What are the top 10 biggest accounting mistakes small business owners make?
While you may not see this list on David Letterman's show, these are important cautions for small business owners (which happen to be the majority of entrepreneurs in Kirkland). In my interaction with clients, I have learned the following 10 points apply to most small businesses:
1. Miscategorizing expenses
There are standard categories that are generally used in accounting. When you set up your accounting software you can select the chart of accounts that best fits your business. Try to stick with those standard accounts. It will cut down on the confusion of the bookkeeper or CPA, therefore saving time and money spent on accounting professionals.
2. Mixing funds
To have a complete understanding of your business it's very important to have a separate business checking account. This will give you a true and accurate tracking of your business expenses. It's very easy to take $20 here and there out of your personal account for business expenses. When this happens you lose the understanding of how much you're spending on your business. More importantly, when the expense isn't recorded, you lose a potentially important tax deduction.
3. Not keeping receipts
The obvious necessity of keeping receipts is for audit purposes. Another important reason to keep all receipts is for accurate bookkeeping. Let's say you have a contracting business. If there is a receipt to a home improvement store it could be categorized two ways. It could be a tool for your business or it could also be material for a job. To have accurate tracking of jobs, it's important to keep all receipts.
4. Not reconciling books
To ensure all deposits and expenses are entered into the books correctly it's important to reconcile the bank statement each month. Along with reconciling the statement it's important to review your profit and loss and balance sheet each month as well. You will then begin to see patterns in your business. Therefore, you can make better financial decisions about your business.
5. Not meeting with your CPA twice a year
As small business owners we spend a great deal of time putting out fires. Come tax time we don't need any surprise tax payments due. If you meet with your CPA mid-year he/she can go over the business strategies and tax planning. That way money is saved as it's earned and you can avoid the big tax bill at the end of the year.
6. Doing it yourself
Small business owners can do their own books. The problem is they don't have the time. It becomes last priority and the task quickly falls behind. Business owners tend to want to clean up the books before they hand it over to a bookkeeper. Bookkeepers clean up books. It is what they do. Find a good one and let them handle the books while you work on the business.
7. Lack of communication with bookkeeper/CPA
If you decide to spend the money and effort on a bookkeeper/CPA it's important to keep open communication with them. They are there to help make things easier for you and your business. If money is being spent or big items are going to be purchased it is important to keep the bookkeeper informed.
8. Not backing up accounting software
I have seen people spend hours entering information that was lost. You can avoid hours of work by simply getting a flash card or a CD and backing up the software on a regular basis.
9. Employees vs. independent contractor
There are many factors that determine whether someone working with you is an independent contractor or employee. A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
10. Not setting a business budget and setting goals
Small business owners can put a simple plan in place to help track the revenue desired vs. earned revenue. They can also track the true expenses of the business. If there is a budget in place it will help you make better financial decisions regarding your business.
In accounting there are many different ways to keep track of your information.
There are many different filing systems and beliefs regarding accounting. These 10 points are very standard throughout the accounting profession. As small business owners it's important to keep the books clean. It is equally important to follow these general accounting rules.
Diana Gregory is the owner of Small Business Accounting in Kirkland. She recently spoke at the Kirkland Chamber of Commerce's business connections breakfast (held every fourth Tuesday at Lake Washington Technical College). Information: firstname.lastname@example.org or www.kirklandsba.com.