Having recently wrapped up another successful tax season here at Baum CPA, our expert accounting professionals like to compare notes on what we have encountered in serving a wide variety of business professional taxpayers. Our primary mission is always to help our customers, and here is a snippet of things we have seen, and tried to offer the most help with. It is no disgrace and not at all unusual to find that small businesses make accounting errors and oversights regularly. Here are five of the most common small business accounting mistakes. Maybe we can help your small business to avoid making them in the future.
1. You don’t take bookkeeping as seriously as you should.
Unless you are a professional bookkeeper or accountant… who likes to take it seriously? But one crucial key to business success is having an up-to-the-minute snapshot of how and where the money flows. This takes serious bookkeeping!
Recording everything is an excellent rule to follow for bookkeeping and accounting in a small business. Ensuring that everything is recorded and categorized correctly in your accounts is essential, from small transactions like purchasing office supplies to large payments from customers and clients. No matter how small your company is, accurate bookkeeping and accounting methods are essential for a reliable assessment of your company’s health.
If you’ve slacked in this area — or let your staff or partners be slack — you might want to find the weak spots. For example, you may need to: categorize your assets and liabilities correctly, have a monthly accounts review, or establish a new bookkeeping system. A sound bookkeeping and accounting system is the only reliable way to know how your business is performing.
2. You refuse to outsource your routine accounting needs.
If you just read Point 1, and the need to establish a new, professionally monitored bookkeeping and accounting system rings true, you’ve identified a serious issue. Many small business owners decide to handle bookkeeping and accounting in-house because they feel “too small” to justify outsourcing those tasks. Or possibly they feel the need to “maintain personal control” over such crucial and private matters like business finances. While the intention to reduce costs by controlling the books in-house can seem tempting, it can be overwhelming when trying to manage a business and also wear the accountant hat. And what is gained by keeping “control” in a matter that is not your primary area of expertise? Doesn’t the distraction of muddling through a tedious, unfamiliar bookkeeping discipline cost even more — in opportunity cost? And frustration? Shouldn’t you be more focused on making money, rather than mastering the accounting detail? We find too many small business owners who create obstacles for themselves in their obsession to be “self-sufficient.”
Because of these factors, handling your own business accounting could be costing you money in more ways than one. Accountants understand ways to save businesses money that can escape others. At Baum CPA, we know all the ins and outs of taxes, deductions, write-offs, etc. It’s ALL we do — all day, every day. Consider outsourcing your accounting to this highly qualified firm instead of missing out on opportunities to make more money in sales and operations. Your first consultation is totally free! Click here to book a FREE appointment today.
3. You outsource, but you fail to communicate with your accountant.
So, maybe you’ve already outsourced your business accounting. But are you communicating with your accountant? Does your bookkeeper know what’s happening in your business? Keeping up with all transactions — great or small — and sharing those with your accountant is vital. Overlooking even small purchases or other types of transactions can lead to costlier issues over time.
Settle on a personal discipline to keep receipts and a record of all transactions — and coordinate with partners and staff to make sure they follow procedure, too. One great way to make sure your accountant is fully apprised of any and all expenditures is to use receipt tracking software or keep a digital log on your mobile pad or smartphone. Your accountant will appreciate your efforts, their job will be easier, and it will make your business management more competent, as well! All of which can save you money in the long run.
4. You don’t record every expense, even the small ones.
This point cannot be emphasized enough. It is essential to record ALL business spending, no matter how insignificant you think. That $5 of petty cash you took out of the cash register to send your employee to pick up a get-well card for your best customer is a business expense that counts! This is particularly important in a cash-based business (i.e., retail brick-and-mortar). No expense is insignificant. This is a fundamental rule to follow, especially for new companies. It is too easy to overlook the small stuff, and as your business grows you will be glad you were attentive, because it makes managing your books so much easier. Again, this can be a big money-saver in the long run.
The bottom line: No transaction is too small to record. Save receipts, keep a record, tell your bookkeeper.
5. You assume that profit always equals healthy cash flow.
If you make a sale of $1,000 that cost your business $300, did you profit $700? Not necessarily. Depending on the type of business you are in, additional costs could be associated with the sale, which in turn reduces the profit. For example, if you’re in retail sales, you must account for expenditures like overhead. Or, what if the merchandise is returned and refunded? Handling the refund costs you money, and that cuts into profit.
Or, suppose you’re in a business that provides services like construction or home improvements. In that case, you must consider setbacks and delays due to receiving materials, weather, etc. Any setback you experience in completing a job means less profit to your firm. Carrying costs on expensive supplies inventory erodes profits, too.
Not accounting for indirect costs can give you a false sense of how your business is performing. As will also missing the analytical value of accrual accounting: the matching of income and expenses by month or by quarter. This is wise because the checkbook balance is only a snapshot today, not the whole show that includes how much the business owes vendors and is owed by customers — significant time-delayed factors that will change that checkbook balance tomorrow, or next week, or in several weeks down the road! While the numbers may look good on paper at a given moment, a distorted picture of business financial health is detrimental to your success.
Awareness of these small business accounting pitfalls can help you improve in weak areas and position your business for long-term success and a healthy financial future. Contact the accounting professionals at Baum CPA now for more help managing your small business financial accounting. Your appointment for a FREE consultation is here with just a click!
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.