5 Accounting Mistakes for Your Small Business to Avoid
Running a small business means wearing many different hats. One of those is an accountant hat, but entrepreneurs may have zero specialized training in how to balance books or keep a profit and loss statement. Unfortunately, you can make accounting mistakes that cost you time and money.
According to the Bureau of Labor Statistics, there were around 1.6 million bookkeepers employed in 2020 with an expected 3% decline through 2030. With over 30 million small businesses in the country, not all are employing someone to keep their books. This means you might miss important deductions during tax season.
While you can’t catch every potential mistake, there are five that are more common than others. Here are the accounting mistakes to look for until you can afford to invest more in bookkeeping.
Mistake #1: Choosing the Wrong Accounting Method
Small businesses can choose cash or accrual methods for their accounting. Knowing which works best for your particular business model can save you money and keep cash flowing.
The majority of small businesses use a cash basis and record income when received and expenses when spent. If you make under $3 million a year, the cash method is likely best for you. The IRS only cares that you use the same method throughout the year.
Mistake #2: Hiring an Inefficient Bookkeeper
Often, the person keeping track of records is also doing other jobs within the company, such as handling client calls or sending out flyers. Handling multiple roles is common in small businesses. However, some people can’t handle multitasking and may let some things fall by the wayside.
Manual processes may create bottlenecks, and some transactions fall through the cracks and don’t get entered. You either think you have more money than you do or you mishandle taxes when things don’t get properly recorded.
Mistake #3: Mixing Personal and Business Finances
At the beginning of your business, you may have started on a shoestring budget with the extra money you had on hand. It’s a lot of work to set up a separate checking account, credit cards, and other accounts. However, mixing personal and business finances muddies the waters and can cause a lot of problems should you ever face an audit.
The need for organization increases for ambitious business owners. If you’re an entrepreneur with multiple income streams, you need to learn how to differentiate costs and revenues stemming from your small businesses from personal or professional investments in real estate and other avenues for passive or secondary income.
The more complicated your spending and investments are, the more likely it is you’ll benefit from consulting a tax professional. But the basics? Carefully track what you’re pulling out as salary, pay taxes on it as you would for any employee, and then deposit the check or direct deposit into a personal account before spending it.
You will need more planning to keep funds rolling in, but it’s vital to separate things, ensure taxes are paid and claim appropriate amounts when filing with the IRS. You’ll save yourself and your growing business a ton of headaches later.
Mistake #4: Lack of Records
Technically, you don’t have to file documentation for receipts under $75, according to nonprofit SCORE, but if you get audited, you may need those smaller amounts to show your expenses and avoid penalties and fines.
Some accounting software allows you to snap a photo of your receipt for your records, but you can also keep the original just to be on the safe side. These days, digital management is the best way to keep financial records in order, but a classic filing system should work well for small business owners who value analog tax preparations.
Mistake #5: Forgetting to Pay Sales Tax
Do you run a small retail business? Remember to collect sales tax and pay it quarterly. Failing to do so will land your business in hot water you may be unable to recover from. You also must pay taxes you collect for Social Security and Medicare.
The problem with forgetting to pay what you owe is that you wind up having to add interest and penalties onto smaller amounts. They can quickly grow out of control and eat into your business profits.
Watch Out For Small Business Accounting Mistakes
When you’re managing a small business, the financial record-keeping can be confusing if you lack accounting expertise. Take the time to build a strong organizational foundation for your business, then stick to the system and consult with tax professionals as needed to check off all the boxes.
Even if you can’t yet afford to hire an accountant to help track your small business funds, spend time talking to one. For example, SCORE is a nonprofit organization offering free advice. You might also be able to afford a consultation when you can’t yet afford a full-time bookkeeper.
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Evelyn Long is a writer and editor focused on home building and construction. She is the co-founder of Renovated, a web magazine for the home industry.
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