Even in a thriving business, following solid accounting practice matters. You’re working for a reason, and overlooking areas where money could be saved means you have to work that much harder to achieve the same level of profit. If your business isn’t robust, these opportunity costs have the potential to sink you entirely. The good news is, many of the most common erroneous accounting practices are easily fixed. You only need to be aware of them and make minor changes in order to reap the benefits.
1. Failure to Track ALL Expenses
Most business owners attempt to track expenses, but they don’t have a system in place for tracking and they don’t know which expenses should actually be tracked. In short, almost any business expense can be deducted at tax time, from the space in your home office to the dinner you had with business associates. Keeping track of everything means that you can deduct more and lower your tax bill. If you aren’t sure what to track, get advice from an accountant.
2. Failure to Save Receipts and Document
Let’s say you’re savvy, and you use a single credit card for all your business expenses. It seems simple enough, as your statement presents a clear picture of expenses and you know the dollar amount, but the problem is that you can’t prove what the money was spent on or how it was a business expense. Keep your receipts and make note of how the items were used or how the business benefited from the expense at the time of transaction. Memories fail us, and months later it can be impossible to accurately recall the details.
3. Commingling Personal and Business Funds
One of the biggest issues small-business owners have is that they don’t keep business finances separate from their personal accounts. Sometimes, this happens simply because the business grows organically, but other times the business owner does it intentionally because the funds are all going “to the same place” anyway. They’re not, though, and commingling funds makes it very difficult to track where money is going, and even harder to make sense of things if the IRS audits you. Keep a separate business account for all business related transactions.
4. Not Being Organized for Your Accountant
If your goal is to keep as much money in your business as possible, organization is key. You should have a system in place for monitoring your books, so your accountant can easily size things up for you. If you have the habit of handing your accountant a box of random receipts, it’s going to take more of his time to make sense of it all. I always suggest setting up a virtual folder, drop box or inbox in email, and saving all receipts electronically, by month.
5. Not Filing Taxes on Time
Entrepreneurs are prone to putting off taxes because they’re so busy running the day-to-day operations of their businesses. By the time tax day rolls around, they’re still gathering up receipts and throwing them into a box. Delayed filing of tax paperwork can result in some hefty fines and it may also signal to the IRS that the agency needs to give your paperwork more scrutiny. If you’re also committing one of the other big mistakes, an audit can be agony.
6. Not Keeping Financial Documents for Seven Years
There are lots of IRS stipulations on how long to keep your tax paperwork. In most cases 2-3 years is sufficient, but some situations call for as many as 7 years. Moreover, your accountant may need to know information about your tax history, so hold onto the information for the full 7 years to make sure you’re covered.
7. Not Billing On a Cycle
Unfortunately, if you don’t set the precedent for payments, people aren’t going to pay in a timely manner. Billing them on a regular basis shows that you’re organized and sends them the subliminal cue that they should be paying timely as well, plus it allows them to budget for their payments to you. Either way, that puts money in your pocket quicker.
8. Not Paying Employees Accurately and on a Consistent Cycle
Labor is probably one of your biggest expenses, if not the biggest expense. Correcting errors costs you time and money. Moreover, errors and delayed payments can cause your staff to lose faith in you, resulting in decreased morale, and therefore increased turnover. Make sure your employees are paid timely and consistently.
9. Failure to Track Labor
Tracking labor goes beyond making accurate payroll payments. You should be doing regular audits to see if more hours are being used than needed, which could signal overstaffing or employees clocking in/out at the wrong times. Equally, low labor cost isn’t a good sign either. It could signal that your staff is delivering decreased service or that the staff you do have is overworked and getting burned out.
10. Failure to Balance Bank Accounts Regularly
If a key piece of equipment broke tomorrow, could you afford to fix it? If business was booming, could you purchase more equipment? These are imperative business decisions that can only be made if you know with total certainty what’s in your account and how much of it can be spent. Make sure to balance all bank accounts at least monthly.
Solid Accounting Practices Eliminate These Issues & Provide Other Benefits
Obviously, you need to have solid accounting practices to avoid these pitfalls and keep your business thriving. However, there are other important benefits of following good practices as well.
- You’ll manage your cash flow better. The structure and stability of having sound accounting practices allows you to make informed decisions about how to invest business funds for maximum ROI (return on investment).
- Taxes are a breeze and audits aren’t worrisome. Being orderly means that your taxes can be done quickly, while making sure your bill is as low as possible. If the IRS decides to conduct an audit, no problem. You’re ready.
- Your investors get the information they need. By being fiscally organized, you can provide proper reports to your investors. Moreover, you’re likely to have better profits, which means you’ll have an easier time attracting new investors if you need them.
Get Accounting Help if You Need It
The benefits of following sound accounting practices seep into every area of your business. If you’re struggling to follow them, whether because finances are overwhelming, you’re too busy running your business, or for any other reason, don’t hesitate to ask for help. At CREDO, we offer customized plans that can help you get organized, manage all your finances, or just provide assistance as you need it. Contact us today and let us know how we can help!
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