Being a small business owner is no easy task. Starting out you will be wearing all of the hats in the business from running the actual operations, HR management, marketing, and administration. One of the key areas that often gets less attention is the accounting function. It’s the “necessary evil” that needs to be done but is usually the last to be prioritized. But without a solid accounting function you as a business owner will be flying by the seat of your pants instead of making data-driven decisions. This can lead to suboptimal results and can even doom your business if you aren’t careful. We have compiled a list of the top five accounting mistakes we see small business owners make so you can avoid some pitfalls.
Number 1: Failing to put systems and controls in place from the start.
To quote author James Clear, “you don’t rise to the level of your goals you fall to the level of your systems.” Implementing a strong set of systems and internal controls is the foundation of your business. Like building a house, you don’t start with the roof. Systems create consistent, repeatable processes that allow your business to scale while minimizing risks and creating accountability. It is the cornerstone of corporate governance. This is especially important for the accounting function.
For example, are there purchasing and procurement policies in place. There should be a process where smaller purchases can be made by staff for operational efficiency, but larger reviews for bigger purchases. A good example is purchasing a vehicle for the business. A large purchase like that should go through a business needs review with management and authorizations from management, the CEO, and potentially the Board of Directors if the purchase will require a large cash outlay. Smaller purchases and employee reimbursements should also be reconciled by an employee not involved in the purchases to ensure personal purchases are not made with company funds.
Number 2: Comingling business and personal expenses.
This is a major no no but it is surprising how often we see this happen. Comingling your personal funds with you business funds is not only an accounting headache but poses major risks to you as a business owner. The whole purpose of creating a separate business entity is to shield your personal assets from the assets of the business. When you don’t maintain that level of separation you risk piercing the “corporate veil” which could allow creditors or unhappy customers to come after your personal assets in a lawsuit. Imagine losing your house because you didn’t make the effort to put groceries on your personal credit card compared to your business card. That’s an extreme example but we have seen new clients consistently mixing their expenses. If you use a once a year tax accountant be prepared for extra fees and a potentially grumpy professional as they try to unwind all the numbers.
Number 3: Failing to properly manage cash reserves.
Do you know if you have enough cash runway to last you the next six months? What about if an economic downturn hits (remember the pandemic)? Cash is king so they say. We see a lot of business owners starting out undercapitalized or not doing enough accurate projections and budgeting to ensure their business can survive into the future. There is nothing more heartbreaking than sinking a lot of money into your business only to realize it is going to fail because the cash was not managed correctly.
This is where a proper accounting function comes into play. Not just bookkeeping although that is of key importance as well (see systems above). You need to not only be keeping track of your numbers but actually using them to make better business decisions. Accounting is typically thought of to be a retroactive exercise. Business owners need to get away from that mindset and understand that it is also a proactive way of determining what action to take next. You should always keep a strong cash reserve and know what your purchasing needs are going to look like for several months down the road. You never want to be in the position where you need to find cash NOW to keep the doors open.
Number 4: Not planning for or outright ignoring taxes.
Taxes are not fun. They are the biggest cash flow suck your business will experience. But they are a reality of life and not doing proper tax planning will make the situation worse. The US tax code is the most complicated in the world before even taking into account state and local taxes. And don’t forget payroll taxes. There are so many different variables that apply to everyone and some very unique ones depending on your industry. The sooner you are proactive about finding a tax professional to guide you along that journey the better. At the bare minimum you should find an excellent tax preparer that can keep you in compliance each year and a good payroll service provider.
The better option is to find a tax strategist that will proactively help you plan to save the most in taxes possible. They are in the best position to advise you on what tax structure you should choose (sole proprietor, S Corp, C Corp, etc.) and what actions to take and when. They should be focused on your long-term strategy and goals to maximize savings over the life of your business, not just in the current year.
Completely ignoring your taxes is even worse. Do not do that. The amount of penalties and interest that will be assessed when you are caught will add to your bill in an astronomical amount. Taxing authorities will have no qualms about putting a lien on your property to settle the debt. Worse yet, you could face criminal penalties as well including prison time. At bare minimum you must stay in compliance.
Number 5: Listening to the social media gurus of the world for tax and accounting advice.
Ten years ago we would not have included this on the list. But it has become such a prevalent issue that we had to bump it up. There is a world of misinformation out there related to business, money, and taxes being peddled by arm-chair finance quarterbacks on Tik-Tok and other platforms. For every true nugget of wisdom you are likely to find hundreds of examples of bad or illegal advice. Practicing skepticism is a wise choice for any business owner. There are no true get rich quick schemes or magic tax loopholes that will ensure you make it big and pay zero taxes. If it seems too good to be true you can almost certainly bet it is. That’s not to say there are not great legitimate strategies out there. There are but they are going to be dependent on your own situation and need to be carefully evaluated. All we ask is you stay safe out there and be careful before making any financial decisions.
If you are looking for proactive accounting and tax professionals, we are here to help. Feel free to reach out anytime and book a call with a member of our team. We look forward to assisting you with any of your accounting, tax, and strategic needs.
