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The Top Accounting Challenges Small Businesses Face

Alika Cooper
Alika Cooper

Small business owners face a number of challenges every day, and accounting is a big one. Here's how to stay on top of your finances as an entrepreneur.

As a small business owner, you need to wear several hats. Your tasks will include marketing your brand, hiring the right people, and maintaining relationships with your customers. On top of all this, you need to keep track of your profits and business accounting.

Accounting is probably not your passion, but keeping your books organized is crucial for your small business. Accounting is the language of financial growth, translating many separate numbers into a comprehensible statement of business profitability.

Typically, accounting involves recording, summarizing and analyzing the financial transactions of a business. This can be difficult in itself, but there are other common financial obstacles small business owners must overcome. Here are 12 of the top accounting challenges entrepreneurs must deal with, and how to overcome them.


1. Cash flow

Managing cash flow is a big challenge for small businesses and startups. According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems. Small business owners find it difficult to earmark funds to cover recurring costs and keep the business alive.

To stay on top of cash flow, analyze your bills carefully and be thorough in chasing payments from customers.

2. Unforeseen expenses

If a retail store earns $150,000 per year after expenses, it may seem to be in good shape – until a slip-and-fall lawsuit costs the store $1.3 million and it has no insurance coverage. Even smaller expenses, such as a one-time government tax on all businesses in a particular region or a rise in the cost of goods, can cause major changes to the bottom line.

Optimize your existing credit to manage your small-term expenses, but also monitor your long-term profitability to ensure that cost changes do not threaten your overall liquidity.

3. Disaster preparedness

Unpredictable natural disasters have devastating effects on lives and businesses, but they hit small businesses especially hard.

You might have planned some disaster recovery strategies, but you need to have cash on hand to ensure that you can revive your business after a catastrophic event. [Read related article: From COVID-19 to Hurricane Season: Disaster Preparedness for Small Business]

4. Taxes

Every U.S. business has to pay taxes, but taking advantage of deductions can reduce your bill come Tax Day.

If your small business is home-based, home office deductions are important for running your profits. As the National Federation of Independent Business explains, Section 179 of the tax code allows you to instantly deduct the cost of business property depreciation. Hence, that investment cost can be reinvested into your company.

5. Managing payroll

Playing the role of an HR or payroll expert can be difficult for a small business owner. If you don't know how to properly classify your new employees, you could run into costly penalties.

In an Ernst & Young survey, 85% of the businesses polled said there is room for improvement in their payroll process. The most common problems were related to organizational inconsistency, including incorrect tax filing, overdue and underdue payments, incompatible software, employee absence tracking, compliance issues, and administrative burden.

6. Staying on top of expenses

Keeping track of your receipts and recurring expenses can be exceptionally hard, but maintaining records of expenses is essential for small businesses to stay ahead in the market.

Fortunately, you no longer have to store all paper receipts in a filing cabinet or box to process later. There are many accounting software options on the market that can help you go paperless. Every program is different, though, so do your research to find the one that best suits your business's needs. [Need help choosing the right accounting software for your business? Check out our recommendations and best picks.]

7. Reconciling your books

Closing your books can be an annoying task, especially without establishing a proper accounting system. It's easy to make a mistake that can lead to incorrect calculations, misleading data analyses, and even IRS audits, which is why it's critical to verify all your business transactions on a monthly basis, if not weekly or daily. You may want to make it a habit to run through your accounting books at the end of each day while the transactions are still fresh in your mind.

8. Analyzing your finances

Making a sound financial decision takes three steps: interpreting, analyzing and advising. Regardless of the reports you use, generating the numbers is only the first stage. What do those numbers actually mean? More importantly, how do you improve them? You must interpret and analyze these numbers to lead yourself to the best advice and decisions. By doing this, you can enhance your financial position in the market and find the loopholes that are affecting your business growth.

9. Trying to DIY accounting

Going it alone is the habit of many small business owners, but that can be costly when it comes to accounting. You may be an expert in creating a certain product or providing a service, but not in bookkeeping. Even if you can balance your books, it's easy to make mistakes when you don't leave it to the professionals. That could lead to a loss of profits if invoices go unpaid;  you could run into cash flow problems, or you could end up overpaying in taxes.

Hiring a skilled bookkeeper or outsourcing accounting to a professional will ensure your books are up to date and accurate, representing the true state of your business. A second pair of eyes on your books will reduce the likelihood of mistakes and help you identify opportunities to cut costs and grow. It will also save you time that you can spend on growing your enterprise.

10. Embracing technology

Pencil and paper or Excel spreadsheets may be the old ways of accounting, but these are still common methods for small business owners. They've done it that way for years, so why change now? 

Cloud accounting software can streamline your business processes and help you identify growth drivers, cut down on the time it takes to record and reconcile your transactions, and reduce mistakes. Most cloud-based accounting programs charge you monthly and give you access to a plethora of services, including sales tracking, budget planning, inventory management, financial statements, payroll and tax management. 

11. Using accounting software to its fullest

The number of features and functions in accounting software can be daunting for small business owners, but that doesn't mean they should be overlooked. Cloud accounting software is powerful, providing actionable insights about your business. By learning the software and training your staff on it, you can cut down on the time it takes to enter data and run reports.

12. Sweating the small stuff

To get the most accurate picture of your business's finances, you must record and categorize everything, even the littlest expenses and transactions. It's also important to perform an audit of your books and accounts each month and run regular reports. The better your bookkeeping system and your oversight of it, the easier it will be to spot errors or areas to grow. Only through accurate and detailed accounting and reporting can you get a clear and reliable picture of your business's health.

Editor's note: Looking for accounting software for your business? Complete the questionnaire below to have our vendor partners contact you with free information.

Avoiding accounting mistakes

An incredibly important task for small businesses is selecting the right accountant. An experienced accountant or CPA can help your business avoid all the above accounting mistakes and advise you on how grow your business in this agile market.

Hiring an in-house accountant can be costly, but it's important to get a qualified professional on board at an early stage. If you are a small business owner or startup facing these or other accounting challenges, outsourcing your finance and accounting needs can be a viable, affordable way to deal with those issues faster so you can get back to focusing on what you do best.

Donna Fuscaldo contributed to the writing and research in this article. 

Image Credit: AndreyPopov / Getty Images
Alika Cooper
Alika Cooper Member
Alika Cooper works a Business Development Manager at Cogneesol, a well-renowned company offering data management, technology, accounting and legal services. She has been working with Cogneesol for the past 10 years and is responsible for branding and generating sales. While handling the projects, she has witnessed a lot of changes over the years. She has been thoroughly researching and sharing her viewpoints about these industry trends and changes on many platforms across the Internet.