Every small business owner knows there’s no room for costly accounting mistakes. Avoid these mistakes to prevent financial loss in your business.
1 – Mixing Personal and Business Finances
Create a business bank account. This is an absolute must. Do not mix your business and personal bank accounts. That doesn’t mean you can’t ever take money out of your business for personal expenses, just don’t pay for your personal expenses with business funds.
If you need money to pay your personal expenses, write a check from your business account and deposit it into the personal account. Don’t start writing checks from the business account for your groceries, utilities, etc. Your accounting records will be much easier to maintain if you have separate bank accounts.
2 – Not Reconciling Your Bank Accounts
Always make sure you are reconciling your bank account at the end of each month. Many small business owners use accounting software such as QuickBooks, which allows you to download the banking activity into the software, but don’t stop there.
The final step is to reconcile business bank accounts to the bank statements. You might discover expenses you have missed or customer deposits that have bounced. There is a simple solution to this problem: make sure your reconciliations are complete and done on a regular basis.
3 – Choosing the Wrong Business Formation and Structure
There are a number of different business structures to choose from; the most popular being sole proprietor, partnership, corporation, and LLC. In addition to their different legal/reporting requirements, each structure has a different taxation obligation.
Investigate and learn the advantages and disadvantages of each structure to find the one that meets your situation and end goal. And don’t just listen to your friend, relative, or neighbor. There are two key experts you will want to engage to help with your decision: an attorney and a CPA.
4 – Missing Reporting and Taxation Deadlines
Make sure you know all the deadlines for your business. Every business owner has different deadlines depending on their business and business structure.
Make sure you are aware of when you are required to submit information because the penalties and interest can really hurt a business’ cash flow. An accountant can help you plan for due dates, but you should still be informed about your requirements.
Other deadlines include payroll returns and payments, sales tax returns and payments, excise tax returns and payments, etc.
5 – Not Reviewing Financial Data on a Regular Basis
There are three key financial reports every business owner should regularly produce and review.
Most people are familiar with the profit and loss statement. Yes, this report is important. But in addition, you should also be preparing a balance sheet and a cash flow statement.
There are major differences between all these reports and keeping them up to date and accurate can supply you with valuable information about how well your business is or isn’t performing.
6 – Cutting Corners in Your Accounting System
Clients ask me all the time how they should organize their records. There is not necessarily a right or wrong way (unless you are putting your receipts in a shoebox!) to do this. If you are shown a complicated way of keeping your records, you probably won’t do it.
Working with your financials and accounting records needs to be done in a systematic and consistent way that makes sense to you. If you handle things differently each month, then the reports you produce won’t be accurate. Once you implement a system, stick with it.
Once you have your system in place to create your financials, learn how to read and understand the data. The reports can provide you with a lot of information to help you make informed decisions about your business.
7 – Being Unprepared for an IRS/FTB Audit
Most small business owners are understandably fearful about being audited by either the IRS or the Franchise Tax Board (FTB). However, there are steps every business owner should implement to sail through an audit with a “no change” outcome:
- Good record keeping is essential. Don’t work with a shoe box of receipts. You need to be able to substantiate all the deductions you take on your tax return. The only way to do this is to keep records in a good order and report what is accurate. Rounded numbers to the IRS are a red flag because they demonstrate that you are not keeping accurate numbers. During an audit, the IRS will ask for financial statements. These financial statements should be accurate and correspond with the tax return.
- When preparing your business tax return, you want to prevent red flags. For example, meals, travel and entertainment expenses are always subject to exposure. Don’t worry if these are legitimate expenses. An audit flag might be caused by your industry type and not necessarily the expense. For example, a contractor who travels to clients might have large auto expenses, but a restaurant owner may not.
- Most people focus on their deductions, but don’t overlook your income. You want to report all your income. Don’t think that just because you didn’t receive a 1099 from a client or customer, you don’t have to report the income. If your records are accurate you won’t have to rely on what a 1099 might show.
- Having losses, higher than average expenses, and low income can be a common red flag. Know your exposure and maintain the correct documents to support the numbers.
Understanding business finances and optimizing your financial systems may be confusing and time-consuming in the beginning but making the right changes can save you time and money in the future. Don’t be afraid to ask questions and seek advice or education from organizations like WEV, as well as your CPA, to find the best financial practices that work for you.
Find the best financial practices that work for you.
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