assist you with tax planning and preparation, help spot trends, and assist in growing your business. To set up a free consultation, please click on the button below to schedule a time that works best for you.
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