Three accounting pitfalls every small business must avoid
Small businesses exist to provide goods and/or services to their customers or clients, jobs for their employees and, above all, making money for their owners. They’re not in business to savor the wonders of double-entry bookkeeping, the joys of paying supplier bills or the confidence of knowing their records are so well organized that they could pass a tax audit with flying colors.
Nonetheless, small business owners operate at their peril if they can’t keep track of the money that flows in and out of their businesses, so they must know some accounting. I’ve had a chance to consult companies over the years, and they’ve ranged from home builders to refrigeration manufacturers. And these companies all struggled with three accounting pitfalls, and if a small business wants to continue operating they must avoid them:
- Ignoring accounting basics. Some business owners take a “cigar box” approach to managing their money: They simply count out their cash drawers at the end of the day; subtract what they started the day with; then deposit the rest in the bank and pay their employees, themselves and their suppliers. Problem with this approach is they don’t know where they stand financially at any point in time and may be bleeding cash without knowing it.
How to avoid: Even the most basic small business accounting software packages, either PC-based or online, will start users with a chart of accounts. This provides a view of income (most often from the sale of goods and/or services) and of expenses, such as cost of goods, employee payroll and recurring expenses like rent, electricity, water and waste disposal. If you hire a bookkeeper or accountant, they’ll start by setting up the same for you, too. In addition, you should have a journal to keep track of assets, such as product inventories, liabilities, and loans. A great investment could be consulting with a local CPA firm to get your business ‘over the hump’ and on right the track.
- Negative Cash Flow. Once you have a chart of accounts set up, it’s much easier to track cash flow. It’s the lifeblood of every business, from the world’s largest corporations to the smallest “mom ‘n pop” corner stores. Cash flow’s usual sources are operations, financing or investors. But, simply put, negative cash flow occurs when a business is paying more money to suppliers, creditors, employees (and anyone else with their hand out) than it’s taking in. Eventually, a business will go bankrupt, unless it has unlimited credit or investor funds. No matter how big or small the business, you can’t outrun the effects of cash flow.
How to avoid: Many small businesses, especially retailers, have seasonal fluctuations in their sales, which can create a mismatch between income and expenses. One way to smooth this out is to use credit carefully, via credit cards, a credit line or a combination of the two. Another way is to manage your receivables (i.e., what your customers owe you) and payables (i.e., what you owe your suppliers). Always be sure to invoice customers right away and, depending on the terms you offer, such as 30-days, start calling them if you haven’t been paid on time.
- Paying taxes on time. No one likes to pay taxes. Period. But taxes must be paid. Full stop. One of the most slippery of slopes that a small business can find itself on is getting behind on paying taxes. Sales taxes. Payroll taxes. Income taxes. They’re the big three. And while they can be avoided, especially in times when cash flow is tight or negative, they cannot be ignored; otherwise, penalties and interest can accumulate, tax liens can be levied, and worst of all, jail time can be issued. Tax liabilities, by the way, cannot be discharged in bankruptcy.
How to avoid: Having a clear chart of accounts can help keep your tax liabilities in view (using additional sub-accounts to track them). But above all, small business owners need discipline to stay on top of their tax liabilities and pay taxes on time. This alone can be a good reason to hire a CPA, who can provide a “tax conscience” of sorts to keep taxes paid on time.
Of course, there’s plenty more to know about small business accounting. That’s why using a good software application makes sense for do-it-yourself types. But that still takes time, no matter how good you are at doing it yourself— it’s time you could better spend marketing your business and serving your customers.
The same goes with handling your cash. Many small business owners want to count cash and make bank deposits themselves, but doing that can take surprising amounts of time – sometimes as much as 10-15 hours per week – and put them at risk for robbery and harm. GardaWorld Cash Services can take the time and risk out of handling cash for much less cost than most people think. To find out more, visit http://www.garda.com/cash-services/en.