Keeping up with your business books keeps getting shoved to the bottom of the list. You have so much to do, that accounting just doesn't feel like a priority... at least not until tax time. But making sure your accounting is up-to-date all the time will help you avoid serious money mistakes than can hurt your business - and personal - finances.
So even if you hate dealing with the bookkeeping chores, try to keep your books as current as possible. It's easier to avoid accounting problems than to fix them. And that's especially true for new and growing businesses.
By getting to know your books better, you can avoid ten common mistakes that damage many small businesses.
10 Accounting Mistakes You Want to Avoid
- 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 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.
- 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.
- 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.
- 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. 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? Ask your accountant and they'll help you with it.
- 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.
- 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.
- Extending credit before checking credit: Before you offer credit to any customer or client, 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.
- 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 avoid penalties for late or incorrect filings.
- 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, a lot transactions may disappear into a bookkeeping black hole when you put this off. And that will throw off all of the financial reports... and maybe increase your tax bill.
- Turning over all of the financial stuff to somebody else: You can’t make effective decisions without 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. Review your company financial statements 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.
If you can't find time to - or just don't want to - manage your company's bookkeeping, you don't have to DIY. Contact me today to schedule a free consult so we get your all of your business accounting on track.