However, many small business owners, who have various responsibilities, usually make common accounting mistakes that can cause cash flow problems, financial discrepancies and tax problems.
Knowing these mistakes and understanding how to avoid them is critical to maintaining the financial integrity of your small business.
#1 Combining business and personal finance
Let’s start with one of the worst common mistakes in do-it-yourself small business accounting: combining business and personal finance. It may seem harmless to charge a business lunch to your personal credit card or use your business account to pay for your children’s clothes. However, these blurred lines quickly create confusion when it comes time to reconcile your books during tax season.
Using one account for both business and personal finances can cause the following problems:
- Problems separating business and personal transactions
- Issues if you want to apply for a business loan
- Inaccurate financial reporting, making it difficult to measure the true profitability of your business
Clean financial administration starts with the complete and correct separation of business and private life. You should open credit cards and bank accounts for your small business and use them only for business expenses.
#2 Neglecting the monthly financial close
A critical part of effective bookkeeping is performing monthly financial closes. Small businesses can let a month pass are quickly six months behind. Hire a company that specializes in small business accounting helps reduce the chance of missing the month-end close.
These procedures include reviewing each line on your balance sheet, identifying and correcting any errors, and producing the results for management to see. Misapplied credit or debit entries can mess up your financial data, making it harder to track performance or detect problems early.
Neglecting the month-end close will produce incorrect financial reports, which will ultimately impact decision-making within the company and in many cases lead to incorrect tax forecasts. To avoid these possible problems, Prioritize the process just as you would your operations or sales procedures. Without an accurate monthly close, your small business can fall off course.
#3 Not properly tracking operating expenses
If you put all your expenses under “miscellaneous,” it becomes more difficult to analyze your cash flow and expenses. If each expense item falls under a specific code from your accounting schedule, you can quickly view your expenses, create reports, and look for ways to improve budgets and cash flow. If you don’t keep proper records, your bookkeeping will be much less effective.
When this happens, your business is susceptible to late payments on critical bills, lost revenue, and overlooked financial insights. This situation is a huge headache during tax season and can cause problems that slow the growth of your business.
No matter how you handle your accounting, It is essential to record every transaction so that you can properly assess the financial health of your business.
Most small business owners don’t have the time or energy to do this. Therefore, it is highly advisable to hire a professional accountant to handle your expenses effectively. Your accountant can record every bill you pay, when you withdraw or deposit money, invoice customers and the monthly closings. If you want to know where your money is going, an accountant has the knowledge to accurately categorize your expenses.
#4 Not classifying employees
Small businesses often have different types of employees, such as freelancers and contractors, who manage different projects. If you misclassify them as employees, you could get in trouble with the IRS, which could lead to tax penalties. A professional bookkeeper can help you explain the difference between each type of employee.
If a small business owner misclassifies an employee, the state and federal governments lose out on payroll taxes. The penalties for this mistake can be significant:
- Small business owners may be responsible for Social Security, payroll, unemployment, and Medicare taxes for misclassified employees.
- The company may also face lawsuits if employees do not receive benefits as required by labor law, especially the Fair Labor Standards Act.
To avoid misclassifying workers, decide whether an individual is a contractor or an employee based on their position, their pay, and their relationship to your company.
#5 Not planning accurately for tax season
Do-it-yourself tax software may seem like a money-saving solution for small businesses, especially if they’re trying to avoid paying for the services of a professional accountant. But while doing your own taxes may work for some individuals with a simple tax return, it’s rarely a good idea for small business owners. Business and payroll tax issues can be complicated, and filing the wrong tax return can be costly.
Missing tax deadlines can generate accrued interest, delayed refunds and penalties, which hurts your cash flow and increases unwanted anxiety. Many small businesses are falling behind because their books are not organized or up to date for tax season. Routine maintenance ensures you’re ready for tax deadlines, speeding up tax preparation and reducing the chance of costly mistakes.
And don’t forget: Hire an experienced accountant
Hiring an accounting professional reduces the chance of errors in areas such as payroll and bank account reconciliation.
Are you sure you are accurately processing your employees’ tax withholdings? Just a few mistakes in these areas can cost you more than you save by not hiring help. At RMP Accounting, we provide small business accounting services, including payroll, sales tax reporting, and keeping your general ledger up to date. Contact us today and let’s talk about your accounting needs.
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