Being a small business owner means you need to be a jack-of-all-trades. There are various skills you need to hone to ensure the success of your business, such as marketing, human resource management and processes, product and inventory management, and many others. However, the most important skill to master is financial management. Understanding your finances and how to manage them is crucial in ensuring that your business thrives and leads to new opportunities and growth.
Although developing your financial skills may be challenging, being aware of the accounting difficulties faced by small businesses is a worthwhile effort that can benefit your business in the long run.
7 Common Small Business Accounting Mistakes and How to Fix Them
There are many common mistakes small business owners can make in accounting. However, knowing what these mistakes are and how to remedy them is a proactive approach in avoiding them and learning how to manage them when they arise.
According to the United States Bureau of Labor Statistics, around 20% of small businesses fail within their first year, while approximately 50% fail by their fifth year. A leading cause of business failure is ineffective financial management, as reported by the U.S. Small Business Administration's (SBA) SCORE program. Here's a list of common business accounting mistakes that you can proactively counter and avoid:
1. Minimal Financing
One of the main accounting issues for startups is minimal financing. Preparation before opening your business is key. As a small business owner, you need to ensure that you have sufficient capital to cover expenses for at least six to 12 months without relying on consistent revenue. To establish your startup expenses, compile a list of expenses that are set and unique to your business.
Depending on your business type — brick-and-mortar, online or services — your expenses could include:
- Rental space costs
- Utilities
- Insurance
- Equipment and supplies
- Permits and licences
- Inventory
- Employee salaries
- Website creation and marketing
Once you have listed your expenses, estimate the total cost of opening your business. If the total leaves you limited with funding your business venture, there are solutions to consider, including additional financial support from:
- Federal support: The SBA offers loan programs for new and small businesses, ranging from $500 to $5.5 million, to fund your business.
- Grants: Numerous federal, state and nonprofit organizations offer grants for small businesses. Grants.gov is a helpful resource.
- Investors: Investors may infuse your business with capital in exchange for future returns or profits.
- Crowdfunding: There are various online platforms that allow small business owners to raise money from contributors.
2. Not Understanding Cash Flow
Managing cash flow will either make or break your business's survival. It is essential to stay informed about where money is going and where it is coming from. An early warning sign of cash flow problems is when business expenses exceed incoming revenue. This may lead to difficulties in paying employees, suppliers, and even taxes timeously.
Keeping meticulous records of your monthly expenses, reviewing your bills frequently and accounting for all customer payments will ensure a clear overview of your cash flow. Being proactive in monitoring your cash flow will prevent underestimating your business expenses and overspending. Cash flow problems are a frequent accounting mistake among small business owners. To maintain a healthy cash flow, consider:
- Implementing a strong accounts receivable system to keep track of the total amount customers owe and set clear expectations on payments.
- Cut unnecessary business costs wherever possible to retain funds.
- Set realistic budgets, monitor business expenses and establish cash flow strategies to maintain financial stability.
- Consider applying for a business credit card for higher credit limits.
3. Unprepared for Unexpected Costs
Unexpected costs can significantly impact your business capital, which is why ensuring you're prepared for emergencies is crucial. These situations are typically out of your control, however, having a cash reserve in place will protect your profitability and ensure that you don't exceed your business expenses.
These unexpected costs could include:
- Emergency care for employees or customers injured at your business.
- Maintenance or repairs of business equipment.
- Increases in utility bills.
- Inventory shrinkage.
- Unexpected tax fees.
- Recovery after a natural disaster such as hurricanes, flooding and earthquakes.
To protect yourself and your business from these uncontrollable circumstances, ensure that you reserve a portion of your cash inflow in a savings account. Over time, this cash reserve will grow, providing a safety net should any unplanned situations occur.
4. Not Tracking Expenses or Analyzing Finances
A simple mistake in a small business is not tracking all expenses and analyzing your finances. These two common accounting challenges faced by small businesses are important to address before tax season, as well as when seeking to efficiently reduce costs and retain funds.
Saving all receipts and tracking recurring expenses will give you a clear indication of your financial health. Keeping these records in order will help reduce your taxable income and provide an overview of your business's profits and losses.
5. Not Using Accounting Technology
As a business owner, you want full control over your accounting operations. However, this is time-consuming and also leaves room for negative financial errors that could cost your business. Transitioning from manual methods to automated accounting processes will benefit your business by saving time and money, reducing errors and giving you better control over your finances.
When managing accounting issues for startups or small businesses, embracing accounting technology allows you to:
- Monitor your cash flow.
- Track sales.
- Automate payroll and invoicing.
- Capture accounts payable and receivable.
- Manage inventory.
- Assist with budgeting.
- Provide accurate financial reports.
- Secure your data from potential online threats.
With accounting technology streamlining your processes, you will have more time to focus on more important aspects of your business.
6. Poor Tax Planning
Tax season can be stressful, but with preparedness and planning in place, it'll benefit your business in the long run. Tax planning is a crucial factor in minimizing your tax liability, avoiding fines and penalties and ensuring accurate reporting. It offers peace of mind, as well as credits, deductions, and timing strategies, giving your business an advantage. Without planning ahead, you could potentially overlook tax deductions that could save you money.
Knowing the various small business tax deductions could offer relief during tax time. Research and see if your small business could benefit from:
- Startup cost deductions
- Taxes and charitable contributions
- Retirement plan contributions
- Health insurance
- Bad debt
- Home office expenses
7. Not Working With an Expert Accountant
The risks of do-it-yourself or in-house accounting are substantial, especially if you're unskilled in finances and are inexperienced in the field. This is where you could risk poor credit scores, penalties, lost financial opportunities and even create additional cash flow issues. To ensure your business thrives, eliminating potential risks is your goal.
To make the process easier and more efficient, consider outsourcing an expert accountant to assist with your financial admin needs. Having an experienced professional overseeing your accounts will give your business an advantage, ensuring that your books are up to date, in order and streamlined.
There are many benefits to hiring a professional accountant to help you with your business accounts, including:
- Increasing efficiency and saving you time.
- Providing access to expert financial guidance.
- Improving cash flow management.
- Assisting in scalability and flexibility.
- Saving you costs.
- Staying informed of policy changes.
- Relieving accounting difficulties faced by small businesses.
- Reducing common small business accounting mistakes.
Consult Mangen & Associates for Professional Accounting Services
To assist businesses with any common accounting challenges, Mangen & Associates offers tailored, professional financial management and strategic advisory services.
With 25 years of experience in accounting and finance, you know that your business will be in good hands. Schedule your consultation today.
