5 Small Business Accounting Mistakes & How a CPA Can Help

Accounting is often a challenge when you run a small business. Financial statements inaccuracies, tax mistakes or lack of enough cash flow management can hurt growth, reduce profitability and even attract penalties. But with the guidance of a Certified Public Accountant (CPA), you can steer clear of these same mistakes, and keep your business on course. In this article, five common small business accounting mistakes will be discussed along with how a CPA can help.

1. Mixing Personal and Business Finances

Blending personal and business finances is one of the most common mistakes small business owners make. It can make it very hard to keep track of profits, losses, and expenses. Not only does it complicate tax season, making it more likely that you’ll misreport your income or forget to claim business deductions.

Why It’s a Problem:

• Confusing cash flow: Distinguishing between how much your business makes and spends becomes increasingly difficult.
• Tax errors: You may forget to take important deductions or wrongly categorize expenses.
• Risk of audits: Mixed accounts are a red flag that can lead to an audit with the IRS.

How a CPA Can Help

An important function of a CPA is to advise small business owners on the best business structure and how to separate personal and business accounts. This will also help you set up specific business bank accounts and bookkeeping software, so you know your finances are organized and audit-ready.

2. Poor Record Keeping

Accuracy in accounting, and proper record keeping, are very important in the management of cash flow as well as the filing of taxes, and making informed business decisions. But many small businesses ignore record keeping and it could result in serious financial trouble.

Why It’s a Problem

• Missed invoices and late payments: Poor record management leads to lost track of what you owe to others, and what you owe them.
• Inaccurate financial reports: Without the data, you are left to guess how to get better.
• Increased likelihood of penalties: If documents are missing, then there will be filing errors or late submissions with a penalty.

How a CPA Can Help

CPAs are proficient in establishing and maintaining well-organized bookkeeping. In addition, they can suggest accounting software that will work for your business, and keep your financial data on point. Additionally, they can help gather the required documentation to file taxes and avoid penalties during tax time.

3. Improper Tax Planning

Most small business owners do not properly plan for taxes throughout the year, and end up with surprise tax bills, or missing deductions. Tax regulations are complex and change yearly, and paying close attention to the details can save you tens of thousands.

Why It’s a Problem

• Overpaying taxes: Assuming you don’t have the right plan in place, you may miss out on deductions and credits which could reduce your tax burden.
• Underestimating taxes: This can result in cash flow shortages and you fail to set aside enough for quarterly or annual taxes.
• Penalties and interest: If you’re late paying or miss filing, you may incur financial penalties and more accruing interest.

How a CPA Can Help

CPAs update their knowledge of the current tax laws and make sure you’re maximizing deductions and credits for your business. They will help you with advice on how to plan your taxes, and what you should do about estimated payments throughout the year, so you don’t end up having a bad tax surprise at the end of the year. One additional advantage of having a CPA is that they will make sure that all tax returns are prepared and filed correctly, and on time.

4. Ignoring Cash Flow Management

Any business needs cash flow. But many small businesses just think in terms of profits and not cash flow. The other benefit of positive cash flow is that you’re able to pay bills, manage payroll, and reinvest in your business. Even if the business is profitable on paper, operational disruption can occur with mismanaging cash flow.

Why It’s a Problem

• Running out of working capital: If you get to the point where you don’t have enough cash on hand to pay day-to-day expenses.
• Missed growth opportunities: Without cash, you can’t invest in new projects or inventory or marketing efforts.
• Credit issues: An inconsistent cash flow will negatively affect your credit rating and raise borrowing costs.

How a CPA Can Help

A CPA can look at your cash flow and see how to enhance it. They can help fill gaps, advise you about acceptable terms of payment with clients, and provide better control over accounts payable and receivable. In addition, CPAs will help you to create budgets and forecasts so that your cash flow stays steady.

5. DIY Accounting Without Professional Support

In an effort to save money, many small business owners attempt to do their accounting themselves. At first hand, DIY accounting seems practical but, with a lack of expertise, mistakes are bound to happen. Accounting isn’t just about recording transactions, it’s about understanding complex financial regulations, managing taxes, and making sure you are compliant.

Why It’s a Problem

• Increased chance of errors: In fact, they are prone to making incorrect entries, misclassifying expenses, and being in compliance issues.
• Lost time: It’s time-consuming to manage your finances yourself, which takes away from running and growing your business.
• Legal risks: Payroll, tax collection, or the management of financial records can result in an audit or legal action against your business.

How a CPA Can Help

Having a CPA on your side helps you to rest easy and concentrate on all that is important to your business core. A CPA helps you pass the test, which is a legal requirement and also gives you advice on how to make your numbers better. They are also able to prepare exclusive financial reports tailored to the health of your business.

Conclusion

The financial side of a small business can be a complicated beast and mistakes could be too expensive. These common errors will hold you back from growing and put your business at risk, from mixing personal and business accounts to tax and cash flow. Get expert guidance and support from a Certified Public Accountant (CPA) to help keep these mistakes from happening and help prevent your business from becoming financially strained and out of compliance with all of the regulations. Small business owners can invest in a CPA’s services and save time, reduce stress, and grow their business.