Home » Accounting Mistakes Likely to Cost Small Businesses a Lot of Money
Working with an accountant has advantages that extend beyond the end results. Let’s say that despite an increase in sales, firm X’s turnover was $50,000 in FY2020 and only $30,000 in FY2021. If firm X had maintained a professional relationship with one in this situation, an accountant might have easily compared the two balance sheets and identified the problem areas.
This is only one of many examples that show how proper accounting makes data collection and planning and strategizing easier. Professional accounting is also useful when making decisions about investments and expansion, as well as when calculating taxes.
Unfortunately, small businesses frequently view employing an accountant as an unnecessary expense and instead manage their accounts themselves, which almost invariably results in mistakes. These mistakes can lead to not only the CRA’s wrath, but also to a company’s demise over time.
Not convinced, or fairly confident in your abilities to run your small business and handle all of its bookkeeping and accounting needs yourself via one of the popular accounting softwares? Our look at six of the most common accounting mistakes small businesses make when attempting ‘DIY accounting’ may change your mind about that.
Accounting and bookkeeping become significantly less effective if you don’t keep accurate records. When this happens, your company is at risk of losing money and falling behind on important bills. This sets you up for huge headaches during tax season, as well as other issues that might stymie a developing business.
It’s not only mistakes like entering transaction data into a spreadsheet incorrectly or omitting to note that a bill has been paid. Inaccurate financial tracking costs your company money and makes it difficult to prepare for the following month or beyond.
It’s critical that your accounting system, whether it’s just you and a spreadsheet or an accountant, keeps track of all transactions so you can accurately assess your company’s financial health.
When you try the DIY approach in the hustle and bustle of actually running your business on day to day basis a lot of this quickly gets lost. Things you meant to enter later get forgotten, and bills you meant to pay to go unpaid. Everything can come undone, from a bookkeeping point of view, fast. Working with an accountant prevents this.
The line between personal and business finances is frequently blurred by small business owners. It’s understandable, especially when a company is just getting off the ground.
You go to Costco to buy some office supplies and, since you’re already there, you pick up a few household products as they are better priced than those at the supermarket near your home.
However, it extends beyond mixing corporate and personal transactions on a single transaction. According to a Clutch survey, more than a quarter of small business owners don’t have a separate bank account for their company. That is not a wise decision.
Using a single account will make it more difficult to separate your personal and commercial transactions, which can lead to serious problems when tax season arrives. You can even miss an expense that you could claim as a business deduction if your financial accounting is shoddy.
Lenders expect a thorough and accurate image of your organization’s finances when they assess your loan application, so blurred borders between business and personal accounts could be a problem when you apply for a loan or line of credit.
Break the habit of utilizing your company and personal bank accounts interchangeably. Set up a separate bank account for your business. The bank where you keep your personal account will most likely provide you with some incentives to do so.
If you’re in a hurry and need to buy, keep your work and personal purchases separate so you can save your business receipts.
Apply for a business credit card if you’re using a personal credit card for company spending. Small business owners can get cards from major banks that give cashback benefits on purchases and special deals with merchants, both of which can be very nice perks to have access to.
Cash flow is critical to a company’s ability to operate from one day to the next. Billing or invoicing customers effectively will go a long way toward ensuring that your revenue arrives on time, allowing you to use it for costs, payroll, and other purposes.
Businesses that don’t have a strong handle on their accounting can often find themselves with insufficient cash flow. Invoicing is delayed, and consumers are slow to pay, leaving your company unable to pay its expenses.
Ineffective bill management has more consequences than just being late with your payments. According to Visual Capitalist, 82 percent of Canadian small businesses fail due to cash flow issues. Another 29% fail because they run out of money entirely.
Start by invoicing your customers as soon as you’ve completed your end of the transaction to improve your billing management.
An invoice sent via email is preferable to a bill sent by snail mail. There is also software that may automatically send invoices to your clients for a faster, more smooth method of collecting outstanding debts.
Employees, freelancers, independent contractors, and gig economy workers are all used by small businesses to get the job done. If they designate these people incorrectly, they risk facing litigation and tax fines.
According to the CRA, if a small business owner misclassifies an employee, national and local governments lose out on payroll taxes, and the fines for doing so might be significant.
It’s possible that business owners will be liable for payroll taxes for employees who are misclassified. If employees are not reimbursed and supplied with benefits they are entitled to under the law, the company may face penalties and litigation.
To avoid misclassifying people, you must decide whether they are employees or contractors based on the tasks they perform, the compensation they receive, and their relationship with your organization.
Doing so can be more complicated than you might imagine, as we explained in greater detail here. Working with an accountant, who deals with these issues every day, will ensure that everyone who works with your business is properly classified and paid the right way.
Small businesses looking to save money on an accountant or other tax specialist may think that do-it-yourself tax software is a viable option for preparing a simple tax return.
If you’re doing your business tax file on your own, you can get stuck if you haven’t undertaken the necessary procedures to properly document your company’s finances.
Nobody wants to spend April stitching together a year’s worth of receipts and documentation because they were disorganized for the previous 11 months. This is especially true for small enterprises, which face a more difficult path to complying with the CRA’s increasingly complex tax regulations.
While more than 93 percent of small businesses stated they are very or somewhat confident in their ability to file their taxes correctly, almost one-third also believe they wind up paying too much at tax time, according to the Clutch survey. Working with an accountant will put you in the 7% of those who don’t feel that way.
Ready to talk about the many ways working with an accountant will benefit your small business? Contact us today and let’s talk!