Here are 7 accounting mistakes you don't want to be making as a small business owner. Is your business at risk?
Accounting plays a significant role in any business. Having a firm grip on cash flow and an understanding of income and expenditure can help a small business to succeed and grow. On the flip side, accounting errors and poor financial reporting can leave it stumbling on shaky ground. Here are seven accounting mistakes that put your small business at risk.
Mixing Business with Pleasure
If you're running a small business, you may choose sole trader status instead of setting up an LLC. This is a suitable approach for most, but may encourage you to use your own personal account instead of opening a dedicated business account. Mixing personal and business finance is a quick route to confusion when it's time to file your returns. If you haven't done so already, open a business account immediately and keep everything separate from this point forward.
Not Keeping Business Expense Receipts
Failing to keep receipts for business expenses can lead to many problems. Noting an expense in a ledger or seeing it listed on a credit card statement is simply not good enough, particularly if your business is ever audited by the IRS. Organizing your receipts at the end of each day, or at least once a week, can help you avoid a multitude of issues. Entrepreneur advises that you make notes on your receipts and keep a digital copy.
Related Article: Why Your Business Needs Mobile Cloud Accounting
Failing to Record Cash Expenses
While payments made on credit and debit cards are easy to track, cash payments are easy to overlook. Failing to record cash expenses is a common error for small business owners and one that can end up being quite costly if you make a habit of it. Most accounting software includes a facility to record these expenses, but as with everything else, you should also make sure that you keep a receipt. Doing so will give you a clear understanding of your profitability at the end of the year.
Creating a Mound of Paperwork
Trying to keep track of your business on paper alone can take up a significant amount of your time. Why make your job more difficult than needed when you could use accounting software specifically designed for the needs of small businesses? The right software can help make your business more efficient and increase profitability by automating reports, tracking projects, tasks and billable hours, and streamlining your invoicing processes.
Trying to Do Everything Yourself
As a small business owner, you'll be familiar with the need to wear several different hats. Whether you should wear the hat of an accountant is a tricky question. One small mistake if you don't know what you're doing could end up costing a lot further down the line. Hiring an accountant can actually help you save money in the end, and since they are a tax-deductible cost, it makes sense that you use their services.
Not Having a Plan B
If you are already using accounting software, then you might think that you have everything all wrapped up. You're probably in a better position than many other small business owners, but you shouldn't rest on your laurels. Make sure you keep physical copies of any business-related documentation and consider using a program like Sage accounting software to keep your data secure in the cloud.
Related Article: Hiring a Financial Consultant Might Be the Best Thing You Ever Do
Failing to Create a Business Budget
Proper accounting is not just about keeping records of your income and expenses, it's about planning too. Within a small business, this planning comes in the form of a budget. Preparing a budget, whether for the year ahead or for an individual project, keeps you organized and helps make sure that you don't overspend. The U.S. Small Business Administration offers useful guidance on how to create and manage a business budget.
For the most part, these seven accounting errors are easy to solve. Hopefully you haven't fallen into bad habits, but if you recognize your business is guilty of any of these errors, the time to change is now. You'll be thankful you did when year-end rolls around.