Small Business Tax Guide: Top 5 Accounting Mistakes that you Should Avoid
Here are some interesting statistics; a 2018 study on small business shows that up to 45% will not employ a bookkeeper or accountant. 72% have one person handling both accounts and HR. 25% still use paper and not accounting software to record their financial transactions. For those that do employ accountants, only 15% have them as a full-time resource.
There could be many reasons behind these shocking statistics. For some, it is a lack of resources that guides the decision not to hire professionals. For others, it could be cost-saving measures that, unfortunately, result in costly accounting mistakes.
We will explore what some of these accounting mistakes are and how to avoid them.
Accounting Challenges Facing Business Owners
Business owners who take on accounting jobs describe it as a loathsome task. A task they leave to the last minute. Many also admit that they do not have proper accounting knowledge, which makes the job tedious. Even with accounting software, they are not able to keep up with most of the tasks.
Some of the main challenges small business owners face with regards to accounting include:-
· A staggering 82% of businesses cannot manage their cash flow.
· Unforeseen expenses
· Inability to plan for disasters
· Taxation issues especially with regards to filing tax returns
· Payroll management
· Not keeping track of expenses and receipts.
· Failure to reconcile books
· Inability to analyze finances
· Ignorance of regulatory rules governing businesses
· Not understanding business reports.
With so much to juggle, small business owners cannot keep up. They tend to fall behind and may eventually close their shops. 82% will fail in the long run due to cash-flow problems. Problems they could avoid by having proper accounting systems in place.
If you cannot afford a full-time accountant, we recommend you hire one on a part-time or retainer basis.
Five Accounting Mistakes You Should Avoid
There are so many challenges facing small business owners. It is, therefore, easy to understand why they may fall behind in their accounting. We will go into an in-depth discussion of the top five accounting mistakes you should avoid.
1. Lack of an Accounting Schedule
The simplest way to define an accounting schedule is supporting documents that explain in detail the elements of the financial report. It is proof that the data is correct, and provides an in-depth analysis of the financial accounting. It looks at everything, including assets, liabilities, and equities; which have categories and subcategories.
Without the relevant knowledge on what to include, it could be easy to leave out some of the critical items. The easiest way to get around it is to update your books regularly. A regular schedule will allow you to capture all the details. Auditors will carefully examine the records and pick out any gaps. It could land you in a lot of financial problems if your documentation is lacking in any way.
2. Failure to Choose Accounting Software
Technology has made life so much simpler, but you need to have the right ones. Accounting software must have the right features depending on your needs. Without them, you could make a costly mistake by creating workarounds. Choose the right software by prioritizing the features you cannot do without.
The more the business scales, the more you may need to upgrade the different functionalities. Payroll processing software, for example, may not be critical for a company with two employees. However, with 50 staff members, you will need to invest in one.
3. Inability to Track Small Transaction
It is easy and very tempting to dip your hands into the business cash. Some expenditures may also be so small that you do not feel you need to account for each and every one of them. It is one of the biggest mistakes small businesses make.
By not recording such expenditure, you will start to realize a cash flow problem. During audits, you may have a tough time explaining where some of the money went.
4. Mixing of Personal Finances with Business Finance
The inability to separate personal and business finances is another major issue. You could, for example, use your personal finances as a loan to the business. You may even use your credit card to purchase office supplies. You may open yourself up for failure due to such accounting mistakes. You are more at risk if you do not keep good records.
Separate your business and personal finances. If you must use your personal finances, consider it a loan to the business and treat it like any other loan. Schedule a repayment plan, detailing terms of repayment as you would do for any other loan from a bank.
5. Not Keeping Records and Receipts
You decide to take a client out to lunch but fail to collect the receipt. You buy some office supplies, and forget to record the purchases due to the amount. You promise yourself that you will update the records, but fail to do so. The day you decide to, you have no idea where the receipts are.
With procrastination, you develop a habit that you will find very hard to break. Before long, you find that money is draining out of the company. The worst part is that you can’t explain where it is going.
Avoid unnecessary cash expenses and use your credit or debit card whenever possible. Alternatively, get into the habit of updating the records immediately when you spend the money.
Why You May Need To Invest In Hiring A Tax Accountant
Unless you are in the accounting business, you need to concentrate on your core business. Undertaking accounting work on your own can expose you to serious mistakes.
Tax accountants have the relevant knowledge and skill to handle your finances. They will undertake tasks such as data management, financial analysis, and writing financial reports. Most importantly, they will ensure that you are complying with the regulatory requirements.
You do not want to find yourself on the wrong side of the law because of ignorance. Consider it a worthy investment to seek the services of a tax accountant for your business. Most importantly, look at their qualifications so that you work with qualified ones. A bad or unprofessional accountant is as good as none at all.
Hiring a tax account will empower you with better financial decision making capabilities. You will also save time and money, while avoiding costly accounting mistakes.