Everyone knows how important it is for a business to maintain best practices for company finances. While faults in customer service or marketing can hinder your business, accounting mistakes can stunt your growth and leave your company struggling to survive.
Small business owners wear many hats, dealing with duties ranging from marketing, to inventory management and everything in between. With the hustle and bustle of trying to stay on top of everything, errors can occur, especially with respect to accounting. But with prudent planning and smart choices, even accounting errors can be mitigated or avoided altogether.
Here are six things you can do to help avoid common accounting mistakes.
1. Don’t Skimp When Hiring an Accountant or Selecting Software
Unless you took more than a handful of accounting courses yourself, the do-it-yourself approach is a tough one. And even if you’re qualified to do it, proper accounting eats up time and energy that you could be devoting to other areas of your business.
For those who are confident in their accounting skills, there are many software options that can facilitate the process. QuickBooks, for example, is a great way for business owners (even those that aren’t the savviest of accountants) to maintain financials.
Software like QuickBooks helps maintain payroll, set up invoices, track sales and more, but not every online financial tool is created equal. As such, it’s important to do your research and find the right software for your business. Remember, the cash your business could lose through poor financial practices isn’t worth the savings you make on cheap or “free” software.
Doing it yourself may work in the beginning stages of your company, but as your business grows, you’ll probably need some help. In this case, hiring an accountant to handle your finances may be necessary.
If you want an accountant that is qualified and attentive, be ready to pay a premium for those qualities. By paying less for an accountant, you may think you’re saving money, but hiring a subpar accountant can lead to cooked books, missed deadlines or worse: an audit.
Like financial software, competent accountants are worth the extra investment. They have the ability to not only take care of the basics, but they can also offer insight into the proper ways to spend your money and grow your business. On top of that, most professional accountants use QuickBooks to handle their clients’ finances, so if you started with QuickBooks on your own, your new accountant will be able to easily take over your books.
2. Be Comfortable About Discussing Finances With Your Accountant
Whether you already have an accountant or are in the process of hiring one, make sure that you feel good about discussing your business with him or her. Just as important, make sure that he or she can explain your financial situation in terms that you can understand. Find an accountant that is patient with your questions and is willing to teach you enough to understand the answers.
Don’t be too proud or afraid to expose your personal lack of knowledge to your accountant. This is especially important when you’re talking about money, so find someone that you feel is competent and honest enough to give you an accurate picture of your business. Accountants understand that their jargon may be inaccessible to the layman, but the best ones know how to speak your language.
3. Control Your Petty Cash
Petty cash is often perceived as a small amount of business capital. Because of this, it’s far too common and easy to overlook. Over time, however, an incidental expenditure of $20 here or $30 there can really add up. An accountant can help you keep this spending in check and, by extension, keep employees from spending too much.
Even if you don’t decide to hire an accountant, it’s a good idea to implement an accounting system for your petty cash. This involves recording the opening and closing balances for each petty-cash deposit in a log, with workers submitting receipts each time they remove money and make a purchase.
This will help you avoid headaches caused by disappearing cash. It might even make your employees think twice about making questionable expenditures.
4. Keep Personal and Professional Expenses Separate
When starting a business, the first thing you should do is open a business checking account; this is where all business income should be deposited. Keeping your business income separate from your personal income minimizes the likelihood of errors that are bound to happen when using a single account. It can also help you stay compliant with IRS regulations.
After opening your business checking account, sit down with your accountant to strategize your earnings management. Consider how much income needs to be reinvested in the company, how to schedule payments for large expenses, your business’ cash flow needs, and any long-term financial goals that you expect the business to fund.
5. Choose the Right Accounting Method
Business accounting has two main methods: the cash method and the accrual method.
Using the cash accounting method, you record income when it is received and process payment transactions at the time of payment. The cash method deals with the actual flow of cash coming in and out of the business. The accrual accounting method, on the other hand, differs in that it files expenses and income when the transaction occurs, even if the cash itself has not yet changed hands.
The cash method is ideal for companies that process much of their business through many small and immediate transactions, such as smaller retail operations. But as a business expands and its transactions become more complex, the accrual accounting method may be the better option because it provides a simpler way of pairing revenue with expenses.
It’s vital to talk with an accountant and determine the best accounting method for your business. If you can’t accurately match incoming and outgoing cash, then your business evaluations may become distorted and appear more lucrative during times with small expenses and less lucrative during months with greater expenses.
6. Don’t Misclassify Workers
The IRS classifies workers into two basic categories: employees and independent contractors. There are a lot of differences that go into making that distinction, but for accounting purposes, you only need to focus on two points:
- For Employees: You will have to pay payrolltaxes on full-time, part-time and temporary employees. This means that you will be responsible for paying a portion of your employees’ contributions to Social Security and Medicare, as well as withholding a portion of their paycheck to pay their federal tax bills.
- For Independent Contractors: As an employer, you likely won’t need to deduct anything from an independent contractor’s pay. Beware, however, that if you control the conduct of your independent contractor, the IRS may classify him or her as an employee, thus requiring you to pay the required taxes.
Misclassifying workers can be costly for any business, resulting in lawsuits and heavy penalties for those businesses that willingly skirt the law.