Small business owners are faced with numerous challenges, not the least of which is navigating financial record keeping. The last thing you want to do is add more stress to your day-to-day functions by failing to implement good bookkeeping practices.
Small accounting errors can easily turn into big problems for your business. Here are some common bookkeeping mistakes that can impact your bottom line and ways to avoid making them.
Sticking with Your Spreadsheet
Although your business may be small, using paper ledgers or spreadsheets to keep track of your finances leaves you vulnerable to errors that can throw off your entire accounting system. Switch from doing things the old-school way and upgrade to accounting software.
Cloud based programs designed exclusively for small business bookkeeping are user-friendly even if you aren’t well versed in accounting. The software keeps track of invoicing, produces reports, makes it easier to file taxes, and allows you to link to your online bank account. It provides a quick and efficient way to stay on top of your finances and avoid costly mistakes.
Not Keeping Receipts for Minor Purchases
Even the most meticulous business owners occasionally forget to save a receipt related to a small purchase. However, those dollars can add up and result in significant deductions when it’s time to file your business taxes. Although the IRS does not require that you save receipts for purchases less than $75, the documentation they provide can give you valuable backup for every penny you claim as a deduction. Create a folder specifically for such purchases or scan your receipts into a designated file on your computer.
Improperly Classifying Employees
Independent contractors, freelancers, consultants, and regular employees aren’t all the same when it comes to your business finances. The IRS has strict regulations for determining whether a worker is an employee or independent contractor. Misclassification is considered a serious offense that can result in significant payroll penalties. If the IRS suspects fraud or intentional misconduct, it can impose additional fines. As a small business owner, you are responsible for making every effort to properly classify your workers. Before you decide to classify an employee as a contractor, be sure you know if they legally qualify.
Not Keeping Things Current
Small business owners are often too busy to enter every expense in real time. However, falling behind on your bookkeeping by only inputting information once a month or less means you may not be catching costly errors or making adjustments quickly enough. You are also losing valuable insights that can help you run your business more efficiently.
Keeping your records current is a bookkeeping best practice. If you do your books yourself, schedule time at least two or three times a week to update your financial transactions. This will give you a clear picture of how your business is performing. If your books are suffering because you are juggling too many responsibilities, you may need to hire a professional to manage this task.
Writing Off Major Purchases as Immediate Expenses
Many small business owners mistakenly expense purchases such as computers, machinery, and office furniture that should be written off over the items’ useful lives. When purchasing property or equipment for your business, items classified as assets must be added to the balance sheet and depreciated properly. To ensure proper classification, consult the IRS website for an overview of depreciable assets or talk to an accounting professional.
Not Accounting for Human Error
Even the most sophisticated software program cannot prevent human error. A mistyped number or lost receipt can result in inconsistencies in your records. Reconciling your records with your bank account statements every month will help prevent mistakes from multiplying. Consider using as little cash as possible for business expenses. Credit and debit card transactions will show up on your statements, creating a paper trail that makes it easier to keep track of your money and provide backup documentation in the event your business is audited.
Mixing Business and Personal Expenses
Small business owners who run personal expenses through their business, such as home mortgage payments, pet expenses, groceries, and clothing purchases, are likely to attract unwanted attention from the IRS. While you may have started your company with funding from personal accounts, established businesses need to keep personal and business expenses separate.
Set up a company bank account and avoid using business credit cards for personal expenses to ensure a high degree of separation. Save and record receipts for all business-related expenditures, and record cash advances from personal reserves as capital contributions or loans. An accounting professional can help you classify these types of transactions properly for tax purposes.
At Summit Financial Resources, small businesses involved in our asset-based lending programs have access to our proprietary online system that allows them to check daily transactions. This system simplifies their bookkeeping by providing information on the total funds received and the invoices the money has been applied to. This service provides invaluable support to business owners who do not have access to in-house or outsourced bookkeeping services.
Costly bookkeeping mistakes can happen to any small business owner. It pays to be prepared and access the information, advice, and support you need to protect your bottom line.
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