Adding and subtracting is easy, but doing financial accounting isn’t always that simple. Small businesses often try and save money by doing their own accounting, but common sense isn’t always the best guide.
When your company’s revenue (and relationship with the IRS) is at stake, you don’t want to mess up the numbers. Here are five common small business accounting mistakes, and how to watch out for them.
1. Time Traveling Revenue
Probably the most common accounting mistake that small businesses make is counting a sale as revenue before actually delivering all the products or services. If your carpet company sells $7,000 worth of hand-stitched Turkish rugs in March, but they are meant to be delivered over the course of seven months, don’t be so quick to write down that you made $7,000 in March.
Logging the sale as one lump sum, rather than spreading it over the seven months it really covers, will give your company a false sense of its cash flow. You’ll end up making decisions on a financial situation that doesn’t actually exist. Instead, each month write down that your revenue increased by $1,000.
2. Ignoring the Golden Ratio
When small businesses are looking to grow, most of the time they will either use existing cash flows or go into debt to finance their growth. A common mistake with either strategy is not paying attention to the ratio of spending on growth and new profits coming in.
If a small business doesn’t keep a close eye on this number, it could find itself heavily in debt or having completely depleted its cash flow, even though it still looks profitable on paper. Paying attention to this ratio will help you realize when to slow down so you don’t go into debt or run out of cash.
3. Unique Procedures for Unique Personalities
Small businesses pride themselves on having employees with unique characters and qualities, but that isn’t a strength when it comes to accounting procedures. Every financial transaction that comes through your business should be handled in a consistent and standardized way.
Without a formalized system of procedures, decision-making can become inconsistent and the numbers just won’t add up. Small businesses should make sure that anyone involved in accounting manages and records all transactions in the same way.
4. Budgeting as a Game of Chance
New entrepreneurs tend to fall prey to this mistake, but any seasoned business owner can tell you that a well-checked budget is indispensable for planning out your company’s future.
You can’t expect to grow successfully if you don’t plan thoroughly and manage your finances accordingly. Setting a proper budget, rather than just estimating, will keep you focused on a smart and efficient business strategy.
5. Tax Return Surprises
When you get your tax returns, either you’re thrilled to see that you’ll be getting something back, or you’re sour the rest of the day that you still owe more. If you have to then scramble to find the cash to make up the difference, it can throw other planned expenses off as well.
Instead of being caught off guard, every time a deposit comes into your business take a little portion (either 10%-20% depending on your tax bracket) and save it in a tax reserve. This way you’ll have a cushion between any return saying you owe a little more and your business’s regular cash flow.
While trying to make it on your own in the labyrinth of accounting might be admirable, it’s not always advisable. Asking for help from a professional accountant or tax adviser always makes better sense.
If you do seek a professional’s advice, make sure you approach the right person. Find someone who specializes in small businesses and is familiar with the rules regarding your particular type of business.