Common Accounting Issues for Small Businesses

Small business owners have many responsibilities, from performing their services and processing payroll to marketing the company and overseeing all processes.

Unfortunately, accounting may not be where your strength lies as a business owner. A limited understanding of tax codes and inconsistent bookkeeping can undermine your business finances. Learn about the common accounting pitfalls for small businesses.

Limited Knowledge

In general, accounting is a way to keep track of money – what you earn and what you spend on payroll, client services, business supplies and taxes. Yet blind spots may exist, including:

·        Different ways of counting money. Cash-based accounting relates to when you receive earnings and pay expenses, while accrual accounts for when earnings and expenses are owed, regardless of whether the money enters or leaves your account.

·        Using accounting software programs to manage transactions, finances and payroll, with many small business owners opting to manually keep track through Excel.

·        Misunderstanding the full scope of accounting software. Capabilities extend beyond managing cash flow or invoices to help business owners with budgeting, forecasting, financial reporting for taxes, expense and income tracking and processing payroll.

Payroll Problems

Whether done manually, through accounting software or a third-party service, payroll involves more than issuing paychecks to employees. Rather, your payroll system should:

·        Accurately track the hours employees have worked in relation to wages and taxes.

·        Ensure all workers are paid on time and in compliance with federal, state and municipal labor laws.

Failing to abide by these rules can result in a complaint regarding a labor or wage violation.

Cash Flow Issues

According to a study by U.S. Bank, cash flow challenges are behind 82 percent of business failures. These issues can often be traced back to inconsistent accounting practices.

Cash flow may be straightforward for a single-person business accepting cash payments but once you involve more employees, customers and expenses, additional variables can affect the process. To better manage cash flow:

·        Track your monthly expenses and bills, looking for areas where you can reduce costs.

·        Take inventory of the equipment and software that is regularly used versus not used. 

·        Anticipate highs and lows during the year to continue paying your employees, ensure you have sufficient supplies and more accurately forecast your budget.

·        Keep track of all transactions to manage cash flow and calculate related taxes.

·        Be prepared to react to delays like late payments from clients, which can mean you don’t have sufficient funds for payroll or supplies.

·        Keep comprehensive financial records, including saving all receipts, bank statements and invoices. These factors can give you a stronger idea of your cash flow, profits and income, also helping to streamline tax filing.

·        Anticipate unexpected expenses, including workplace injuries and natural disasters.

·        Consider bank reconciliation with your accounting software to ensure your records match all bank transactions for more accurate cash flow monitoring.

·        Depending on your size and scale, review all business transactions on a weekly or monthly basis to see if you’ve missed anything or are still waiting on payments.

Tax Filing and Audit Mistakes

Inconsistent recordkeeping can lead to mistakes when you file taxes. As a small business owner, you may be served a significant fine or even face jail time.

Common concerns regarding tax filing for small businesses include:

·        Inaccurately reporting your income on your tax return, which can trigger an IRS audit

·        Unreported income, resulting in a higher tax bill

·        Not filing quarterly estimates, which can result in a penalty or late filing fee

·        Not understanding the tax code for your business model and size

Combining Bank Accounts

To have a clearer picture of your company’s cash flow separate from your personal assets, it’s not recommended to combine bank accounts. Additionally, if your business declares bankruptcy, you can also lose all your personal expenses in the process.

As a small business owner, work with Ion Bank to organize your business bank accounts and keep track of your expenses. To learn more about our services, contact us today!