7 Financial Accounting Pitfalls Small Businesses Should Avoid
If you are a new business owner, doing your accounting and bookkeeping may be your first option when starting your business venture. Perhaps you want to be in control of every financial aspect of your business, but accounting involves way more than just keeping track of numbers on a spreadsheet. Accounting involves keeping a record of financial transactions, reporting and analyzing data, keeping track of tax information, and reporting to tax collection entities on behalf of the business. These are some of the functions that accounting entails, but there are seven accounting pitfalls small businesses should avoid if they want to succeed in getting their numbers right.
Doing Everything on Your Own
Handling every single financial detail on your own will take a toll on your business in the long run. By doing so, if any errors occur in your accounting process you will have to take full responsibility. Getting numbers wrong by accident is a big deal that can hurt and stunt the growth of your business. If you are a determined entrepreneur with knowledge of basic accounting principles and enjoy crunching numbers, handling your business accounts when your business is just getting started may be a reasonable option in the beginning.
However, it’s the little details small business owners could miss out on that could lead them to regret ever doing the accounting on their own. Do you have the accounting tools you need? Are you knowledgeable about business taxes? This can be a burdensome task that can weigh heavy on new business owners as they are attempting to keep the balance between numbers and the day-to-day operations of their business.
Not Hiring a CPA
One of the major pitfalls small business owners make is they ignore the benefit of hiring a Certified Public Accountant (CPA). This type of accountant is certified and tested in basic and complex accounting principles and hiring one can dramatically ease the burden of dealing with finances, so as a business owner, you can focus on business operations and spend less time crunching numbers. Many small business owners brush off the idea of hiring a CPA because it can be too costly or there is not enough money to allocate for an accountant at the moment, but the truth is, just like your business, hiring a CPA is an investment.
Ignoring Accounting Software
As you expand your business, the need for reliable and robust accounting software will be essential. Especially if physical file folders are still being used, your small business will show its limited ability in processing accounting tasks. Traditional spreadsheets are becoming an outdated method of accounting but with the use of modern accounting software, generating reports, entering data, and storing information can be done with ease. Not using accounting software forces a business to rely on their ledger and a calculator, and it can take a small business days to process the information they have compiled.
Another major financial pitfall small businesses make is going over their budgets, which if done often can lead to bankruptcy or having too much in debt that will be difficult to pay back. Over time, poor budget management practices can negatively affect the financial health of your business. Small business owners may extend their spending budget to compensate for unexpected expenses, but doing this too often will result in a net-negative on your balance sheet. Especially if a business has multiple budgets for various functions.
Accepting Profit as Cash Flow
Profit and cash flow are two things that can often get confused with one another and a newly established small business can mix up the two. While cashflow does consist of profit later down the road, cash flow is the amount of revenue generated consistently that shows stable earnings. Profit is the net income of your business at the end of each quarter or the end of the year. Distinguishing these two factors is essential in accounting, especially if you want to grow your business with the help of investors as they like to see the data from these two.
Classifying Employees Improperly
A very often overlooked detail that small businesses make in their accounting practices is classifying employees incorrectly. Various employment forms need to be filed for new employees, forms such as W-2s, W-4s, and W-9s depending on the hire. Information from these forms is used to determine how much to deduct from the employee’s gross pay, for local and state taxes.
Outdated Credit Card Processing
Using a dated credit card processing platform for transactions can pose a security risk and that is why small businesses need to upgrade their payment terminals or any point of purchase system to secure payments. According to Interchange Pros, their credit card processing solutions for businesses will help ensure secure transactions and provide a digital record of all transactions and activity made via their software for easier financial accounting tasks. Outdated processing can also cost your company money in unclaimed interchange fee discounts. If you’re a B2B or B2G company, you may be paying too much for your business and government credit card transactions. By updating your processes and hardware, you can save over half of the money you pay in interchange fees.Back To Blog