Anyone who has owned a small business will likely tell you they expected to spend more time working on their business than in their business. However, business owners often end up taking on the role of manager, salesperson, accountant, marketing specialist, and more in order to keep the wheels turning. They find themselves up late at night, trying to figure out their cash flow or scrambling at the end of the month (or year) to get all their income and expenses recorded correctly.
But the survival of your business depends on having a solid financial plan, which means streamlined record-keeping, consistent financial analysis and, perhaps most importantly, cash flow management. The problem I typically see in small businesses is lack of knowledge about the most efficient and effective way to handle the accounting side of things, which results in wasted time and errors.
Below are the most common bad habits I see along with how to fix them in order to free up your time to focus on growing your business.
1. Mixing Personal and Business Expenses
Separating the two is an absolute must for every business owner. It’s simple and often free to open a new business bank account (you can even get bonuses sometimes!), which you can then use to pay expenses and deposit income to. Not only does this help you get a better picture of the financial health of your business, it’s also vital if you’re ever audited.
2. Using Spreadsheets
Many small businesses start out by tracking income and expenses in a spreadsheet. That’s a great way to start, but manually tracking things creates opportunity for errors to slip through. Once your business grows beyond a handful of transactions each month, it’s best to upgrade to a cloud-based system that can integrate with your bank account. Quickbooks Online is an excellent example that will automate most income and expense tracking for you for an affordable price.
3. Putting Off Bookkeeping
It’s easy to avoid that box full of receipts or the growing list of transactions that need to be categorized, but that means rushing at the last minute and an increased likelihood of missing important items. It’s much better to take a few minutes each week or even just once a month to properly record things. This will also help you spot cash flow problems before they get out of hand.
4. Ignoring Tax Obligations
Income – Expenses = Profit, right? Yes, but many people forget to include taxes in the expenses category. As an employee your employer takes taxes out of your paycheck. As a business owner, you become responsible for setting aside and paying those taxes.
A good rule of thumb is to look at every dollar earned as 50 cents in your pocket. Roughly 30% will go to taxes and at least 20% will typically go to your expenses.
Keep in mind that Uncle Sam wants his cut quarterly. Make a note of estimated tax deadlines and be sure to make the payments when they’re due. Otherwise, you’ll be facing additional penalties and interest.
5. Not Hiring a Professional When Necessary
Many small business owners try to save money by doing things themselves. That might be okay when you’re first starting out, but it can end up costing you a lot of money down the road.
Accounting professionals can make sure you’re in compliance with the law and help you find deductions and other cost-saving opportunities. I often end up saving my clients more than the amount they pay for services. Plus, it never hurts to have another set of experienced eyes review your books. Remember, the success of your small business depends on getting your finances right.
If you need help getting and keeping your small business on track for financial success, or if you simply want someone to review your current system, get in touch. My firm specializes in helping small businesses handle bookkeeping, accounting and tax structure efficiently and effectively.