How to Overcome Common Accounting Slip-ups that put your Business at Risk
Accounting slip-ups can hinder the growth of your business and have tax implications. Unfortunately, these slip-ups are all too common. Below are insights on how to avoid making these mistakes.
Not Staying on Top of Receivables
Getting paid is always an exciting part of running a business. What isn’t as exciting however, is keeping track of your receivables.
When you issue an invoice, a receivable is recorded—meaning that a customer owes you money. Checking your receivable listing you’ll see that customer’s balance as outstanding. As soon as you receive payment from that customer, it should be applied against the invoice to mark it as paid. In practice however, this is easier said than done, and customer deposits are often left to reconcile later on since there’s never enough time in a day.
At tax time you’re left with a bunch of customer deposits sitting in your revenue account and a receivables report that doesn’t make sense. The consequences? Hours wasted updating the receivables listing, overpaying on your taxes, and high bad debts. Making it a point to follow up on your receivables—and apply payments to invoices on a monthly basis—can save you tons of resources in the long run.
“Want to skip out on the manual updating of invoices as paid? Consider using a combination of cloud accounting software and accepting online payments, since this process will automate your receivables process, helping you get paid faster and sleep easy at night.”
Not Focusing on Cash Flows and Working Capital
Today capital and credit have dried up, customers are tightening belts, and suppliers aren’t tolerating late payments. Cash is king again.
It’s time, therefore, to take a cold, hard look at the way you’re managing your working capital. It’s very likely that you have a lot of capital tied up in receivables and inventory that you could turn into cash by challenging your working-capital practices and policies.
Some tactics that will quickly and substantially improve your cash flow: (i) Ask for deposit or milestone payment (ii) Streamline AR and collections process so that customers can pay faster via cloud-based solutions (iii) Request more favorable payment terms from the vendors (iv) Finance purchase orders (v) Increase margins (vi) Sell or lease idle equipment (vii) Sell future revenue (viii) Sell invoices (factoring)
Not Keeping Expense Receipts
Many business owners fail to save copies of business expense receipts, which can result in a series of tax, accounting, and cash flow problems. How many times have you looked at your bank account statement and
had no clue what that $100 charge is? Is it supplies, a business meal, equipment—or is it a personal expense you accidentally paid for using your business card? Not having an actual receipt that can give you details about the charge can result in incorrectly reported tax expenses and a high tax bill if you’re ever audited.
How can you correct your receipts problem? Save a receipt of every business purchase. That process may seem very cumbersome, so here are a few tips to make it easier and less time-consuming: only use your business bank or credit card to pay for business expenses; have an envelope in your bag/car where you can put all your receipts instead of putting them in your pocket, purse, or worse, trash can; once a week/month go through the receipts stored in the envelope and file them to your tax folder or save digital copies in the cloud.
“Or better yet, add these expenses while you’re on the go. Intacct and Expensify have a very helpful feature I personally use that allows you to add your expenses and even attach digital copies of the receipt from anywhere you are—your desktop or your mobile device.”
Not Recording Cash Expenses
It is crucial for entrepreneurs to track all expenses related to running a small business so these costs can be subtracted from total income at tax time and to keep a better sense of overall profitability throughout the year. While credit cards, debit cards, and checks from your business’s bank account are easily linked into Intacct, it’s easy to overlook expenses paid in cash. Most commonly, some of these expenses are not recorded and thus forgotten—causing the business owner to overstate income for the year! Be sure to develop a method for tracking these cash expenditures.
“Ask for a receipt from the vendor to enter into Intacct when you return to the office or log the expense immediately using the Expensify/ Intacct app on your smart phone.”
Not Getting on the Same Wavelength as Your Accountant
So, you’re sitting there with your accountant, in a fancy office, listening to this: ‘EBITDA is strong, way up from last year.’ You shift in your seat. You nod. It continues, ‘Add in D & A, and your bottom line is still positive. And here’s the kicker, thanks to loss carry forwards, tax liability is nil.’
It’s the bane of many small business owners. Not so much the part about meeting with professionals who love spouting jargon and buzzwords. No, that’s not the problem. The issue, actually, is that most small business owners are too shy to tell their accountants that they might as well speak Romulan.
You’re a small business owner. You’re not a financial professional. And nowhere does it say you have to be up-to-date on all the latest accounting blather. Besides, buzzwords, jargon and fancy strategies are why you pay your accountant. Translating all that techno-talk into language you understand should be part of the package.
“Think about it. Would you rather hear this? ‘We used accelerated capital cost allowance to bring your tax liability to nil.’ Or this? ‘There’s a temporary tax program that lets us completely write off all of the new computer equipment you buy. So if you need a new IT kit, buy it now cause we’ll use that cost to get your tax bill down.”
“Bottom line is, if you and your accountant speak the same language then she’s part of your team. She’s watching your back, and she’s providing advice you can bank on.”
If you are looking to find a friendly accountant that understands the needs of a small business, please click here to set up a free 30-minute phone consultation.