Business Owners Make a Mess in their Bookkeeping.
In this article I’m going to walk you through some of the most common mistakes I see business owners making when we help them clean up their books. Most of these lead to overpaid taxes and can muddy a small business owners’ understanding of their cash flow. Lacking good cash flow is the number 1 killer of small businesses.
You need Pristine Financials
Here at Diwan Tax & Accounting, we perform the bookkeeping for our business clients. Why? Because business owners are typically amateur accounts.
When your bookkeeping is bad, you'll:
- Overpay in Taxes (big time)
- Get nasty letters from the IRS
- Waste time & money getting audited
- Have trouble with cash flow and matching books to reality
- Miss out on loans, new equipment etc.
- Get approved for lower surety bonding because you're accounting is bad
- Pay too much to clean things up at the end of the year
- Keep your year-end tax planner busy with journal entries, leading to missed pro-active strategies
In short, if you're doing your own bookkeeping, you're probably making things worse.
3 Most Common Critical Accounting & Bookkeeping Mistakes
1 - Double counting your income = overpaid taxes
There are probably over 50 reasons why you shouldn’t do your own bookkeeping as a business owner, but this is probably the biggest (if you’d like help with bookkeeping reach out to us here).
It is extremely easy to double count your income when using most of the mainstream bookkeeping solutions out there (this article proves it!). Unless they are properly attached to each other, your invoice of payment from a customer and the deposit of those funds into the bank account can easily both represent income.
Why this matters:
If you don’t know how to reconcile your books and make these two align properly with each other, then your income statement will show double the income. That means when you go to make your quarterly tax payments or end of year tax summary you’ll be paying taxes on double the income.
Probably more importantly it will be very easy to overestimate how well your business is doing and find yourself struggling with cash flow.
Without good financial data, it’s impossible to make good decisions on things like:
- Are you charging your customers enough?
- Can you afford to hire another employee?
- Should you switch to a S-corporation to save on taxes?
- Can you afford to take a vacation?
Accounting, when done correctly, is a series of checks and balances (debits and credits) that keep your business books accurate and full of information that allows you to make healthy decisions as an owner.
Don’t keep double counting your income and muddying your financial intelligence!
2 - Improperly Tracking Expenses = audit risk
Although it is tedious and time-consuming, tracking expenses for your business is probably the single best way to avoid tax liability at the end of the day.
Failing to track these expenses means that you might be paying taxes on your gross profit rather than your net profit or put simply you’ll be paying taxes on how much money passed through your business rather than how much you kept!
Pro Tip: If you’re using Quickbooks, then get into the habit of using their receipt scanner to scan expenses or email expenses into your account right after each purchase. Doing this consistently will cut down on the amount of work you have and also allow you to remember more important details (especially when receipts are faded). This also will keep a digital footprint of your expenses for any potential tax issues in the future.
Chart of Accounts
Part of putting your expenses into the system is also having a good chart of accounts that is well organized and allows you to easily earmark each expense for what it is. Different expenses can be written off in different amounts and you want to make it as easy as possible on whoever is doing your taxes at the end of the year so you don’t lose out on any tax write-offs and end up overpaying your taxes.
3- Inefficient DIY = Wasting Time
We get done in minutes, what takes you an hour.
I could have put any number of other items here as pitfalls that business owners make. In fact, if you're still curious, here is a list of them from another article.
However, in reality one of the biggest mistakes you can make is trying to do it yourself. Let’s be honest here, you didn’t get into business to do accounting. You got into business because you had a passion about working in a specific industry or the benefits that come with being your own boss.
Trying to wear one more hat on top of the pressures that already come with being a business owner is unnecessary and dangerous for your business!
Here at Diwan Accounting we offer packages for business owners at every step of the process, from the small start ups to 20+year experts. With our expert guidance and help you can avoid these costly mistakes and keep your finger on the pulse of your business while focusing on driving sales and offering killer customer service (something we pride ourselves on as well!).
For more information on our different offerings or how to get started, please reach out to us here.
How to Lower Your Business Taxes in Seattle or Washington State
Are you certain that you're not overpaying in taxes?
We can help you understand real strategies to reduce your small business taxes & ensure that you never overpay in taxes again. If you like the idea of at least getting some strategies that you could implement, then head to our free guide called "5 Tax Reduction Hacks for Seattle Small Businesses" and read it through. We're certain it will be helpful.
3 Most Important Tips to Scale Your Business
The other day, we were talking with Dan, a long time owner of Country Creek Builders in Lakeville Minnesota, and he shared 3 of the most important things you can do when you're a business owner to go from startup, to running a successful team.
Here are the three tips he provided:
1 - Hire to Get Yourself out of the business
You can't actually build a successful business if you're just swinging a hammer.
You kind of forget how important it is to build up a team when your'e starting your contracting business, and it's even less concerning as you're getting your contractors license.
You'll want to be working with customer, and developing your business to make sure that you're actually building a system that frees you from the tyranny of doing everything yourself. You can't sell, pro-actively communicate, close lots of deals or follow up on service if you're busy swinging a hammer. The most important thing to grow a great business is to hire to get yourself out of doing all the work yourself.
2- Hire an Accounting Firm
You need someone working to pro-actively reduce your taxes, keep track of profitability and keep you away form IRS problems.
You also want to make sure that your bookkeeping is always up to date.
While you might want to hire some attorney's to work on your contracts, but the real long term relationship you'll want is with a business accountant that does your tax planning, bookkeeping and compliance.
Why do you need a pro-active accountant?
You'll end up paying for it in overpaid taxes, audits, compliance work and disorganization.
Your business will ultimately suffer if you don't have a great pro-active accountant.
3 - Save Money to Prepare for Downturns
Economies are cyclical, and you'll always come up to a point where sales decrease.
You don't want to be stuck without a savings account to live off of.
You can lay off your team, you can scale back operations and get out of your buildings, but if you don't have cash to survive on when a downturn comes, you start to lose your homes, your cars and your livelihood.
Don't loose everything because you failed to save.