Few decisions are as crucial to the expansion of your company as keeping track of its finances. Many small business owners try to handle their books independently instead of hiring an internal accountant or bookkeeper. However, they end up making many mistakes in the process.
Business accounting is essential for several reasons. It helps you keep track of your company’s inventory, assets, and liabilities. It also aids in finance and investor recruitment when necessary. Last but not least, it’s required for tax and regulatory purposes.
Going it alone results in blunders for many business owners that are easily avoided. Here are some accounting blunders that may ruin small businesses, along with some advice on preventing them.
When a firm owner handles accounting duties, bookkeeping mistakes are far more prevalent. Many business owners typically concentrate on their books after work when exhausted. Any inaccuracy, from clerical errors to publishing an entry to the wrong account to erroneously classifying an employee to sales tax issues, can negatively affect your organization.
You can avoid accounting mistakes by using accounting service providers. They can ensure you have accurate financial records to make tax filing and compliance easier. To accurately assess your company’s financial health, every transaction must be recorded by your accounting system, whether with a spreadsheet or a bookkeeper.
Lack of accurate cost tracking for business
Your bookkeeping and accounting will be significantly less effective if you don’t keep precise records. If you do that, your company is exposed to financial loss and late payments on significant obligations. This puts your organization in a position to have substantial difficulties during tax season and other issues that could obstruct its expansion.
Other mistakes include forgetting to record a bill payment or putting incorrect transaction data into a spreadsheet. Inaccurate financial monitoring hampers the ability to budget for the upcoming month or beyond, eventually costing your company money.
While hiring a bookkeeper or having a financial expert manage your accounts might be beneficial, an integrated accounting system can also assist you or your bookkeeper in their duties more effectively. Your accounting software will automatically retain a record of each bill payment, cash deposit or withdrawal, and invoice you send.
Mixing personal and business accounts’ finances
Small business owners sometimes mix up their personal and professional finances. It makes sense, especially when a company is just getting off the ground. It may be more challenging to separate your personal and commercial transactions when using one account, which could lead to severe problems come tax season. You can even overlook a cost that qualifies for a company deduction due to poor financial accounting.
When you seek a loan or line of credit, the lenders want to see a clear and accurate picture of your business’s finances and may find it difficult if there are blurred lines between your personal and business accounts.
If you’ve been mixing up your personal and corporate bank accounts, stop doing that. Having a personal and business bank account is best to avoid mixups, and your bank may even provide you with specific incentives to do so.
Failing to prepare adequately for tax season
Small businesses wishing to cut costs on an accountant or other tax specialist may find that do-it-yourself tax software is acceptable for preparing a simple tax return. If you’re attempting to file your business taxes alone, it is easy to make mistakes.
This is especially true if you haven’t taken the necessary steps to record your company’s financial information along the route. Nobody likes having to compile an entire year’s worth of receipts and paperwork at once because they were disorganized during the year. The situation is even worse for corporations, who have a harder time adhering to complex tax requirements.
About records and receipts, everyone occasionally becomes complacent. The ideal strategy is to ensure that your firm employs an accounting system that effortlessly records business spending, payroll, and other essential elements of your business’s profit and loss statement.
You can find potential savings and things your company could be doing differently before the tax year is done by hiring a skilled accounting firm such as Boardroom. They can check in on your firm regularly and perform tax-related organizational sweeps.
Not correctly classifying employees
Small businesses depend on staff members, independent contractors, freelancers, and gig economy workers to complete tasks. If they designate these people incorrectly, it could lead to legal action and tax fines.
According to the U.S. Labor Department, if a company owner misclassifies an employee, the federal and state governments lose out on payroll taxes, and the consequences for doing so might be severe. If an employer fails to pay employees and offers benefits as required by the Fair Labor Standards Act, they may also be subject to fines and legal action.
Determine whether a worker is a permanent employee or a contractor based on their tasks, compensation, and relationship to your business to ensure workers are correctly classified.
Going paperless without a backup
An audit by the IRS is the last thing a small business owner wants to experience. The more papers you have, though, the better placed you’ll be if you do need to. It’s reasonable that people don’t save their documents for a few weeks, much alone seven years, in this digital age where everything lives in the cloud or on an app, but the IRS will need it during an audit.
As a general guideline, keep the following records for at least seven years:
- Company tax returns
- Payroll tax records
- Current employee data
- Records of business ownership
- Accounting records
- Operation-related records
You can use the help of accounting service providers to switch to digital accounting without losing your critical documents.
When you consider all of these factors, outsourcing your company’s accounting makes sense at some point. And as a business owner, doing so offers some advantages. You’ll have more time if you outsource accounting to interact with suppliers and keep up with business changes.