Three small business accounting pitfalls to avoid
July 9, 2018
By Christine Tudrick, CPA
Gordon Advisors, P.C.
Every small business owner knows being an entrepreneur is a lot of work and takes a lot of attention to detail to do well. This is especially important when it comes to accounting. Many small businesses have gone under or failed to thrive as they could have simply due to poor accounting practices. Ask any accountant who has come to the rescue of small companies in trouble, and they’ll tell you there are three things common to the scenario. Read on and then take a look at your company’s accounting practices to see if you too should shape up.
Pitfall #1 — Mixing business and personal accounts and expenses.
This is a very common mistake, especially for very small businesses. It is, essential that business and personal accounts and expenses be kept separate to enable the use of proper bookkeeping and accounting practices.
Set up a new separate business bank account when you start your company and resist the urge to use company cash or credit cards for personal purchases or a personal credit card or cash for business purposes. Pay yourself on a regular schedule (just as if you were an employee) rather than siphoning off random cash amounts to pay bills and so on.
The benefits of this separation are notable. For starters, if you do your own accounting or bookkeeping, you will be able to enter, track and account for income, expenses, and cash flow, and all of the other basics concisely. Equally important is that the Internal Revenue Service (IRS) very much prefers a clear line of demarcation between business and personal finances, which gives them a much better view of the legitimacy of expenses and deductions. It also may help to lower the possibility of an IRS audit because it eliminates the red flag associated with commingled finances.
Pitfall #2 — Being disorganized.
Your shelves are neatly filled, your advertising all lined up, and your business plan is in order, but your receipts are in a shoe box, you have no idea how many outstanding invoices you have right now, and you do accounting whenever you can get to it. This is a recipe for disaster.
Begin by learning the fundamentals of accounting for small business or by hiring an accountant. Next, get organized by creating a schedule for completing bookkeeping tasks (e.g., paying bills, invoicing, payroll, etc.) and write down all procedures so that you begin to create a documented process. Decide how you will manage receipts — paper or digital — and document the timing and process for doing so. This is especially important for cash payments and purchases that leave no electronic trail like debit or credit card spending does.
It is also important for anyone doing their accounting and bookkeeping to perform regular (at least monthly) reconciliations on bank accounts, accounts receivable and accounts payable. This will help to catch seemingly minor data entry errors that over time can cause big headaches. The longer mistakes go unchecked, the bigger the problem can become.
And finally, include in your written procedures a schedule for backing up your accounting data often. This is not only wise; but it also shows the IRS you are taking steps to preserve your financial records as proof of your compliance with rules and regulations.
Pitfall #3 — Paying taxes late.
As hard as you work and regardless of how successful your business becomes, there is one sure thing that will never go away … taxes. Depending on your business situation, you may have to pay sales, payroll or income taxes at a minimum, and it’s very easy to let taxes get away from you. When you do, the snowball effect takes over, and the amount begins to grow. When the ball stops rolling, you can end up paying penalties and fines, lose your business and even go to jail.
The easiest way to deal with paying taxes is to set up a payment schedule through an accountant. An accountant knows the intricacies of how and when to withhold taxes, what forms are required for filing which taxes, and all of the exceptions and special rules that apply. Unless you are an accountant yourself, leave this one to the professionals.