The most common accounting mistakes that small business owners make are tied to the same central concept—lack of effective management. Often constrained by time and money limitations, business owners try to manage accounting for their business on their own and end up skimping on necessary expenses.
Although this strategy may seem effective initially, delaying the inevitable and failing to delegate tasks to a professional ends up harming small business owners in the long run.
Regardless of whether you’re a new business owner or have been in operation for some time, make sure that you don’t commit these five common accounting mistakes.
1. Hiring an Accountant That You’re Uncomfortable With
Accountants are a necessary part of any company, regardless of its size. They handle the dirty work that comes with preparing and cataloging the financial records of the company. Although you aren’t required to be best friends with your accountant, you need to feel comfortable with him or her.
Many accountants are exceptionally skilled at what they do, but leave you confused when it comes to explaining what they are doing. Your accountant should be a person you trust, someone who can give you advice when needed, and who can forecast financial issues before they arise.
If you are not comfortable with your accountant and find yourself more confused than informed, it may be time to examine why. If they use jargon, ask them to be clearer and use layman terms. A proficient accountant leaves you knowledgeable, informed, and able to understand your company’s financial health clearly.
2. Forgetting to Catalogue Cash Payments
When you make a cash payment for any materials or supplies for your business, it’s easy to forget about them later. Failing to report an accurate expense record means that you will overstate your income once you file your taxes, causing you to pay more money.
When you don’t set a process and train yourself to keep an account of your cash expenses, you lose money that could have been spent on your business. Although it is easier to manage business expenses digitally, it sometimes isn’t possible.
The best way to keep track of your cash expenses is to make it a deliberate habit to save every receipt on the spot. You may think that you’ll remember a particular expense or will just take care of it later, but you will overestimate your ability to remember once you have a plethora of other accounting tasks to maintain before tax season.
3. Failing to File and Save Receipts
Any receipt for an item purchased for your business must be kept. This point applies whether the purchase is as small as a box of staples or as large as an order for computer desks. Not being able to produce receipts if the IRS audits you can lead to penalization.
Keeping your receipts saves you money because you claim your expenses on your tax returns. If you don’t save that record, you’ll likely forget to claim it on your taxes, which costs you more in the long run.
Every receipt that has to do with your business should be saved and filed on the spot. To make the process easier, make space for all your receipts in a single filing cabinet drawer or binder. The idea is that this binder or drawer is within easy reach, which encourages you to use it.
Instead of placing receipts haphazardly in drawers, on tables, and in your car, you now have one place where any receipt can be accessed immediately. Every month, sort through your receipts and organize them by month and date. Save your digital receipts in one folder with subfolders labeled by month.
4. Manually Managing Accounts Receivable
If you are manually managing your accounts receivable, it’s only effective if you’re meticulously updating them as they’re paid. Most small business owners often have a lot on their plate, which prevents them from marking receivables as paid consistently.
This practice is harmful because receivables are considered current assets. If these haven’t been updated and maintained throughout the year, you’ll be left with a receivables report that doesn’t match your deposit balance.
Most clients nowadays can make electronic payments, and automating billing and receivables saves time, money, and the environment. Accounting software that suits all business sizes does all the work for you, without the headache of doing it yourself manually.
5. Skimping on Professional Tax Preparation Services
Taxes are manageable if you’re an individual, but when you have a small business, the process is more complicated. Hiring a professional to file your taxes may seem like an unnecessary expense. However, tax professionals who work for small businesses are well-versed in the nuances that come with these returns and work in your best interests.
By hiring a tax preparation specialist, you can rest assured that:
- You will not have to deal with the complexities that come with tax preparation
- Your chances of being audited by the IRS will drop significantly
- The preparer is updated on new tax codes that can change frequently
- You will receive tax planning advice that you can implement year-round
- Mistakes you’ve made on previous tax returns will be amended
Hiring a tax professional saves time, money, and stress in the long run. If you are penalized by the IRS or overpay yearly due to bad management, you will end up paying more than hiring a professional.
Small business owners often wear many hats, but accounting work should be managed by a professional. A lack of precision is a costly mistake for small business owners, and so is a stressed business owner who manually manages financials at the last minute.
Hiring a professional to handle your business’s accounting affairs is an investment that will pay off as your business grows. You will be able to maintain accurate records from the get-go.
Need a professional accountant in Michigan? At MI Tax CPA, we can help. Our team will not only help you avoid common accounting mistakes but can craft you an efficient bookkeeping system that saves you time and money. Get in touch with our team today for a free no-obligation consultation.