If you're spending more time chasing payments or doing your own taxes than building your business itself, that's a red flag. There is much you can do to fix issues like these before they come back to bite you.
Accounting is a backbone of any growing business, whether that business is a sole proprietorship or a retail store with multiple locations.With more than half of new businesses failing within the first five years, it's important that a business avoid costly mistakes that could derail operations. Here are a few major accounting blunders your small businesses may be making that could eventually lead to your demise.
1.) Expense Lag
Cash flow is the lifeblood of any business, with timely management of expenses and income crucial to remaining solvent. In addition to the many bills you pay as a business owner, you also are responsible for efficiently reimbursing employees for all travel. Failure to pay on those expenses quickly can eventually cause employees to leave.
But just as your business shouldn't be late on paying expenses, your employees should report them quickly, as well. When an employee holds onto receipts for months and turns them all in at once, it can hit your budget hard, especially if you set aside money each month to pay expenses. Businesses should set a deadline for turning in expenses and reprimand employees who delay their requests. Software like Expensify can automate the process of submitting receipts, allowing employees to capture information on the go and have it accessible immediately.
2.) Inadequate Billing Practices
If your business relies on payments from clients, having a system in place to handle billing is essential. When communications are informal and personal, it puts you in a difficult position, since you don't want to harm your working relationship. It's important to establish your billing policy from the beginning, communicating the number of days allowed before interest is charged.
Have a policy in place to address payments that are more than 30 days late. You may wish to automate the process using a popular accounting software solution, with emails automatically deploying if payment hasn't been recorded by a specified time. Be sure to include a way for them to pay easily, such as a link to a page where they can enter payment information. If a client is consistently more than 30 days late in paying, you may want to rethink your relationship with that client. Your time and energy are better spent building your business than chasing payments around.
3.) DIY Taxes
With so many accounting tools now available, it's all too easy for a business to try to do its own taxes. While software packages can help small businesses by walking them through each step of the process, this can be dangerous unless you have the tax expertise necessary to know what laws apply to your business this year. You may have a significant deduction you wouldn't have otherwise known about, for instance, and not claiming that deduction could cost your business, especially if you miss deductions every year.
Professional tax accountants make it a priority to stay informed at all times. Each year, tax laws change and professional accountants are well-aware of those changes. They want this to be a reason why you would choose them over doing the work yourself. By turning your business's tax accounting over to someone who specializes in it, you'll likely save money while also taking the burden off of yourself. In many cases, your tax preparer will also help if you're ever subjected to an IRS audit.
4.) Failure to Background Check
Background checks are a must, especially for employees who will be handling money or managing your company's money. While a criminal background check won't necessarily catch every person who might steal from your business or mismanage funds, you'll at least be taking an extra precaution.