According to the U.S. Bureau of Labor Statistics, about 20 percent of new businesses fail within the first two years of operations, and 45 percent close within the first five years. While inadequate market research and poor management are often to blame for these failures, a lack of financial accountability is also a common contributing factor.
You might be savvy at business, sales, and communication, which are key growth factors, but unfortunately, having these crucial skills doesn’t always translate to an understanding of the finer principles of finance and accounting. And failing to have a firm grasp on your business’s financial status can hinder your venture’s ability to grow.
Many small business owners go on the accounting and bookkeeping journey alone. Unsurprisingly, only under a quarter of small U.S. businesses employ an accountant, as per Accounting Today. The same survey also found that more than 66 percent of small business owners had no intention of hiring an accountant.
If you are one of the many small business owners who decide to tackle accounting by themselves, here’s some insight into five common accounting mistakes that could cost you money or even get you into legal trouble.
Failing To Properly Track Business Costs
Too often, business owners fail to track their business expenses comprehensively, or they accidentally mix up business and personal expenses. For your own analysis and protection, it’s best to keep track of every single business transaction.
Inaccurate or incomplete financial tracking makes it difficult to pay bills on time and calculate tax deductions when the time comes. It will also hinder your business’ growth by undermining your ability to plan for the coming months.
While you can handle your books yourself, you may want to consider investing in an integrated accounting system. An integrated system connects and tracks all the financial transaction-related functions your business engages in, from tracking bank deposits to cutting paychecks, paying bills, and invoicing clients.
Failing To Plan For Tax Season
According to a survey by Clutch, nearly one-third of small businesses say they end up paying too much in taxes. Even if you are working with tax software, chances are you will stumble if you haven’t taken the right steps to document your company’s finances throughout the year. Not staying organized during the other 11 months of the year will leave you struggling to piece together all the receipts and documents required to file an accurate tax return in April.
The best approach to minimize errors and oversights is by making sure you do tax-oriented organizing periodically and keeping track of every expense, payroll, and other elements that contribute to your business’s overall profit and loss statement.
Trying To Do Everything In House
Are you among the many small business owners who handle everything from bookkeeping to payroll and more by yourself?
When you run a small business, it’s tempting to lower costs by doing everything you can on your own. While doing your business’s accounting yourself may seem like a great way to save money, it may end up costing you in terms of botched payroll taxes, mismanaged cash flow, and poorly-informed decisions.
While hiring an accountant might come with higher upfront costs than managing your account on your own, it can ultimately help save money both in the long and short run. Finding a top CPA for small businesses comes with many benefits, including discovering tax cuts you didn’t know about and catching errors that are difficult for you to see but easy for an expert to spot.
Mismanaging Cash Flow
Recent studies show that 82 percent of small businesses fail due to a combination of poor cash flow management skills and poor understanding of cash flow. Often, businesses confuse profits and cash flow. However, your business having a positive cash flow doesn’t necessarily mean that it is running profitably.
To fully understand where they stand financially, business owners need to understand the concepts of cash flow versus profits, gross profit, and net profit.
Not Reconciling Accounts
Though it is difficult to account for every cent that passes through your business, it is necessary to stay in control of your finances. You have to accurately record every purchase and sale, which is relatively easy to do.
However, every business owner uses different ways to process payments and purchases, including bank accounts, third-party accounts like PayPal, and business credit cards.
When it comes to recording transactions, your accounting records must precisely align with the bank records. The bank records are the ultimate source to know the truth about money flowing in and out of your account. So, if your records don’t match, that means your accounting reports are not accurate.
For this reason, you must reconcile your accounting records against the monthly statement you get from your bank. If you fail to resolve the inconsistencies, they will result in inaccurate reporting
Your small business doesn’t have to face failure because you are handling the accounting. A well-planned accounting system and careful recording will help you make your business dreams come true. Always analyze your business’s financial condition to avoid pitfalls and plan your accounting direction ahead of time. If you need guidance, surf the web for resources so that you can guide your business with confidence.