Accounting for your small or midsize business entails much more than keeping the books for tax purposes. It is an important facet of your business to identify potential waste, fraud and theft—and ultimately will allow your business to grow.
Two local experts weigh in on common accounting mistakes, how to avoid them and save your business some money in the process. Alyssa Lebovic is a partner in Keller and Lebovic, CPAs in Fair Lawn (www.kellerandlebovic.com). Alexander Rosenfeld is the principal with Alexander Rosenfeld CPA, in Maywood (http://alexrosenfeldcpa.webstarts.com/).
The following accounting mistakes are among the most common for small businesses:
Lack of organization
In accounting, organization is critical, says Rosenfeld, adding that not keeping adequate records is one of the biggest mistakes. “Business owners as well as individuals should have accurate lists with dates, check numbers, names and amounts of medical expenses, charitable deductions, employee business expenses, etc.,” he says.
That includes keeping receipts for all expenditures, using business credit or debit cards for expenses, keeping the books up-to-date and properly logging petty cash expenses. Also, avoid mixing personal and business finances. Get receipts for all business purchases, even those that seem insignificant.
Lebovic says sometimes a business owner can be “penny wise and pound foolish.”
“In most cases, the owner of the business is the best salesperson for that business and no one else can explain what the company can do for the customer and show quite the same enthusiasm for what they do. Yet, rather than devoting their time to selling, which typically will get them the best return on the time they invest, I often see business owners trying to save money by wearing too many hats and trying to do everything themselves,” she says.
A typical example, Lebovic explains, is making a delivery instead of paying someone or an outside service to do so.
“Unless they can parlay making that delivery into the opportunity to have an extra discussion with the customer to attain new business, it’s not a good use of their time,” she said.
Neither is doing your own bookkeeping, filing your own payroll taxes, picking up supplies in person, etc.—and most of all: filing your own taxes. One missed deduction or missed opportunity to make an election can easily pay for paying a professional to do your taxes.
Not hiring a pro
Rosenfeld and Lebovic agree that accounting software, like Quickbooks, has made bookkeeping easier and more convenient for small and midsize businesses. But ease and convenience won’t mean a thing if you don’t have the right person to correctly input your information. The cost of hiring a professional accountant is always a smart business move.
But if you opt to keep bookkeeping in-house, choose wisely. Quickbooks, for example, is available in desktop or online versions, each of which comes with different bells and whistles in its yearly upgrades.
Lebovic says, “If you own the 2017 version, do you need to run out and purchase the 2018? Unless you are processing your own payroll through QB, you can probably use the version you already have for a few years.” Also, if you do a lot of travel for your business and need to access your records in the field to bill on location, maybe the online version should be your choice. The bottom line is, no matter which software you utilize, make sure whoever is doing your books—including you—has had proper training. Even seemingly insignificant errors can lead to poor fiscal health for your business.
Rosenfeld adds that using a reliable accounting system will cut down on errors that might occur with handwritten records. Don’t cut corners when it comes to keeping records, he advises.
What’s in a name?
Rosenfeld says choosing the correct entity for your business is crucial and can have a serious impact on your business’s financial well-being. For instance, are you an LLC (limited liability company) or LLP (limited liability partnership)? Are you filing as an S Corporation or are you a sole proprietor?
While they share similar qualities, they also have distinct differences that will affect how your business is structured and managed. Most importantly, each comes with its own set of rules and regulations when it comes to accounting.
“People are choosing the wrong entity for their business needs based on what friends are telling them,” Rosenfeld says. “They should first speak to an accountant who will explain the differences and the advantages and disadvantages of each.”
Yes, it’s easy to get caught up in the everyday aspects of your business, especially if you’re busy (which is the goal, right?). But falling behind on tasks, like paying bills, updating records, managing invoices, maintaining sales tax payments and other bookwork can result in time wasted down the road.
Not only can falling behind result in accounting mistakes that may be difficult to prove later on, but you could be liable for tax penalties or even lose out on big financial opportunities because your books are not current.
Spend a few minutes each day to make sure your records are up-to-date and avoid playing catch-up when it’s easier to make mistakes.
Not looking at the big picture
Lebovic says smart business owners should be looking at the profitability of each service or type of product offered: “Make sure you not only compare your selling price with the direct costs of selling that service or item, but some of the indirect costs that do increase with the volume of sales. Before you agree to borrow against that line of credit or home equity loan to finance the upfront cost of something until a client pays you, make sure to factor in those interest costs in your pricing and make sure it makes sense. This is especially true if your customers are hospitals or municipalities or other buyers with notoriously slow payment cycles. If you have to pay enough interest, while waiting to get paid, it can substantially eat into your profits unless you factor it into your costs and pricing.”
The bottom line, Lebovic says, is not every sale is a good sale: “Your goal should not be to sell to anyone willing to buy from you; your goal should be to identify which sales have greater profit margins and focus your time on promoting those sales. It’s okay to have certain items that are loss leaders and bring business in, but you have to recognize those as such and limit the amount of those you pursue with thin or no-profit margins. They only serve a purpose if they get customers to try your product or service and then buy additional items that are more profitable for you.”
Not backing up
The most expensive cost of all could be the cost of recreating records or services or analysis for your own business or for a customer—necessitated by not backing up regularly.
Rosenfeld and Lebovic agree that every business mantra should be “Backup, backup, backup.”
“Most important of all is keeping that backup away from the computer you’re backing up,” says Lebovic. “Whether you backup to the cloud, or an external hard drive, or key files on a flash drive, take that backup off premises.”
And remember, you’re not only backing up in case your hard drive crashes or you become the victim of a cyberattack. Think low tech physical problems like a pipe bursting, fire or simple theft of a laptop.
“I heard of an architect who was located in a building that was substantially damaged by fire. The majority of the tenants in that building never recovered and went out of business,” Lebovic notes.
“The architect was able to be up and running with very little downtime because he had proper backup and could restore it to a computer in his home office the very next day.”
Bottom line: Be smart. Your business’s financial health will thank you for it.
Angela Daidone is a freelance writer, editor and public relations specialist. She can be reached at email@example.com.