8 Accounting Mistakes Made by Small Businesses (and how to avoid them)
It is common for small business owners to start out doing their own bookkeeping. Whether you use outside resources, in-house professional help, or keep your books yourself, there are some common mistakes you should be aware of so you can avoid the potential problems. Your tax professional will thank you for paying attention to these day-to-day bookkeeping mistakes and the financial health of your company will reap the benefits.
1. Trying to do everything on your own.
You are starting (or started) your business from the ground up and you have undoubtedly worn many hats. The area of accounting/bookkeeping is something that could end up costing you money in the end if you don’t get it right. Depending on the needs of your business, it may be best to start with outside help in this area. It is important that you develop an accounting system that works and allows you to focus on your business instead of taking up more time than you can spare.
Whether it is through asking around or a network of other business owners like we have at Southern Business Institute, get recommendations from other business owners.
2. Going with the cheapest accounting option.
You get what you pay for. It’s that simple. This can apply to many areas of business, but none so risky as accounting. Poor bookkeeping/accounting can cause a range of problems. Finding the right person is the top priority over cost. You can certainly save, but don’t go with the cheapest option for the sake of saving.
Plan for hiring a professional accountant/bookkeeper to be a larger line item in your budget even if you have to cut costs somewhere else less vulnerable.
Find ways to achieve the help you need within your budget. Find someone to set up your system and consult along the way with your day-to-day bookkeeping in lieu of hiring a full-time bookkeeper. Your tax professional will thank you for making their job easier (and you will likely save more money!).
Lacie Myers
GranthamPoole, one of Mississippi’s largest regional accounting firms with offices in Metro Jackson and Oxford, uses focused-industry experience to customize solutions for your financial life. Discover how we can problem-solve with your needs in mind.
Emily Pote
Pote Management is a consulting business that handles everything from bookkeeping and organization to marketing and event management.
3. Not watching your cash flow.
According to Business.com, “Adequate cash flow is a crucial aspect of running a successful business. Unfortunately, many businesses overestimate how much cash they have on hand. Overstating your cash flow can make it hard to manage cash flow, pay your employees and vendors, and fund important business purchases.” Those are the most important relationships you will have in business, so avoiding mistakes in payment is top priority. Learn more about managing your cashflow in this article from Business.com.
4. Failing to tracking reimbursable expenses.
While we are at it, add not saving receipts under $75 for tax purposes to this number. Track your expenses along the way. Staying on top of your reimbursable expenses means you are less likely to overlook something later. Find a third party app or use the one in your accounting software to scan the receipts, but do keep those hardcopies in case of an audit.
Remember: It is important to keep a backup of your financials for at least seven years.
5. Misclassifying employees.
Contract employees, freelancers, and consultants are a common occurrence in the small business world. Know who is on staff and how to classify them to avoid significant issues like tax penalties and lawsuits. If you want to read more about the pros and cons of hiring contractors vs. employees, this article is an excellent resource.
Jessica Cooley
Carraway Cooley a specialty business and high wealth consulting and tax advisory practice focused in the areas of mergers & acquisitions, strategic planning, estate, trust, and gift planning, and corporate and partnership tax and related matters.
6. A lax approach to handling petty cash.
If your company uses petty cash, you should have a designated person that handles its approval and tracking. This lowers the risk of fraud or abuse, along with making deductions easier at tax time. Make it clear that receipts should accompany any purchase made with it. The receipts and the remaining cash should equal the original designated fund amount.
7. Failing to reconcile your books with your bank account.
In an article for Business.com, Dock David Treece says that “Reconciling a bank account at least monthly is extremely important for business owners to ensure that the transactions they've accounted for are accurate and that they have as much money in their account as they think they do. This is also the best way to catch any missed or potentially fraudulent transactions so they can be corrected as soon as possible.” His in-depth article on reconciling accounts covers all the ins and outs of the importance, process, and outcomes and is a great resource.
8. Mixing business finances with personal accounts.
Missing potential deductions, problems when applying for loans, IRS issues - need we say more? For clarity’s sake we will. Deductions are important to you as a business owner and directly affect your bottom line. Mixing personal and business finances makes it harder for banks to see a clear picture of your finances and could make applying for a loan difficult. Running business expenses through your personal account could give the IRS the impression that your business is actually a hobby. There are some factors that contribute to the IRS deciding whether a business is actually a hobby (which can be found outlined here) - one of them being “the manner in which the taxpayer carried on the activity”. Commingling bank accounts won’t work in your favor.
Nathan Best
First Commercial Bank offers a straight forward, uncomplicated roster of core banking services designed specifically with the needs of businesses and professionals in mind. From Business Checking for small businesses and professionals to our premium Commercial Checking ideal for corporate customers, from sophisticated investment services to basic Internet banking capabilities, FCB’s products and services are tailor made to meet the rigorous demands of the commercial marketplace.
Mary-Straton Smith
The Source by BankPlus is a free program established to connect, educate and empower women at any stage in their careers and in any industry, through opportunities to network, share experience, and reach their professional goals.
Mistakes are going to happen, but you do have an opportunity to learn from the mistakes of others. Set yourself up for a great start to your business or give your current business some healthy habits that will lead to a profitable and organized year.
