Small Business Accounting common mistakes
Accounting mistakes can impede the growth of your business and put it on shaky ground. Unfortunately, mistakes are all too common, especially for new or young businesses.
Below are common accounting mistakes shared by small business owners. It provide insight on how to avoid making these bad-for-business bloopers yourself.
Mistake #1: Not staying on top of receivables
Getting paid is always an exciting part of running a business. What is not as exciting however, is keeping track of your receivables.
When you issue an invoice, a receivable is recorded—meaning that a customer owes you money. Checking your receivable listing you will see that customer’s balance as outstanding. As soon as you receive payment from that customer, it should be applied against the invoice to mark it as paid.
In practice however, this is easier said than done, and customer deposits are often left to reconcile later on since there’s never enough time in a day. At tax time you are left with a bunch of customer deposits sitting in your revenue account and a receivables report that doesn’t make sense.
The consequences?
Hours wasted updating the receivables listing during tax time.
Unfollow debts would contribute to high bad debts and weak management of cash flow, which consequently restrict your business development.
Inaccuracy in debtors and revenue listing might duplicate the revenue recognition that overpaying your taxes.
Making it a point to follow up on your receivables—and apply payments to invoices on a monthly basis—can save you tons of resources in the long run.
Mistake #2: Not keeping expense receipts
Many business owners fail to retain copies of business expense receipts, which can result in a series of tax, accounting, and cash flow problems.
How many times have you looked at your bank account statement and had no clue what that $100 charge is? Is it supplies, a business meal, equipment—or is it a personal expense you accidentally paid for using your business card?
Not having an actual receipt that can give you details about the charge can result in incorrectly reported tax expenses and a high tax penalty during tax audit.
How can you correct your receipts problem? Keep a receipt of every business purchase. That process may seem very cumbersome, so here are a few tips to make it easier and less time-consuming: only use your business bank or credit card to pay for business expenses; have an envelope in your bag/car where you can put all your receipts instead of putting them in your pocket, purse, or worse, trash can; once a week/month go through the receipts stored in the envelope and file them to your tax folder or save digital copies.
Mistake #3: Not recording cash expenses
It is crucial for entrepreneurs to track all expenses related to running a small business so these costs can be deducted against business income at tax time and to keep a better sense of overall profitability throughout the year.
While credit cards, debit cards, and cheques from your business’s bank account are easily tracked in the monthly statement, it’s easy to overlook expenses paid in cash. Most commonly, some of these expenses are not recorded and thus forgotten—causing the business owner to overstate profit for the year!
Be sure to develop a method for tracking these cash expenditures. Ask for a receipt from the vendor and when you return to the office, log the expense immediately in your cashbook.
Mistake #4: Not hiring a professional to handle taxes
Small business owners often try to save money by doing their own taxes.In reality, not hiring a professional can cost big bucks down the road. You may not claim all the deductions you qualify for, or you might underpay your tax bill—leading to penalties and other fees.
Spending the money to hire a professional means you will have an expert who knows what they are doing, and can apply the right tactics for your financial situation. They can keep updated on the ever-changing tax laws and help you plan ahead for potential tax hikes.
Paying for a professional bookkeeper can also help keep your costs of an accountant at a minimum, since they do all the prep work. Plus having another pair of eyes is never a bad thing, especially when it comes to finances and taxes.
The success of your small business depends on the accuracy and organization of your financial paperwork.
Mistake #5: Not getting on the same language with your accountant
So, you’re sitting there with your accountant, in a fancy office, listening to this: ‘EBITDA is strong, way up from last year.’ You shift in your seat. You nod. It continues, ‘Add in D & A, and your bottom line is still positive. And here is the kicker, thanks to loss carry forwards, tax liability is nil.’
You are a small business owner. You are not a financial professional. And nowhere does it say you have to be up-to-date on all the latest accounting blather. Besides, buzzwords, jargon and fancy strategies are why you pay your accountant. Translating all that techno-talk into language you understand should be part of the package.
If you and your accountant speak the same language then he is part of your team. He is watching your back, and he is providing advice for you to make your business decision.
