Effective bookkeeping is the basis of any thriving small business. Correct financial records offer crucial insights into a business’s financial health, enabling sustainable growth and the ability to make informed decisions.
However, numerous small business owners, managing several responsibilities, usually make common bookkeeping mistakes that could create cash flow problems, financial discrepancies, and tax issues.
Knowing these mistakes and understanding how to avoid them is vital for preserving the financial integrity of your small business.
#1 Mixing Business and Personal Finance
Let’s begin with one of the worst common mistakes of DIY small business accounting: mixing business and personal finances. It might seem innocent to put a business lunch on your personal credit card or use your business account to pay for your children’s clothing.
However, these blurred lines swiftly generate confusion when the time comes to reconcile your books during tax season. Using one account for both business and personal finances could create the following issues:
- Trouble separating business and personal transactions
- Issues if you want to apply for a business loan
- Inaccurate financial reporting that makes it difficult to gauge your business’s true profitability
You’ll squander time attempting to separate expenses. Moreover, you might have missed deductions or misclassified transactions.
Clean financial records begin with the complete and correct separation of business and personal. The fix is easy but non-negotiable. You should open credit cards and bank accounts for your small business, using them just for business expenses.
It’s an essential habit that safeguards you from unnecessary risks.
#2 Neglecting the Monthly Financial Close
A critical part of effective accounting entails performing monthly financial closes. Typically, small businesses will let a month slip by and then immediately find themselves six months behind. Hiring a company that specializes in accounting for small businesses helps decrease the odds of missing the month-end closing.
These procedures include assessing every line on your balance sheet, detecting and correcting any mistakes, and producing the results for management to see. Misapplied credit or debit accounting entries can mess up your financials, making it more difficult to track performance or spot problems early.
Neglecting the month-end close will generate incorrect financial reports, eventually affecting decision-making within the business and, in many instances, leading to wrong tax projections. To avert these possible problems, prioritize the process as you would with your operations or sales procedures. You should set up a standard review schedule with your accounting team.
As a small business owner, you need the facts to make informed decisions about operating your business. Without an efficient month-end process, making business decisions will be impeded. The most successful small businesses depend on their monthly results to modify their business strategies.
An excellent idea is to use accounting software to continually categorize, track, and report transactions. When business and personal finances are kept separate, your small business appears legitimate to investors and lenders, preparing and filing your taxes is simpler, and your financial records are cleaner.
Without an accurate month-end close, your small business will start to drift off course.
#3 Not Tracking Business Costs Correctly
Putting all your expenses under “miscellaneous” makes it more difficult to analyze your cash flow and spending. With each item of expenditure put under a particular code from your accounting chart, you can swiftly review your spending, run reports, and seek ways to enhance budgets and cash flow.
If you don’t keep correct records, your accounting is way less effective.
When this occurs, you leave your business susceptible to late payments on critical bills, lost income, and overlooked financial insights. This situation produces huge headaches come tax season and can create issues that slow your business’s growth.
It’s not only the mistakes you make while inputting your transaction information into a spreadsheet or neglecting to record that you paid a bill. Incorrect financial tracking eventually costs your business money and undercuts your ability to plan for the future.
Regardless of how you do your accounting, whether you use a spreadsheet or an accounting software, it is vital to record each transaction so you can correctly assess your business’s financial health.
Most small business owners don’t have the time or energy to do this, which is why it is highly advisable to hire a professional accountant to handle your expenses effectively. Your accountant can record every bill you pay, when you withdraw or deposit money, invoicing clients, and month-end closes. If you want to know where your money goes, an accountant possesses the knowledge to categorize your expenses accurately.
#4 Failing to Classify Employees
Small businesses have lots of various types of workers, such as freelancers and contractors, managing different projects. Misclassifying them as employees could put you in trouble with the IRS, resulting in tax penalties.
A professional bookkeeper can school you on the difference between each type of employee.
If a small business owner misclassifies an employee, the state and federal governments miss out on payroll taxes. The penalties for this error can be significant:
- Small business owners might be responsible for social security, payroll, unemployment, and Medicare taxes for misclassified employees.
- The business could also face lawsuits if workers aren’t offered benefits as required by labor laws, specifically the Fair Labor Standards Act.
To avert misclassifying employees, you need to decide whether an individual is a contractor or employee based on their job, their pay, and their relationship to your business.
When in doubt, talk with an experienced accountant to guarantee compliance and stop possible penalties.
#5 Not Accurately Planning for Tax Season
DIY tax software might seem like a money-saving solution for small businesses, particularly when trying to avoid paying for the services of a professional accountant. But while doing your own taxes may work for some individuals with a simple tax return, it’s seldom a good idea for small business owners. Business and payroll tax problems could be complicated, and wrong tax filings can be expensive.
Make sure your business uses an accounting system that effortlessly tracks business expenses, payroll, and other essential components of your profit and loss statement to lessen tax oversights and errors.
Missing tax deadlines can generate accrued interest, delayed refunds, and penalties, which hurt your cash flow and add unwanted anxiety. Many small businesses fall behind because their books aren’t organized or up-to-date for tax season.
Unfortunately, catching up in the first quarter is typically too late to fix bigger issues. The solution is to keep your books updated during the year, not just in the first quarter or the day before the tax deadline. Routine maintenance guarantees you’re ready for tax deadlines, making tax preparation quicker and lessening the odds of expensive mistakes.
Staying aligned with tax timelines keeps your small business compliant and your finances stable all year long.
A huge part of your bottom line is taxes. Partner with an experienced tax accountant who can navigate the tax world and make sure you pay the least amount of tax legally acceptable.
Taxation is complex, and it’s easy to make expensive errors if you’re not organized and prepared. Don’t wait until tax season to try to begin sorting everything out.
Be sure you know all your business tax liabilities.
Set aside money for taxes during the year, and consider consulting an accountant to make sure your taxes are filed correctly and you have taken advantage of every tax incentive, deduction, and credit your qualifications match.
Hire an Experienced Accounting Professional
Hiring an accounting professional diminishes the possibility of mistakes in areas such as payroll and reconciling bank accounts.
Are you sure you’re handling employees’ tax withholdings accurately? Just a couple of errors in these areas could cost you more than you’re saving by not hiring help. At RMP Accounting, we provide bookkeeping services for small businesses that include payroll, sales tax filing, and bringing your general ledger up to date.
Contact us today and let’s talk about your accounting needs.