For small business owners, it’s easy to assume that the accounting process will somehow run itself — as long as the business is making money, there’s not much to worry about, right? Wrong. There are 5 common accounting mistakes that small business owners typically make that could curtail the growth of your business or leave it in a vulnerable financial condition.
Here are the top five mistakes to avoid:
Mistake #1: Failing to track accounts receivable
In order to get paid on a timely basis, you have to track your receivables. This may be easy enough if you only have a few customers, or if most of your customers pay upfront using cash. But what if the payment terms drag on for 30, 60 or 90 days? You need to have a process in place to track the aging of those receivables.
That means you continually need to check your list of receivables to see which customer balances are still outstanding. As soon as any payment is received, you need to be applying this amount against the invoice, to show that it is being paid. At the end of every quarter or during tax season, this makes it easier to reconcile any customer deposits still sitting in your revenue account. This is where Spire can help, by automating the receivables process.
Mistake #2: Not keeping expense receipts
Failing to save expense receipts can lead to a series of tax and accounting problems later down the line. It’s especially an issue with smaller amounts — think less than $100 — since at the time, this amount may not seem like a lot. But these amounts really add up. Later, you’ll have a hard time figuring out whether the expense was related to, say, meals, supplies or equipment.
As a result, you should save a receipt of every purchase. You can also take other steps, such as only using a business bank or credit card to pay for business expenses. This makes it easier to draw up an itemized list of expenses.
Mistake #3: Failing to record cash expenses
Cash is king, but it can also be an accounting nightmare. While credit cards, debit cards, and cheques are easily linked into your accounting software, it’s easy to overlook expenses paid in cash. As a result, you need to develop a method for tracking cash expenditures.
Mistake #4: Doing your own taxes
Small business owners should really hire a professional to handle their taxes. You may not claim all the deductions you qualify for, or you might underpay your tax bill, all of which could result in penalties and other fees. The money you think you’re saving could disappear. Plus, tax professionals can keep you updated on changing tax laws, or help you find ways to reduce your tax burden.
Mistake #5: Failing to understand the business implications of accounting terms
Most business owners only carry about the profit and loss of the business. Thus, accounting terms like EBITDA and tax loss carry forwards may have very little meaning for you. But you have to understand the business implications of these accounting terms — how do they impact cash flow or profitability? If the jargon and buzzwords are too daunting, it may be time to switch to another accounting professional who can explain in plain, everyday terms how you can maximize financial success of your business.