Accounting mistakes can impede the growth of your small business and put it on shaky ground. Unfortunately, mistakes are all too common, especially for new or young businesses. Small business owners face numerous everyday challenges, and they usually conquer them with their entrepreneurial strength. Unfortunately, keeping the books on their growing business is a place most business owners miss the mark and the potential consequences of messing up on the accounting functions can have serious consequences when it comes to the success or failure of a business. The founders of the cloud accounting system Freshbooks have come up with the top five accounting mistakes that small business owners face, and how to avoid them.
#1 MISTAKE: NOT STAYING ON TOP OF RECEIVABLE
Getting paid is fun. Managing who owes you money is usually not. But staying on top of your receivables is critical to ensuring your cash flow is healthy and that you know where you stand financially each month. It also ensures that at tax time, you’re not scrambling to piece together which payments belong to which invoice. Fortunately, there are more software options than ever before for freelancers to painlessly manage this part of their business. Freelancers should consider taking advantage of cloud accounting tools that allow you to send invoices and update payments from anywhere. Softwares like FreshBooks, Xero, and QuickBooks Online for example, allow you to even automate most of the billing process, including sending out late payment.
#2 MISTAKE: NOT KEEPING EXPENSE RECEIPTS
How many times have you reviewed your bank account statement trying to figure out what a charge was for — was it supplies for your office or was it an expense related to a client’s project? Not only is this frustrating, but not having copies of your receipts can land you in trouble at tax time. If you’re unable to accurately report your expenses, you might find yourself getting nailed with costly penalties including paying more taxes than you ought.
Best practices for keeping organized include:
- Paying business related expense strictly from your corporate bank account
- Keeping copies of your receipts in one place and reviewing these at least weekly or monthly while they’re fresh in your memory
#3 MISTAKE: MIXING PERSONAL/BUSINESS FINANCES
When starting your own business, a first step should be to open a separate bank account where you deposit your income and pay your business expenses from. A second step should be getting a debit/credit card that you will only use for this business. These are important signals to the Tax Authority that you’re running a business vs. a hobby. If you’re mixing your finances, the Tax Authority might not grant this important distinction. Mixing your expenses also prevents you from really knowing how much money you’re actually making vs. spending for your business, which increases your chances of accidentally running up debt or losing track of project profit margins.
#4 MISTAKE: NOT HIRING A PROFESSIONAL TO HANDLE TAXES
In an effort to save money, small business owners might be tempted to do their taxes themselves, but hiring a professional you can trust will pay off in two ways. First, your accountant can apply the most up-to-date tax laws to ensure you’re benefiting from all the deductions you qualify for. Secondly, working with a professional on your taxes means they can help resolve any discrepancies or confusions resulting from guesswork (ex. incorrect tax categories, deductions) that might have otherwise lead to an audit, saving you potentially huge fortune in penalties.
#5 MISTAKE: NOT GETTING ON THE SAME WAVELENGTH AS YOUR ACCOUNTANT
Your accountant/business advisor can be an ally to you and your business, since they have the skills and training to help guide important business decisions you might face. Is it time to hire your first employee? When’s the right time to make a big purchase for your business, like upgrading your software or buying a new computer? All too often however, creative professionals are uncomfortable with accounting jargon and might be embarrassed or intimidated when trying to communicate with their accountant, resulting in them not asking the questions they have.
It’s important that when you don’t understand, that you ask your accountant to explain things in plain language. Or if you continue to find this tricky, consider finding an accountant who is more on your wavelength and communicates in the style that works best for you. FSC Professionals are willing to be your trusted business advisor in this wise.