When it comes to running a small business, having good practices and accounting techniques in place will ensure your company grows to success! Starting a small business can be pricey, so it may be tempting to take some shortcuts in the accounting area, especially if you feel confident that you can manage the business’s finances. However, before deciding you can manage the bookkeeping all on your own, it is important to know the 5 most common accounting traps small business owners find themselves in causing financial distress.
Trap #1: Mixing Personal and Business Expenses: When you start your business, you’re going to immediately want to open a business checking account. It is up to you where you choose to open this, but consider shopping around for accounts with minimal fees and requirements. This not only keeps the business finances and liability separate from your personal finances and liability but it also:
- Allows your accountant or bookkeeper to easily sort, read, report, and process different expense reports using bank statements. You can also clearly see incoming versus outgoing funds to determine cashflow.
- May be required by law to have a business account. For any incorporated business entity, a separate account is required by the IRS.
- Makes check payments easier to track. Not only is it simple to review any purchase or payment made by check, but you can also easily track any outstanding checks.
- When writing checks to vendors or clients, you will have your business name, and banking information on the check rather than your personal information. This helps keep your personal information private and secure.
- Protects you in the case of a tax Audit. If you get the news your tax return is being audited, you’re going to want to provide the IRS clear and straightforward documentation such as a bank statement.
Trap #2: Starting Your Business Without Money Saved: Starting your business not only costs a lot of time, but it costs a lot of money. It can take businesses up to 4 years before they can become profitable. When starting to financially plan your business, in addition to rent, inventory, supplies, and staff, consider how much it may cost you to live your current lifestyle without bringing in a paycheck. To get cashflow, you may need to apply for loans or gather investors to support the business expenses in the beginning. Working with your accountant can help you determine the best course of action to take. The My Accountant Bookkeeping & Tax Service Inc team will be able to give you guidance on approximately how much money to keep in your account for reserves at any given period.
- When starting out your business, you may feel comfortable with having an abundance of funds in the bank until you learn how much profit and cashflow your business is bringing in. Once your business is a little more consistent and predictable, an average rule of thumb to follow is to have enough reserves on hand for 4-6 months worth expenses.
- Without having enough money saved, your business can fail before it really starts. You will have inventory and staffing issues along with debt that can threaten to shut you down.
Trap #3: Delaying Invoice Management: Putting off review of your invoices can lead to huge trouble in the long run. If someone owes your business money, wouldn’t you want to know in a timely manner so you can take action? Having a system in place to report your business’s invoices will ensure you are getting paid all within a timely manner. Also, to ensure your taxes are filed accurately, you need to know how much the business has made/received.
- To avoid losing out on money your company is owed, it is important to come up with a process to track all invoices and know which are paid versus unpaid. Although you may find a solution that works for you, your accountant can also provide this type of bookkeeping and more.
Trap #4: Unorganized or Lack of Bookkeeping Process: Without a proper bookkeeping system, you don’t know where your business stands financially. Luckily these days, there are many convenient ways to ensure you are properly bookkeeping. You can either hire your accountant to manage your books, hire a bookkeeper as a member of your staff, or use software. Below are just a few of the many reasons you need a proper bookkeeping system:
- You can’t make accurate financial decisions such as investing in large purchases or expanding.
- You can’t analyze or review data to determine business trends, where your money is coming, or where your money is going.
- Proper bookkeeping ensures you have the proper number of employees to run the business successfully and that they are getting paid timely and accordingly.
- Investors, clients, employees, and the IRS (if audited) will want to know the financial standing of the business they are investing their time or money in.
Trap #5: Thinking You’re a Tax Expert: It’s important to understand, starting a small business means lots of documentation and paperwork. Things you didn’t need to file your tax return before are now a necessity. Before deciding you are going to do your own taxes, just know, it is not only going to be more complicated than prior years, but to ensure you get the most money back or owe as little as possible it is important to know what credits, deductions, and write-offs you qualify for.
- Although you may want to save money by filing your own taxes, just remember you are an expert at your business. While accountants are the tax experts. Let the experts take this one on for you. Accountants can review all of your paperwork and accurately complete your tax return with your best interest in mind. Accountants who are enrolled agents with the IRS can also represent you in the case of an audit, offering you more time and less stress.
There is absolutely nothing wrong with wanting to try to your hand at managing your business’s bookkeeping and accounting with the right processes in place. If you do decide to manage the day to day finances of the business, it is still always a good idea to work with an accountant to do your annual reviews, planning, and taxes. Teams like the My Accountant Bookkeeping & Tax Service Inc will save you from any accounting trap you may otherwise fall into.