Accounting mistakes can impede the growth of your small business and put it on shaky ground. Unfortunately, mistakes are all too common, especially for new or young businesses.
Here are five of the most common accounting mistakes we see from small business owners. We also provide insight on how to avoid making these bad-for-business mistakes yourself.
Mistake #1: Not keeping track of receivables
Getting paid is always an exciting part of running a business. What isn’t 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’ll 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’re 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, overpaying on your taxes, and high bad debts. 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: Loss of expense receipts
Many business owners fail to save 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 bill if you’re ever audited.
How can you correct your receipts problem? Save 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.
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 subtracted from total income at tax time and to keep a better sense of overall profitability throughout the year. While credit cards, debit cards, and checks from your business’s bank account are easily linked, 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 income for the year! Be sure to develop a method for tracking these cash expenditures. Ask for a receipt from the vendor to enter when you return to the office and log the expense immediately.
Mistake #4: Doing your taxes yourself
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’ll have an expert who knows what they’re 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. The success of your small business depends on the accuracy and organization of your financial paperwork.
Mistake #5: Different wavelength as your accountant
You’re a small business owner. You’re not a financial professional. Nowhere does it say you have to be up-to-date on all the latest accounting blather and tax laws. 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.
Think about it, would you rather hear this? ‘We used accelerated capital cost allowance to bring your tax liability to nil.’ Or this? ‘There’s a temporary tax program that lets us completely write off all of the new computer equipment you buy. So if you need a new IT kit, buy it now because we’ll use that cost to get your tax bill down.
Bottom line is, if you and your accountant speak the same language then they are part of your team. They have your back and are providing advice you can bank on! Here at McMullan we work side by side with you and speak your language!by