Did that title make you cringe a little? I promise you are not alone; we all are guilty of having at least one lazy accounting habit. It doesn’t matter how long you have been in business; we could all use a small reminder (or large reminder!) of some best practices. Here are four common accounting mistakes we have come across.
Mistake #1: Not Keeping Receipts for Expenses
Often with business receipts, we assume the credit card statement will be enough. Unfortunately, this is not always the case. When it comes to accounting and tax purposes, those receipts are essential to have.
Trust me. I know how hard it is to keep track of receipts. If you checked out my purse at any given time, there are at least five receipts crumpled at the bottom. Are any of them the one I need to return something to the store? NOPE. The best practice I have found and learned from others in the industry is to save your receipts electronically. Many software options are happy to help you keep track of your expenses. They can sort into many categories to further help you stay organized. Not ready to for that, then snap a photo with your phone and save them in a separate folder. You are keeping the information secure until the time comes when you need it.
Another easy step you can take before snapping that photo is to make a quick note right there on the receipt/”Lunch with Jason from ABC Company.” This simple note can help jog your memory if/when the time comes.
Having your receipts organized will be especially important if the IRS ever decides to audit you. We all think “it won’t happen to me,” but unfortunately it may happen. You know what they say about death and taxes.
Mistake #2: Not Staying up to date with Receivables
I know, accounts receivable is not the most exciting or glamorous task on your to-do list. It is though how you get paid, and that is the goal of running a small business. To make a profit. In order to make a profit, you must keep track of who owes you and how much they owe you.
The first error small business owners make is not using some software to help track payments. Now is not a time to go “old school.” Trust me, I love visiting the “old school,” but in this case, it is a bad idea. Cash flow problems are a leading cause of business failure; you cannot have customers taking 60+ days to pay you.
Secondly, when you do get paid RECONCILE IT!! Like immediately!! It can be so easy to deposit the payments and tell yourself you will reconcile it later. Talk about a recipe for disaster. When you stay on top of reconciliations, your account aging report is up to date. This practice shows it worth at the end of the year and at tax time.
Mistake #3: Mixing Personal and Business Accounts
The first step in starting a business should be to open separate business bank accounts. Unfortunately, many do not follow this sound advice. Especially if the company is a side hustle, only part-time or in its infancy.
Mingling personal and business funds is the first step to an IRS nightmare. When it comes time for filing taxes and finding your business deductions, you will need to go through each expense line by line to determine personal or business. That should only take weeks to accomplish. This habit leads to missing deductions, which leads to paying extra taxes — something no one wants.
Also, depending on the structure of your business, you may be required by law to keep things separate. If you have an LLC or Corporation, your personal assets are protected by what is called a “corporate veil.” This veil keeps your business creditors from going after your personal assets. If you have a habit of comingling your personal and business accounts, you are in danger of piercing that veil.
Lastly, if the situation arises when transferring money between personal and business accounts become necessary, DOCUMENT, DOCUMENT, and DOCUMENT again. Both you and your accountant will sleep better at night.
Mistake #4: DIY Your Tax Return
Listen, I understand wanting to save a few dollars by going down the DIY path. I don’t like paying someone else to do something I am capable of doing (or think I am capable of doing). Whether we are talking about home improvement, car repairs, or taxes, 9 out of 10 times using a professional the first time around saves money in the long run. They are professionals for a reason.
When you hire a tax professional, you have gained access to someone with a knowledge of tax strategies best for your business. They spend countless hours making sure they are up to date on the ever-changing tax laws, practices to reduce your tax bill and, make the filing process simpler for you. It is their job to understand taxes and thank goodness someone understands it!
When choosing a tax professional, make sure to do your homework. Ask friends, family, and other business owners you know. Read reviews. How long have they been in business? Have they worked with other companies in the same industry as your business? Are they only open during tax season or year-round?
Don’t be afraid to ask the hard questions; what you are asking them to provide for you is an essential service. If they talk over your head or can’t seem to answer questions to your liking, it may not be a good fit.
If any of the above mistakes rings true to you, it’s not too late for course correction! Make the needed changes, stick to them, and down the road, you will reap the rewards. Like was stated, finding and hiring the right accountant or tax professional may be the best time-saver, headache saver and best was to mistake-proof your business accounting.
Have any questions about accounting, accounting mistakes or business finances? Let me know in the comments!