Effective bookkeeping is the basis of any thriving small business. Correct financial records offer crucial insights into a business’s financial health, enabling sustainable growth and the ability to make informed decisions.

However, numerous small business owners, managing several responsibilities, usually make common bookkeeping mistakes that could create cash flow problems, financial discrepancies, and tax issues.

Knowing these mistakes and understanding how to avoid them is vital for preserving the financial integrity of your small business.

#1 Mixing Business and Personal Finance

Let’s begin with one of the worst common mistakes of DIY small business accounting: mixing business and personal finances. It might seem innocent to put a business lunch on your personal credit card or use your business account to pay for your children’s clothing. However, these blurred lines swiftly generate confusion when the time comes to reconcile your books during tax season. 

Using one account for both business and personal finances could create the following issues:

• Trouble separating business and personal transactions 
• Issues if you want to apply for a business loan
• Inaccurate financial reporting that makes it difficult to gauge your business’s true profitability

Clean financial records begin with the complete and correct separation of business and personal. You should open credit cards and bank accounts for your small business, using them just for business expenses.

#2 Neglecting the Monthly Financial Close

A critical part of effective accounting entails performing monthly financial closes. Small businesses can let a month slip by and then quickly find themselves six months behind. Hiring a company that specializes in accounting for small businesses helps decrease the odds of missing the month-end closing.

These procedures include assessing every line on your balance sheet, detecting and correcting any mistakes, and producing the results for management to see. Misapplied credit or debit accounting entries can mess up your financials, making it more difficult to track performance or spot problems early.

Neglecting the month-end close will generate incorrect financial reports, eventually affecting decision-making within the business and, in many instances, leading to wrong tax projections. To avert these possible problems, prioritize the process as you would with your operations or sales procedures. Without an accurate month-end close, your small business can start to drift off course.

#3 Not Tracking Business Costs Correctly

Putting all your expenses under “miscellaneous” makes it more difficult to analyze your cash flow and spending. If each item of expenditure is under a particular code from your accounting chart, you can swiftly review your spending, run reports, and seek ways to enhance budgets and cash flow. If you don’t keep correct records, your accounting is way less effective. 

When this occurs, you leave your business susceptible to late payments on critical bills, lost income, and overlooked financial insights. This situation produces huge headaches come tax season and can create issues that slow your business’s growth.

Regardless of how you handle your accounting, it is vital to record each transaction so you can correctly assess your business’s financial health.

Most small business owners don't have the time or energy to do this, which is why it is highly advisable to hire a professional accountant to handle your expenses effectively. Your accountant can record every bill you pay, when you withdraw or deposit money, invoicing clients, and month-end closes. If you want to know where your money goes, an accountant possesses the knowledge to categorize your expenses accurately.

#4 Failing to Classify Employees

Small businesses often have various types of workers, such as freelancers and contractors, managing different projects. Misclassifying them as employees could put you in trouble with the IRS, resulting in tax penalties. A professional bookkeeper can help explain the difference between each type of employee.

If a small business owner misclassifies an employee, the state and federal governments miss out on payroll taxes. The penalties for this error can be significant: 

• Small business owners might be responsible for social security, payroll, unemployment, and Medicare taxes for misclassified employees. 
• The business could also face lawsuits if workers aren’t offered benefits as required by labor laws, specifically the Fair Labor Standards Act.

To avert misclassifying employees, you need to decide whether an individual is a contractor or employee based on their job, their pay, and their relationship to your business. 

#5 Not Accurately Planning for Tax Season

DIY tax software might seem like a money-saving solution for small businesses, particularly when trying to avoid paying for the services of a professional accountant. But while doing your own taxes may work for some individuals with a simple tax return, it’s seldom a good idea for small business owners. Business and payroll tax problems could be complicated, and wrong tax filings can be expensive.

Missing tax deadlines can generate accrued interest, delayed refunds, and penalties, which hurt your cash flow and add unwanted anxiety. Many small businesses fall behind because their books aren’t organized or up-to-date for tax season. Routine maintenance guarantees you’re ready for tax deadlines, making tax preparation quicker and lessening the odds of expensive mistakes. 

And don’t forget: Hire an Experienced Accounting Professional

Hiring an accounting professional diminishes the possibility of mistakes in areas such as payroll and reconciling bank accounts.

Are you sure you’re handling employees’ tax withholdings accurately? Only a few errors in these areas could cost you more than you’re saving by not hiring help. At RMP Accounting, we provide bookkeeping services for small businesses that include payroll, sales tax filing, and bringing your general ledger up to date. Contact us today and let’s talk about your accounting needs.