Some people understand the joys of accounting. If you’re like me, you’re not one of them. However, the accuracy and functionality of your bookkeeping will help grow and maintain a healthy company.
How healthy are your accounting habits? Here is a list of common mistakes that could kill your business.
Every expense should be accounted for, regardless how small the transaction.
If you struggle with losing receipts or forgetting to document expenses, now is the time to create a routine. Utilize tools that work best for you. For example, there are apps available for recording mileage, such as MileQ or Mile Logger. Or, simply keep a small notebook in your car and train yourself to record your business-related trips. For receipts, use an envelope or folder. You will also find apps, such as Office Lens, that allows you to scan and save your receipts. Find what works best for you and be diligent.
If you believe that cash flow automatically equals profit, it’s time to reprogram your thinking. A profit does not reveal its true dollar value until the product or service has been delivered.
Lisa Gerard notes in her article Three Common Accounting Mistakes that “When you make a sale, don’t count it as income until your company has delivered the product or service to the customer.” If you contract a sale in March and count it as revenue, but deliver the service in May, your March profit will be skewed. Be sure to record sales in the appropriate month, quarter and year for accurate profit results.
For example, a trade professional just entered a 3-month contract with a customer for $20,000. Her expenses to fulfill the contract should be $7,000. But that doesn’t mean an automatic $13,000 profit. There are other forces in the universe that can manipulate her actual expenses until delivery, such as the varying cost of products, underestimated shipping expenses, changes in building codes or safety regulations, and even the cost of travel. So it’s far too early for her to claim an exact profit amount.
Not Adhering to a Strict Reconciliation Regimen
Accounting Simplified emphasizes that “Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals.”
Reconciling is a procedure used to make sure your in-house books reflect the same balance as your real-world bank statement. Avoiding this foundational step in bookkeeping will result in inaccurate records, leaving you unsure about the true financial health of your company.
Ivan Lavelle a company finance expert recommends business owners reconcile at least once a month “to ensure all of their transactions are accurately recorded, preventing their books from becoming out of sync with the real status of their accounts.” Another option is to reconcile once every week or two so that it takes a shorter amount of time and mistakes are caught earlier.
The side effects of mingling personal and business finances are detrimental to your business for several reasons.
First, if the IRS sees business transactions processed through your personal account, they may decide to classify your company as a hobby instead of a business. Convincing the government otherwise would become a difficult task since the burden of proof is in your bank statement.
Other side effects include having to take time to separate personal and business transactions at tax time, difficulty keeping track of possible deductions, and making it impossible meet the requirements of a government audit (which include maintaining clear and accurate records).
Improperly Classifying a Worker
To avoid penalties, it is important you properly classify someone who works for you as either an employee or a contractor.
According to Justin O. Walker an employment attorney at Walker Law, PC. “Being caught for misclassifying those who should be on the payroll as independent contractors, even inadvertently, can lead to a range of penalties, including court orders for the payment of back wages, fines, and of course, the additional expense of costly litigation to defend yourself.”
Sometimes it’s difficult to place someone in a particular category, but here are the general guidelines:
- On the payroll
- Hours of work, place of work and process of work is dictated by a boss
- Tools and equipment are provided by the business
- Employer pays social security tax
- Eligible for employee benefits, such as health insurance and workman’s comp
- Business provides or reimburses work-related expenses
- Receives a W-2
- Maintains freedom of time, workspace and work process
- Must acquire benefits privately, not through business
- Must pay their own social security tax
- Files a 1099-Misc declaration to the IRS
- Usually takes care of own business expenses
- Often works for more than one company
If you are unsure which category your worker falls under, your safe bet is to use the employee classification. Ideally, however, you should seek help from a business attorney.
Choosing the Wrong Accountant
Obviously, you want to hire the most experienced, trustworthy accountant to handle your finances. Finding the right professional for the job will take time and research. Schedule interviews with several certified public accountants (CPAs) and consider the following details before deciding.
- Determine how involved you want your accountant to be. They are skilled in every aspect of small business accounting. You can delegate all bookkeeping tasks to your CPA, or become more involved and just farm out the annual tax return.
- Does location matter to you? If you prefer to do business face-to-face, you will most likely prefer a local professional. If you use one of an accounting software programs with iCloud capability, you can easily work with accurate, real-time data with an accountant who lives further.
- Relevant Expertise. Choose a CPA who works with businesses similar in size and type to yours. However, you may want to check that they work with larger customers as well, if you intend to grow considerably.
- Does this professional use the same software you use? Do you need someone who is familiar with cloud-based accounting?
- Good accountants will be proactive in finding deductions and warning you of potential hazards. Check their track record with current clients and, if possible, former clients as well. Remember that you are ultimately responsible to pay any penalty if a law is broken. So experience and integrity in an accountant are important.
- Determine how much you will pay for an accountant. Some offer hourly rates, some charge a monthly retainer fee and others simply require a percentage of your profit. Keep a note during the interview process what each one charges. When you narrow down your selection, you can negotiate their fees.
- Find out an accountant’s preferred form of communication and determine if it aligns with yours. Communication is a vital part of the accountant-small business owner relationship. In addition, how quick does the accountant respond to your inquiries? A CPA that takes two days to respond or answers with two-words is probably not someone you want involved in your finances.
Remember that your accountant will be very involved in your business. Find someone you are comfortable with and who is dedicated to helping you grow.
Ignoring the Need for a Back-Up System
Make sure your only copy of your accounting records doesn’t rest on the hard drive of your laptop. Imagine the headache and time needed to re-enter months of data into your books. Use a backup program, like Carbonite, or opt for a cloud-based option, like Quickbooks Online or ezClocker. See what is out there and choose what works for your particular need.
Avoiding these common accounting mistakes will definitely put you ahead of many small business owners. You will be able to determine your company’s specific strengths and weaknesses and know where to make adjustments for optimal results with confidence.
Author: Cindy Lynn Sawyer
Cindy specializes in writing features, how-to articles and informative pieces on topics of interest to entrepreneurs and homeowners. She owns and operates her own company, Capitol Hardware, LLC, with her husband. As an experienced business owner, she has developed expertise in various areas of entrepreneurship, but emphasizes, “There’s always something new to learn.”