Running a small business entails a lot of work. There are various things to keep track of, from marketing and sales to customer service and inventory management. And then there’s accounting.
Although handling accounting may not be the most exciting part of being a small business owner, it’s an essential aspect that you should never take lightly. Remember that accounting allows you to keep track of your finances, ensure you’re paying the right amount of taxes, allow you to make well-informed decisions to ensure your business growth, and the like.
Unfortunately, small business owners often make accounting mistakes. While some of these errors are minor, others can seriously affect a business’s bottom line. To avoid this, here are some small business accounting common errors you must be aware of and ways to prevent them:
Small Business Accounting: 5 Common Errors And How To Avoid Them
1. Not Hiring A Reliable Accountant
One of small business owners’ biggest mistakes is not hiring a professional accountant. There’s a reason why accountants exist.
A small business accountant is well-versed in tax laws and has the knowledge and expertise to create financial reports and analyze financial data. Therefore, this expert can help you set up a sound accounting system, track your finances, and prepare taxes.
While you can run a business without an accountant, you’re more likely to make accounting errors if you take on accounting tasks of your own. You may also waste more time and money trying to do your own accounting. So, if you want to impede the growth of your small business, don’t think twice about hiring a reliable accountant.
If you worry about your budget, there are several cost-effective options you can consider. For example, instead of hiring an in-house, full-time accountant, you can work with a freelance professional or bookkeeper who works remotely. You may even consider signing up for monthly accounting packages, often offered by several firms and ideal for businesses with tight budgets.
2. Not Using An Accounting Software
If you’re still keeping track of your small business finances in a paper ledger or spreadsheet, you might want to invest in the best accounting software. It helps reduce human error and makes it more convenient to handle your business spending.
One of the primary benefits of using accounting tools is accuracy. It can help keep your records accurate and up to date for tax filing and to avoid paying hefty fines.
Another advantage of implementing accounting software is improved efficiency. It can help you automate many of the tasks in bookkeeping, such as invoicing, bill paying, and bank reconciliation. This can save you time and money.
With the countless perks of accounting software, there’s no doubt why it’s a valuable tool for any business. When choosing an accounting tool, prioritize your specific needs and requirements. Other factors to consider are:
- The size of your business;
- The number of transactions you process;
- The features you need; and others.
To select the right accounting software, compare the prices and read reviews. This way, you’ll know which software works best for your unique small business needs without going beyond what you can afford.
3. Not Separating Your Personal Finances From Your Business Accounts
When running any business, it’s never an ideal move to mix your personal finances with your business accounts. It makes it difficult to sort out your business transactions, which can cause headaches when the tax season arrives.
Combining your personal and business accounts can be problematic once you apply for a line of credit or loan as well. It’s because lenders want an accurate and complete snapshot of your business’s finances before they approve your loan.
So, if you’ve been using your personal and business accounts interchangeably, it’s time to break that habit and open a separate bank account for your small business. This way, you can quickly track your business-related spending and file your taxes.
4. Not Keeping Accurate Records
Another common small business accounting error is not keeping accurate records. This may result in various problems, including:
a. Inaccurate Financial Statements
Your financial statements are crucial to making better business decisions. But if they’re inaccurate, it’ll be much harder to set realistic goals for your business since you don’t know how much money you’re making or spending.
b. Penalties From The Internal Revenue Service (IRS)
The IRS can impose penalties for various accounting errors, including the late filing of taxes, inaccurate tax returns, and failure to pay taxes. These penalties can be costly and can even lead to criminal charges.
c. Damage To Your Reputation
Accounting errors can damage your reputation. If customers or investors discover that your business has made accounting mistakes, they’ll be less likely to trust you. You’ll also find it hard to attract new customers and investors and damage your relationships with your existing clients.
d. Lack Of Access To Capital
Lenders and investors are more likely to lend money to businesses with accurate financial records. If you don’t have correct financial records, you may have difficulty getting the capital you need to grow your business.
It’s crucial to keep accurate records of all your financial transactions. These include receipts, invoices, bank statements, and payroll records. Doing so will help protect your small business from dealing with problems down the road.
5. Not Paying Attention To Your Cash Flow
Cash flow is the lifeblood of any business. It’s the difference between the money coming in and going out. If you’re not paying attention to your cash flow, you may not be able to meet your financial obligations, which can lead to business failure.
Making wiser business decisions without accurate cash flow information can be challenging too. For example, you may be unable to decide whether to invest in new equipment or hire new employees.
Luckily, there are many ways to pay attention and manage your cash flow better. One of these is to track your income and expenses. To make this process easy, use a spreadsheet or accounting software.
Accounting is a critical part of running a successful small business. By avoiding common mistakes, you can help ensure that your finances are accurate and that you comply with the law.
If you’re unsure how to handle your small business accounting tasks, hiring a professional is a good idea. It’s a wise investment that can save you time, money, and headaches.