As many business owners struggle to maintain balance in the midst of a hectic schedule, bookkeeping tasks often fall by the wayside. However, accurate bookkeeping can mean the difference between staying in operation and closing down due to cash flow problems or tax troubles. If you find yourself falling behind in your accounting duties, it’s time to clean things up before your business becomes the victim of one of these common problems.
Not tracking receivables could put you in the position of having a great deal of potential revenue but little actual money coming in. Without a way to manage all outstanding invoices at once and monitor which of your clients still owes you money, you run the risk of losing income from aging accounts. This disruption in cash flow can force you to have to take out a loan to cover expenses or cause your business to grind to a halt. The best way to avoid having invoices that sit for too long is to use invoicing software that sends automatic reminders to customers as due dates approach.
Small purchases, recurring payments, hidden fees and interest charges add up fast. Failing to keep track of these “extra” expenses can result in a large discrepancy between the money you think you have and the actual funds available to your business. Many business owners also forget to track small purchases made with petty cash, an omission that leaves the door open for less than prudent use of the petty cash account.
Incomplete or messy books don’t provide an accurate record of the business expenses that you can claim on your annual tax return. That could mean losing out on many deductions and paying much more than you have to. The government isn’t going to go through your return for you and point out where you could have done better, so it’s your responsibility to log every expense relating to business operations and list them all come tax time. Keep your personal and business transactions separate, and hold on to receipts to validate your purchases.
The IRS looks for certain “red flags” when deciding whether to audit an individual or business, one of which is consistently showing a loss for a period of three years or more. Some people set up fake businesses just to be able to write off expenses, and the IRS will eventually check to see if these companies are legitimate. Errors in bookkeeping that show a loss that doesn’t exist or a larger loss than your business actually experienced could catch the eye of someone in the IRS and trigger an audit.
Payroll and Sales Tax Penalties
As a business owner, it’s up to you to track taxes associated with payroll and any goods you sell that are subject to sales tax. These must be paid as part of your regular tax return. Inaccurate reporting and payment could cause the IRS to take notice. Should they decide to question your payment, you may find yourself tangled up in a lengthy, costly battle that takes you away from your business and negatively impacts profits.
When you don’t make clean record-keeping a priority, you wind up having to scramble to catch up every time you need completed books for a financial transaction. The more you have to rush, the more likely you are to make mistakes that require correcting. The time lost to this cleanup process costs your business much more than taking a few minutes each day to fill out the books. If you make any serious mistakes in your hurry, you could wind up facing bigger problems in the future.
Avoiding Bookkeeping Errors
Running a small business is complicated enough without the stress of dealing with regular accounting tasks. Hiring an experienced bookkeeper takes the burden off you and greatly decreases the chances of having problems with business funds. Give your bookkeeper whatever information he or she needs to maintain accurate records, and keep the lines of communication open to ensure that data isn’t omitted or transferred incorrectly.
Keeping organized files and records from the start makes balancing your books at the end of each month, quarter and tax year much easier. With a clear picture of income, expenses, profits and cash flow, you can run your business knowing that you have enough money on hand to support daily operations and drive long-term growth.