5 Accounting Mistakes That Put Small Businesses at Risk
Accounting mistakes can have a negative impact on the growth of your business. The reality, unfortunately, is that these types of financial mistakes are all too common. Minimizing these accounting errors can go a long way in ensuring your business can succeed without significant financial problems. The following is a list of the common accounting mistakes made by small businesses and how you can combat them.
1. Poorly Managing Cash Flow
If your business has a cash flow problem, you may not be in business for long. Even a profitable business can go bankrupt if there isn’t sufficient cash to cover bills and expenses. You need to keep up with your receivables to ensure you’re being paid promptly and that you don’t constantly have invoices that are severely delinquent. Poorly managed cash flow means you may not be able to grow your business in a sustainable way. Conduct a monthly review of your financial statements so you have a clear idea of what you’re selling and what you’re billing. Having a solid understanding of payables vs. receivables means you can stay on top of any cash flow issues before they arise.
2. Mixing Business and Personal Finances
Commingling personal and business accounts is a surefire way to derail your company’s finances. You may be using personal finances to fund business expenses; however, properly recording these transactions is a must. You should only run business transactions through a dedicated business account. Bank statements allow you to track your company’s finances accurately, stay on top of spending and even manage cash flow. Not accounting for business expenses can lead to not being able to take deductions you qualify for and, ultimately, a higher tax bill.
3. Not Keeping Meticulous Records
Do you have a system in place to track all your business-related purchases? Are you saving and keeping track of your receipts? What about expenses paid in cash; are you keeping track of them? If the answer is no to any of these questions, you can find yourself in a world of hurt come tax time. Without proper records of your business-related spending, filing your taxes is a nightmare. If you don’t have a record of it, it didn’t happen, and you can’t deduct it. Once you establish a separate business account, how you’re going to manage your financial records is the next big decision. Saving receipts and consistently logging expenses are essential to maintaining a complete picture of your finances and ensuring you won’t have any problems come tax time.
4. Not Using Accounting Software
Using accounting software solves most of your record-keeping issues. The right software can make business processes such as bookkeeping and payroll automatic, as well as eliminate many accounting mistakes. Using software also cuts down on the time you have to spend managing your finances and allows you to focus on growing your business.
There are many accounting software options. Make sure you choose the best fit for your business based on your needs and not by the many services these software solutions offer. Remember, small businesses rarely require enterprise solutions, so find an accounting software that fits your needs and your budget.
5. Not Outsourcing Tax Preparation
As a small business owner, it’s often tempting to do everything yourself in an attempt to save money. However, your taxes, more often than not, should be outsourced to a professional. Small business taxes can be tedious, time-consuming and complicated. If you’re not a professional tax preparer, it’s likely you don’t understand all the rules, regulations and deductions that apply when filing your taxes. Improper tax filing can lead to missed deductions, a higher tax bill and even a tax penalty. Forgo the potential headache, and find a tax professional you can trust.