Do you hate dealing with accounting? If you’re like most small business owners, your answer is yes. So when it comes to your to-do list, keeping up with the business books keeps getting shoved to the end.
You have so much to do that accounting just doesn’t feel like a priority. At least not until tax time, when suddenly it’s hanging over your head.
But making sure the accounting is up-to-date all the time will help you avoid serious money mistakes that can hurt your business (and maybe even your personal) finances.
Even if you hate dealing with those boring, overwhelming, confusing accounting chores, it’s crucial to try to keep your books as current as possible. It’s 1,000 times easier to avoid accounting problems than it is to fix them.
And that’s especially true for new and growing businesses.
By paying more attention to your accounting, even if you hire someone else to do it, you can avoid ten common mistakes that damage many small businesses.
10 Accounting Mistakes You Want to Avoid
#1 Not knowing your cash balance
Online banking makes a lot of things simpler, but you still need to pay attention to account balances. Business cash balances can get tricky when you use online banking combined with debit card transactions and a physical checkbook. Combine those with automatic payments and bank charges, and the money you think you have in your checking account may actually already be gone. Avoid this by checking on your balance regularly and keeping track of transactions that haven’t hit your account yet.
#2 Not separating personal and business finances
Mixing business and personal money can cause accounting and legal problems, especially for LLCs and corporations. On the accounting side, using business funds to pay personal expenses can trigger tax issues and incorrect profit reporting. On the legal side, you could lose your liability protection. Avoid both kinds of problems by keeping your business and personal finances 100% separate.
#3 Confusing profits and cash
If you normally bill customers, your company can post big profits without seeing any cash. This happens when clients don’t pay right away… or sometimes at all. You’ll see profits from those sales on paper today, but no cash until your customers actually pay up. No matter how big your profits look, your business can’t run without plenty of available cash.
#4 Setting your prices too low
Before you set prices for the products or services you’re selling, make sure you know all of your costs. That includes everything from supplies to software subscriptions to paying yourself. And without that information, you’ll risk losing money on every sale. Creating a simple break-even analysis gives you the information you need to set prices at a profitable level. Not sure how to do a break-even analysis? Ask an accountant and she’ll help you with it.
#5 Paying your bills too soon
If your vendors offer a thirty-day timeframe to pay them, take it. Paying bills when they’re due – instead of right away – will improve your company’s cash flow. That’s especially important when you’re just starting up. So, unless you’ll miss out on a big discount for paying early, pay the business bills right on time.
#6 Paying taxable dividends accidentally
If your business is set up as a corporation, every time you pull money out of the business, it counts as a dividend. Even if that wasn’t your intent. This includes things like paying personal expenses with the corporate card or transferring money from your business bank account to your personal account. And those unintentional dividends may lead to a bigger personal income tax bill.
#7 Extending credit before checking credit
Before you let any customer buy now and pay later (also called extended payment terms or extending credit), check their credit. Until you collect basic credit information, don’t allow on-account sales. More sales are great… but not if your company doesn’t get paid.
#8 Not hiring a payroll service
Even the most confident DIY-ers don’t want to mess with payroll. The minor cost of hiring a payroll service offers a huge benefit for your company. It will free up your time and also make sure you avoid penalties for late or incorrect filings.
#9 Putting off basic bookkeeping tasks
No matter how you track your business books, they need regular attention. Avoiding this can leave you with a giant stack of bookkeeping to tackle all at once. And no one wants to deal with that! Plus, transactions may disappear into a bookkeeping black hole when you put this off. And that will throw off all of the financial reports. And it may also lead to overpaying your taxes.
#10 Turning over all of the financial stuff to somebody else
You can’t make effective decisions without at least understanding your company’s financial picture. Even if you don’t want to deal with accounting tasks yourself, you need to know what’s going on. If you hire someone to handle the books, review your company’s financial statements with them regularly. That will help you plan for profits and avoid potential problems.
How to Avoid These Accounting Problems
The best way to avoid the top ten accounting mistakes: Keep your books current! Using accounting apps like QuickBooks or Xero make bookkeeping easier and quicker. But there’s still a lot to stay on top of.
I get it. As I said earlier, you’re trying to run a business. You don’t want to spend a ton of time fighting with a bookkeeping program or sorting through receipts. However, this is all part of running a business.
Another part of running a business is hiring help. That includes hiring a bookkeeper.
This is not the same thing as #10, where you turn over all the financial stuff to somebody else. Instead, this is hiring a professional to enter all the data, review it for you, and give you a complete report, so you can make the appropriate financial decisions as needed. And you’ll be ready for tax time.
I offer bookkeeping services and have a few spaces open in my roster. If you are interested in working with me and my team, please contact me by clicking the button below. We’ll have a free consultation to make sure we’re a good fit, and move forward from there.