Most Common Accounting Mistakes Made by Small Business Owners
As a small business owner, you wear a lot of hats and balance myriad responsibilities. Because you operate a small business, as opposed to a medium-sized or large company, there is even less room for error when it comes to accounting mistakes. Accounting is a significant facet of any business enterprise, and it involves much more complex computations than adding and subtracting.
Although accounting software has made bookkeeping and accounting more manageable for small business owners, it also can make errors and accounting mistakes. Over time, poor accounting practices can have a negative impact on a company’s fiscal health. In more extreme cases, continual accounting mistakes can lead to insolvency or company administration.
When it comes to small business accounting, there are certain mistakes you will want to avoid at all costs. Preventing these mistakes with your accounting could make the difference between a healthy, thriving enterprise and a struggling, fiscally unsound business that doesn’t have the resources to compete in the marketplace.
8 of the Most Common Accounting Mistakes by Small Business Owners
Presuming Profits Always Translate into Cash Flow
Perhaps you recently closed a $40,000 deal for your small business that will take four months to complete. It will cost your business $10,000 to fund this project, meaning you record a $30,000 profit on this deal.
Recording it this way is actually a major mistake. Consider what would happen if this deal encounters some problems and ends up taking another four months until completion due to delays? You will undoubtedly come up against costs increases, which would render the $10,000 cost estimate inaccurate.
You may be inclined to write down each deal as income when it occurs. It is new income for your company. But that makes for poor small business accounting practices. Doing this can make your company seem fiscally healthier than it actually is, giving you a skewed picture of your business’s financial condition.
Failing to Distinguish Between Contractors & Employees
For the purposes of small business accounting, there is a huge difference between an employee and a contractor. It is a difference that will need to be reflected in your accounting.
Knowing the difference between an employee and a contractor, in addition to the accounting ramifications of this distinction, is essential to prevent your small business from recording its accounts inaccurately.
Failing to Understand the Difference Between Capital Purchases and Expenses
When it comes to small business accounting, one very common mistake made by business owners is attempting to write off a large capital asset as an expense.
Here is the difference:
- A current expense is a day-to-day operating cost of the business;
- A capital purchase is one that gives a lasting benefit or advantage for a longer duration than a year;
An example of this might involve a big renovation project to improve the useful life of a rental property, or increase the value of the property. This has to be capitalized as it offers a lasting benefit. Conversely, something like purchased printer toner, which will be used in much less than a year, should be accounted for as an expense.
It is important to note that capitalized items are depreciated over many years, typically the estimated useful life of that asset. Whereas expense items are recognized as they occur.
Using the Same Credit Card for Personal & Business Expenses
Don’t succumb to convenience when it comes to credit card use, as this could get your company into trouble that has the potential to create mayhem with your small business accounting system. Refrain from using just any bank card that happens to be handy when making a purchase for your business. It may become difficult to distinguish what was made as a business purchase and what was a personal expense.
Best practices call for keeping your business and personal bank transactions separate. One easy method for doing this is setting up a separate business card. Restrict business credit and debit cards for business expenses. You want your personal expenses to come out of your personal account.
When you are diligent about keeping your business and personal expenses separate, your bank statements are a precise record of your business. This practice also assists you in not forgetting to track your expenses and denying yourself opportunities for valuable tax savings.
Failing to Track Your Sales Invoices in Accounting Software
There are numerous ways to keep track of sales invoices. But some are better than others when it comes sound small business accounting. Utilizing a something as basic as Microsoft Excel to track invoices maybe somewhat helpful, but there are more effective ways to track sales invoices for your business.
An example of this is Xero, a cloud-based bookkeeping application, which makes it simple to keep track of your invoices while seamlessly integrating them with your bookkeeping. You also have the capability with Xero to set up reminders and receive online payments.
Opting for the Cheapest Methods
Although you may think that pursuing the cheapest methods when it comes to hiring, for example, will save your small business on expenses, but it ultimately could cost you more money. For example, you might hire a bookkeeper at a cheap rate and then discover that she is making mistake after mistake, costing your business a lot of money.
It is worth it to invest adequate amounts of money into areas like staff hirings so you can reap the benefits of quality work, saving your business money in the long run. Too often, cheap propositions lead to subpar results.
Not Performing Regular Backups
The importance of regular backups of your systems cannot be overstated. You never know when you might encounter a computer crashing or lost or stolen equipment. It is always helpful to be prepared for extreme circumstances.
We recommend having multiple backups of your financial data, even if that is in separate locations. This will ensure you always have access to this data for many years to come.
Not Keeping Proper Records
Be aware that you must hold onto every business expense receipt for seven years. While a physical copy is satisfactory, it is preferred that you make a digital counterpart, as well.
If your business is audited, you will be required to show two things:
- Proof of purchase (receipt)
- Proof of payment (bank or credit card statement)
That is why you will want to have both of these. You will find that you will be called upon to provide your bank statement and a sample of receipts from your list of expenses.
A CPA is a Valuable Asset to Your New Business
It is wise to obtain the services of a CPA as you approach launching a new business, especially during the startup phase. This valuable professional relationship will serve you well as you establish your financial systems that include bookkeeping, tax preparation and payroll.
An experienced CPA is a huge asset for your business as you identify potential areas of company growth, handle an audit by the IRS, and create a business plan. In fact, hiring the right CPA will be one of the most important decisions you will make during the creation phase of your new business venture.
Look to PorterKinney for Exceptional Quality Accounting Services
PorterKinney is a premier accounting CPA firm located in the Tri-Cities, WA, which specializes in strategic tax preparation for businesses, rental properties, estates and trusts.
The firm dates back to 2006, when Chris Porter began operating a home-based tax firm and prepared his first tax returns on his kitchen counter. In June 2014, Walter Kinney left a large local firm to partner with Chris, and the company was named PorterKinney, PC.
In addition to tax preparation, we also offer bookkeeping and payroll services, as well as a variety of business consulting services. Our business tax and accounting experience covers a wide range of market segments, from farmers’ fields to physicians’ offices.
If you are interested in using any of our accounting or business consulting services, we invite you to reach out to us on our website. You can also call us at our two offices in the Tri-Cities: