As a business owner, you want to focus on what you know best – your product or service. Accounting and finances are a necessary evil but probably aren’t a favorite part of your work. However, lack of knowledge about finances and accounting could cost you big-time down the road. So, set up your small business accounting practices for success with some deliberate thought and action today.
Adhering to some simple guidelines will help you avoid the following 4 common accounting mistakes.
1) Mixing Business and Personal Finances
Whether you are an LLC, partnership or a sole proprietor, keeping your business and personal finances separate is essential, wherever you do business in the world. Antii Nakyva of the Finnish Tax Administration says “mixing expenses comes with an expensive price tag when audited by tax authorities.” From a legal standpoint, keeping records separate provides protection for you if your business is ever sued. From a practical standpoint, it so much easier to keep track of your business’ finances, especially at tax time. Set up a separate business checking account, get a business credit card and keep your business records and transactions separate from your personal ones. It’s that simple.
2) Not Recognizing There are Two Sides to Business: Operations and Finance
Finance and operations are critical components of any business, but they do different things and need to be kept separate. According to Jerry Nordland of Red to Black Bookkeeping, too often “business owners try to expense everything”. Rather than separating assets and expenses, they lump them together. Good accounting practices call for separating operating activities like receipts from sales, payments to suppliers, and buying merchandise from non-operating activities like purchasing or selling assets (land, buildings, equipment, etc.), getting or giving loans, and distributing dividends. A qualified professional accountant can help you keep these activities in the correct columns on your books.
3) Hiring the Wrong Person
Your cousin is an accountant and needs the work, so you hire him to keep the books for your business, or you want to save money while your business is young, so you do your own bookkeeping and taxes. Bad ideas! A trustworthy professional accountant is able to a) set up your accounts to maximize efficiency and reporting and classify entries correctly, and b) apply the most up-to-date tax laws to ensure your business gets all the deductions and credits it qualifies for. She can also check for discrepancies that could lead to penalties or an audit, help you find ways to save money and keep those finances and operations separate. Do yourself and your business a favor – hire a pro. It is well worth the money.
4) Not Performing Regular Backups of Records
Whether you are using cloud- or desktop-based accounting software, be sure you are backing up your data regularly! A natural disaster, an office fire, a plumbing leak, a security breach – any of these things could happen at any time, unexpectedly. So, have a system and process in place to back up your business financial data at least once a week in multiple places and formats. An external device off the internet as well as a secure cloud backup will help you sleep better at night.
Avoiding or correcting these common mistakes will help keep your business out of financial trouble and make it easier for you to focus on the part of work you love – providing your customers with the best product or service possible.
What accounting tips have made your small business successful?