Starting a New Business, Making Accounting Mistakes?
When you decided to open for business, you had a vision for the future. You identified a need and came up with a solution you could provide and sell. Also, you invested your time, your money, your knowledge, and your drive to make it into a reality. You’re probably like a lot of small business owners. You did not anticipate having to handle your business’s accounting needs. Many highly intelligent, responsible business operators get caught making common small-business accounting mistakes. These errors can trip them up and cost them a lot of money in the long run. Are you afraid this might happen to you? Or if it already has — what is the best way to avoid these costly errors? Learn the top four small-business accounting mistakes and how to prevent them.
The Top 4 Accounting Errors Made by Small Businesses
The truth is that these four mistakes are relatively easy to address. The best way to avoid them is to set aside time every week for the specific purpose of taking care of basic accounting tasks. Once you get into the habit of doing them regularly and the right way, you’ll be able to avoid the hassle of having to go back and correct these mistakes in the future.
Let’s look at each accounting mishap individually, in a bit more depth.
Reporting Employees as Independent Contractors
If you hire people to work for you, it’s important for you to understand the difference between employees and contractors, and to classify them correctly. There are very specific ways that you must account for each type of worker. If you don’t get it right you will likely have to make corrections — and possibly pay penalties — in the future. If somebody is your employee, then you have control over when they work, how they get paid, and how they do their job. You are also responsible for withholding payroll tax on their behalf. By contrast, when you bring somebody in to do work for you as an independent contractor, you can give them a deadline, but they have more control over their own schedule, the work that they do, and how they get paid by you. They are responsible for their own taxes.
Not Reconciling Bank Accounts Regularly
Certain tasks need to be done to keep your business running smoothly, and that need to be addressed on a regular basis. Reconciling your bank accounts is one of those things. Make sure that every expense and every deposit is recorded in your books. The best way to do that is to compare what you’ve written down to the statement that the bank provides. Doing this on a regular basis, helps you to quickly identify and address items that don’t match. This helps you to correct any mistakes and take full advantage of available deductions. Small business owners tend to wait until the end of the year to do it. Not only is this task at year-end much more time consuming, it is harder to catch all the mistakes. It is harder to figure out what is missing when you have a full year’s worth of information to go through.
Forgetting to Record Payments Against Open Invoices
You receive a check in the mail or make a deposit into your bank account for an open invoice. If you don’t go back and check off the box showing that receivable as paid, your accounting data will be incorrect and incomplete. Get into the habit of immediately linking payments to their open invoices in order to avoid problems in the future. This is especially true if you try to collect from a client who has already paid you.
Not Understanding the Differences Between Cash Flow and Profit
The money that comes in from your customers and the money that goes out as you spend it to operate your business is known as cash flow. It’s important to have a positive cash flow, as that is a good indication that your company is healthy. It also means that you can pay your bills. But cash flow is not the same thing as profit. Profit is a measure of whether you are making more from the sale of your service or product than you spend in bringing it to market. You may be profitable, but if the cash isn’t in hand then you can still have a negative cash flow. And people may pay you quickly so that you have cash on hand but you still may not be making a profit.
Accounting Software for Small Businesses
What is one of the single best and easiest way to avoid these mistakes? Take advantage of all of the tools and functions that your accounting software package offers. Most accounting programs include powerful tools and how-to guides. Keep in mind, in many cases small business owners just invest in the packages without taking the time to learn all that they can do — or to learn it well. Take a little time on the front end to go through the available tutorials. When go through the tutorials you’ll find that you’ll save yourself both time and trouble on the back end. Our best advice is to set aside time one day of the week. First, to learn the software and then, going forward, to go through that week’s records. Set aside the same time slot each week as if it is a meeting or appointment.
We can Help Your Small Business Avoid These Accounting Mistakes
If you find that you need help getting your accounting in order, don’t hesitate to contact us for tips and/or training — we’re happy to help. Or, maybe you don’t want to do your accounting work. Call Alex Franch, BS EA at our Worthtax office at 781.849.7200, he’ll be glad to help. Worthtax has locations in Quincy, Weymouth and Dedham.
Bonus: One Last Accounting Tip
Here is one last tip for you. Once you learn what you’re doing, make sure that you back up your files. Some programs have automated back up features. However, be safe and Include back ups as part of your weekly appointment with yourself. There’s nothing quite like doing the right thing and then having it disappear after all the work has been done.
Other Accounting Resources
- 5 Accounting Tips That Will Make Managing Your Small Business a Breeze
- Refund Too High? Owe Taxes? Adjust Your W-4!
- Only One IRA Rollover Every 12 Months – Period!
- Statute of Limitations: How Long Am I on the Hook for a Tax Assessment?