they are and make a conscious plan to avoid them yourself. Why not learn from others rather than make the same mistakes other small business owners have made?
1: Not staying on top of receivables
You have done the work, and now it is time to be paid. Sometimes owners just assume that a customer will pay or small business owners forget to enter receivables into their books because they are too busy working. A receivable is entered when an invoice is sent to a customer – the accounting entry is to debit accounts receivable and credit revenue. At the end of the year, if you have not collected on your customers’ accounts, then you will recognize a lot of revenue and have a large accounts receivable balance on the books. By not collecting on receivables, you can run into trouble at tax time, especially if you are an accrual basis taxpayer (as opposed to a cash basis taxpayer) because you will be obligated to pay taxes on the receivables you have not collected. Regardless of what method of account you use to prepare your tax returns, customers willingness to pay invoices decreases with time. So by now billing accurately and timely, you are only hurting yourself in the long run.
2: Not keeping expense receipts
Many small business owners do not always keep copies of their receipts. It can be hard to recall what a $250.00 charge hitting last month’s bank statement was and if it was a valid charge. You can go back to the vendor who had the charge and ask for a copy of the receipt. But that is time consuming, and your time is too valuable to be spent trying to remember if a charge was valid and chasing down receipts. You also run the risk that your bookkeeper misclassifies expenses in your accounting records, and some expenses may not be 100% deductible, such as meals and entertainment, so you can run into issues if these are misclassified in an expense account that is fully deductible. The point is to keep your receipts; it is easier and will help you avoid potential problems in your bookkeeping.
Small business owners sometimes commingle personal and business expenses in their books, which can be a nightmare to figure out which expenses are personal expenses at the end of the year when you go to prepare your taxes. Your tax preparer will not know which are personal or business expenses either, and if they have to try to identify which expenses cannot be deducted by combing through all your transactions, then you could be hit with a significant tax preparation fee for the time and expenses your tax preparer has to do to reconcile that for you.
4: Not keeping up with monthly bookkeeping tasks
Small business owners are rarely accounting professionals so few, if any, enjoy the day-to-day technicalities of the accounting process. Many small business owners who keep their own books do not do monthly bank reconciliations or credit card reconciliations or compare their accounts receivable or payables reports to the general ledger. By keeping up with these and other reconciliations, you can make your business run smoother. You can also hire a bookkeeping professional, even if just on a part time basis, to do these reconciliations for you to help keep your books in order. The best accounting software will not do this for you — you need to manually check your books periodically.
5: Not hiring a professional to prepare your taxes
Many small business owners miss out on opportunities to maximize their deductions or do not prepare their tax returns properly. Do-it-yourself tax software may be easy to use, but there are just far too many scenarios for any software to be able to cover, so sometimes you need to rely on another professional and let them do what they do for a living. The expenses may be worth it, even if not in the short-term, your tax professional may be able to give you advice as he or she watches your business grow and increase in complexity and profitability.