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Updated Apr 22, 2024

7 Accounting Mistakes That Cost Small Businesses Significant Growth

Learn the seven biggest accounting mistakes to avoid if you're managing your small business finances on your own.

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Jamie Johnson, Senior Analyst & Expert on Business Operations
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When you’re growing your business, few tasks matter as much as tracking your company’s finances. In the beginning, many small business owners try to manage their books independently instead of using an in-house accountant or bookkeeper. 

For many business owners, going it alone leads to easily avoidable mistakes. Here are some of the biggest accounting mistakes that can derail small businesses, along with some tips for avoiding them.

Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

7 accounting mistakes to watch out for

Stay aware of the following avoidable accounting mistakes: 

1. Failing to hire an experienced finance professional

Even experienced accountants and bookkeepers make mistakes — but they’re finance professionals, and you probably aren’t. Even if you are, is it really worth the extra time investment to manage your business’s books on your own? Hiring a professional minimizes the potential for errors in areas such as tracking expenses, paying vendors promptly, balancing bank accounts and running payroll.

Are you confident you’re handling employees’ tax withholdings properly? Are you tracking all financial transactions, regardless of size? Just a few mistakes in these areas can cost you more than you’re saving by not hiring help. Here are a few options for obtaining professional financial assistance: 

  • Bookkeepers: Consider hiring a bookkeeper who’s licensed by the National Association of Certified Public Bookkeepers. They mainly record your business’s financial transactions via high-quality accounting software.
  • Certified public accountants (CPAs): Consider hiring a CPA to assist with tax planning and help you spot trends — and avoid mistakes — as you manage your books. To verify that a potential hire is a CPA, check their license in the AICPA database.
  • Freelance financial professionals: If you can’t afford a full-time, in-house financial professional, consider hiring a freelance bookkeeper or accountant who works remotely. This route is relatively easy, thanks to the wide selection of sites that match employers with professional freelancers. 
TipBottom line
To hire the right accountant for your business, look for financial professionals who follow a fiduciary standard and are required to put their client's best interests above their own.

2. Not tracking business costs accurately

If you’re not keeping accurate records, your accounting and bookkeeping become much less effective. When that happens, you leave your business vulnerable to losing money and being late on crucial bills. This situation sets you up for major headaches come tax season and more problems that can get in the way of a growing business.

It’s not just errors you make while entering transaction data into a spreadsheet or failing to note that you paid a bill. Inaccurate financial tracking ultimately costs your business money and undermines your ability to plan for the next month or beyond.

It’s essential for your accounting system — whether it’s just you and a spreadsheet or a bookkeeper — to track every transaction so you can accurately gauge your business’s financial health.

While it’s useful to have a financial professional handle your books, an integrated accounting system can help you or your bookkeeper do their job better. Accounting software tracks all of your financial transactions. It records every time you pay bills, deposit or withdraw money, or send an invoice

3. Mixing personal finances with business accounts

Small business owners often blur the line between personal and business finances. It’s understandable, especially when a business is just beginning to find its footing. You go to Costco or Walmart to pick up some office supplies and, because you’re already there, get a few items for your home.

But it goes beyond combining business and personal items on a single receipt. Many small business owners don’t have a separate business bank account. Using one account for personal and business purposes can cause the following problems: 

  • Difficulty sorting personal and business transactions 
  • Significant issues when filing taxes 
  • Missed tax deductions
  • Problems when you apply for a business loan or line of credit

If you’ve been using your business and personal bank accounts interchangeably, break that habit. Open a separate business bank account. You’ll likely get some incentives to do so from the bank where you have your personal account. If you’re shopping and in a bind, always separate business and personal purchases so you can set aside business receipts.

TipBottom line
If you're using a personal credit card for business purchases, apply for a business credit card instead. Major banks have cards that cater to small business owners and offer cash-back bonuses on purchases.

4. Inefficiently managing billing

Cash flow is essential to keeping a business operating from one day to the next. Billing or invoicing customers efficiently ensures you have money to pay for expenses, payroll and other needs.

Businesses that don’t manage their accounting well can suffer from cash flow problems. Invoicing can be delayed, and customers may take longer to pay, leaving the business struggling to cover its bills.

Being late on your bills isn’t the only ramification of inefficient bill management. According to Statista, 91 percent of failed startups cited running out of money or lacking financing as the reason they went out of business. 

Because the stakes are so high, improve your billing management by invoicing customers immediately after you’ve fulfilled your end of the transaction. Accounting and invoicing software can help you create a more seamless process for collecting unpaid invoices.

5. Not properly planning for tax season

Do-it-yourself tax software can be an attractive solution for small businesses that are looking to save money on an accountant. But while doing your own taxes may be OK for individuals with a simple tax return, it’s not a good idea for small business owners. Business and payroll tax issues can be complex, and incorrect filings can be costly. 

Ensure your business uses an accounting system that seamlessly tracks company expenses, payroll, and other fundamental components of its profit and loss statement to minimize tax errors and oversights.

FYIDid you know
Work with a tax consultant or another qualified tax professional to help you spot potential savings and areas where your business can improve its tax situation.

6. Failing to classify employees properly

Most small businesses rely on employees or hire freelancers to conduct essential work. Classifying these individuals correctly is crucial because you could face lawsuits and tax penalties if you do it wrong.

