As women we are often charged with taking on additional roles to maintain our households and family and in most cases we get the job done without compromising our quality of life. In business you may also be tempted to take on all of the roles and functions required to run your company. You have been deeply involved in running your business from day one excited about implementing your sales funnels, marketing, and on-boarding clients that perhaps you’ve overlooked certain aspects of your accounting. A few months have gone by and you didn’t have time to reconcile your bank account or properly gather your receipts from services, or supplies purchased. It’s near year-end and in effort to get information to your Tax professional timely you quickly download transactions and mistakenly miscode items. Some of these errors can be costly for your business. If caught early these mistakes can be corrected and along with implemented a process to prevent them from occurring again. Below I outline some of the more common errors small business owners make:
1. Failing to reconcile your bank/credit card accounts monthly
When you don’t reconcile your bank and credit card statements you not able to uncover errors, unauthorized transactions, or unjustified bank charges, outstanding checks, or overdraft bank fees. You are not able to stay on top of your cash when you don’t perform this reconciliation timely. The same goes for your business credit card transactions you need to monitor those to be sure you are charged properly for purchases and you don’t have any surprise transactions popping up. You want to ensure everything is in order before paying your credit card bill and the easiest way to catch problems is by doing routine reconciliations. The key is to stay consistent with it comes to your small business bookkeeping.
2. Misclassifying expenses
Knowing how to categorize your expenses properly can save you a lot to time and headache when you need to produce financial statements, or simply get an accurate assessment of the financial health of your business. Account coding involves knowing the accounting and tax impact of your transactions to the income or balance sheet which is an acquired skill and if done incorrectly can have a ripple effect on financial reports and the decisions you make based on these transactions. As business owners you need up to date and accurate financial reports to make the best strategic decision for your business.
Misclassifying expenses not only means that the accounting system may not properly reflect what’s going on in your business but can cause misrepresentation for tax reporting purposes which may also cost you some tax savings.
3. Mixing personal and business finances
If you are using your personal checking account for business transactions stop now and open a separate account for all of your business income and expenses. Commingle personal and business expenses on your books is not recommended because by doing this you don’t know what is truly a business transaction and what’s personal a year or two down the road.
Additionally, mixing personal and business finances can cause you some problems during a tax audit resulting in disallowed deductions and a higher tax bill. For accurate record keeping, it is critical that personal and business finances are always kept separate to ensure proper classification for financial statement and tax purposes.
4. Lack of supporting documentation
Documentation such as receipts, invoices, contracts, bids, etc. are important for state, local and federal tax audits, or lending institutions. It also can be significant when you have disputes with the other party to the transaction to be able to produce this documentation as evidence and support. It also helps to properly identify the transaction for accounting purposes as well.
I asked a colleague of mine who use to work for the IRS small business self employed division what the number one audit issue was that she encountered and she stated hands down the lack of documentation. So you may very well have a valid business deduction but because you failed to keep track of your receipts, invoices etc you risk having these deductions disallowed and increasing your tax liability for that period. Listen I get it you are busy running your business serving your customers’ needs and it’s easy to overlook these routine, mundane accounting tasks but failing to do this or have someone track these for you can cost you big time.
5. Trying to do it all yourself.
Accounting and finance are specialized areas of business that takes years of education and experience. No one expects a business owner to run their organization and also be well versed in accounting or even bookkeeping. Business owner may think they are saving money by doing the bookkeeping themselves or delegating it to a trusted friend or relative but in reality you could be leaving thousands of dollars on the table with costly mistakes.
An experienced professional accountant can save you money by providing you timely and accurate financial data you need to run, grow, and nurture your business. Accountants are trained to uncover mistakes or errors that cost you money. The time you waste doing your own bookkeeping is better spent on obtaining new clients, improving efficiencies, technology and many other revenue driven activities that will maximize your profits.
These are just the top 5 mistakes that I’ve encountered with businesses but there are so many more. You and your business do not have to suffer through debits and credits and figuring out what the financial statement report means. Let us handle your bookkeeping and financial reporting needs and you focus on providing the excellent service to your clients.
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