If a small business owner misclassifies an employee, federal and state governments miss out on payroll taxes. According to the U.S. Department of Labor, the penalties for this mistake could be substantial: 

  • Business owners may be responsible for payroll, Social Security, unemployment and Medicare taxes for misclassified employees. 
  • The business can also be penalized and sued if employees aren’t reimbursed and provided benefits under the Fair Labor Standards Act.

To avoid misclassifying employees, you must determine if they are employees or contractors based on the jobs they perform, how they are paid and their relationship with your company. 

If the individual works eight hours a day, five days a week; is paid a salary; and receives health benefits, they are a full-time employee. If the person works and gets paid per project and isn’t provided any benefits, they should probably be classified as a contractor.

Once you’ve made that determination, ensure the worker completes the correct payroll form for their classification. A contractor completes a W-9 form, while a full-time employee fills out a W-4 form. 

If you make a mistake but can prove to the IRS that you have a “reasonable basis claim,” you can get relief. You need to prove one of the following to be eligible:

  • You reasonably relied on a tax-related court case or ruling by the IRS to make your classification determination.
  • Your business was audited by the IRS when the employees in question were treated similarly to independent contractors, and the IRS didn’t reclassify the workers.
  • You treated your workers as independent contractors because the rest of the industry does so, and you can prove that.
  • You relied on the advice of a lawyer or accountant who knows about your business.

7. Going paperless without a backup

The last thing a small business owner wants to experience is a tax audit. But if you must, the more paperwork you have, the better. 

In this digital age where everything lives in the cloud or on an app, it’s understandable that people don’t save their paperwork for a few weeks, let alone seven years. However, the IRS will want specific records during an audit. 

A good rule of thumb is to save the following documents for at least seven years:

  • Business tax returns
  • Payroll tax records
  • Current employee information
  • Business ownership records
  • Accountant records
  • Records from operations

The biggest accounting errors small businesses make

What may seem like a minor accounting error can have significant consequences for your business’s finances. Consider the following common accounting errors you should avoid at all costs:

  • Overstating cash flow: Adequate cash flow is a crucial aspect of running a successful business. Unfortunately, many businesses overestimate their cash on hand. Overstating your cash flow can make it hard to manage operations, pay your employees and vendors, and fund important business purchases.
  • Tracking income incorrectly: If you don’t have accurate records of your business’s revenue, you could end up overreporting or underreporting your income. This can have tax consequences down the road.
  • Tracking expenses incorrectly: Another common mistake businesses make is failing to track business expenses comprehensively. This mistake will increase your taxable income and cause you to pay more in taxes at the end of the year.
  • Forgetting to pay invoices: When vendors send invoices for services rendered, they likely have a due date within 30 to 60 days. If you don’t stay on top of your accounts payable process, it’s easy to overlook due dates and pay your invoices late. This can lead to late fees and damage your vendor relationships.
  • Missing the signs of fraud: Some business owners want to handle all accounting tasks personally, while others make the mistake of outsourcing everything. You should never put yourself in a position where you don’t know what’s happening with your business finances. Failing to track your finances could cause you to miss the signs of fraud.  
TipBottom line
To prevent employee fraud, vet your team thoroughly during the hiring process and minimize employees' access to financial information.

Best accounting software for accounting accuracy

If you struggle to manage your company’s finances, accounting software can help. The best accounting and invoicing software can track the money flowing into and out of your business and streamline tasks such as sending and following up on invoices. Consider the following excellent options: 

  • QuickBooks Online: QuickBooks Online is a solid choice for businesses thanks to its wide range of features and user-friendly interface. The software can reconcile bank transactions, send invoices and pay vendors. Our QuickBooks Online review details this platform’s 750-plus app integrations that help you create a customized solution for your business.  
  • FreshBooks: Thanks to its robust invoicing features, FreshBooks is popular with small businesses and freelancers. You can use it to send branded invoices, set up recurring billing for retainer clients, and automate late-payment reminders. Read our FreshBooks review to learn how the software tracks billable hours, making it a great option for individuals who work one-on-one with clients.
  • Xero: Xero doesn’t charge extra to add users, making it one of the most affordable accounting software options around. Xero helps you track your income and expenses, invoice clients, and set up automated billing. Our Xero review highlights the platform’s user-friendly interface and hassle-free 30-day trial.
  • Oracle NetSuite: Oracle NetSuite is a great option for businesses that need a comprehensive and customizable accounting solution. Our detailed Oracle NetSuite review explains how the platform’s ERP software features can also help you manage payroll, HR and taxes. 
author image
Jamie Johnson, Senior Analyst & Expert on Business Operations
Jamie Johnson has spent more than five years providing invaluable financial guidance to business owners, leading them through the financial intricacies of entrepreneurship. From offering investment lessons to recommending funding options, business loans and insurance, Johnson distills complex financial matters into easily understandable and actionable advice, empowering entrepreneurs to make informed decisions for their companies. As a business owner herself, she continually tests and refines her business strategies and services. Johnson's expertise is evident in her contributions to various finance publications, including Rocket Mortgage, InvestorPlace, Insurify and Credit Karma. Moreover, she has showcased her command of other B2B topics, ranging from sales and payroll to marketing and social media, with insights featured in esteemed outlets such as the U.S. Chamber of Commerce, CNN, USA Today, U.S. News & World Report and Business Insider.
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