Accounting and bookkeeping can seem like you are entering a foreign country without knowing the language or having a guide. Many people find this arena intimidating or do not have the time or skills needed to do it properly. Ignoring this aspect of your business can create havoc and ultimately lead to business failure. Bookkeeping and accounting is not something you do just once a year for tax purposes, it is an ongoing process throughout the year.
Bookkeeping tends to be clerical in nature and time consuming, which is why many small business owners let it fall to the wayside. The accounting process begins where the bookkeeping process ends. Accounting is primarily concerned with the preparation of reports, the interpretation of reports, and the assurance of tax compliance. Bookkeeping and accounting are complimentary; one cannot exist without the other. In a small business, you may only have one person doing everything because of money constraints.
Mistake #1: Discounting the Need for Current Financial Statements
Discounting the necessity of financial statements has repercussions throughout the business. Financial statements make things infinitely easier when it comes to taxes, loans, and your personal understanding of your business’ financial position. Through reports, you can see your revenues, where those revenues have gone, upcoming bills, expected revenues, liabilities the business is responsible for, and assets you may leverage to better the business.
Mistake #2: Not Maintaining Financial Records
To have financial statements, you first need to use bookkeeping to maintain your financial records on a continuous basis. Bookkeeping helps your business keep your finances organized and under control during the year. If you are not maintaining financial records, you cannot know exactly how much you have brought in, paid out, are owed, or owe. Using accounting software such as QuickBooks, the business can organize income, expenses, assets, and liabilities as required under GAAP (Generally Accepted Accounting Principles).
Mistake #3: Taxes, Taxes, and More Taxes
In the United States, taxes are a big part of operating a business. There are taxes for payroll, taxes on income, sales and use taxes, property taxes, etc. There are even taxes you may incur if you sell specific products such as furs, tobacco, or liquor! Not understanding the taxes affecting your business can create future problems. If you do not know what taxes your business is responsible for, how can you ensure on-time payment of taxes? It is vital for small business owners to research and consult professionals to identify and understand the business’ tax obligations.
This is especially important for employer taxes as fines for paying late or not paying at all can become thousands of dollars between fines and interest. The IRS has especially harsh penalties for those businesses that fail to pay employment taxes. Not only can they charge interest on the unpaid amount, the IRS can charge penalties of up to 15 percent of funds not deposited. This could turn an unpaid balance of hundreds of dollars into thousands if not paid in a timely fashion. This includes payments for Federal Unemployment Tax, social security, Medicare, and income taxes. Depending on your business’ size, you may be required to pay such taxes every other week, monthly, or quarterly. This is where having a record keeping system and experienced bookkeeping and tax people keeps your business out of trouble.
Federal Income Taxes
Most business owners understand they must file year-end taxes and possibly pay income taxes. How these taxes are handled depends on the extent of your taxes and the business’ organizational structure. Depending on the profitability of your business, during the year you may need to plan for your year-end income tax bill. This plan may include making estimated tax payments throughout the year to avoid a hefty bill or fine for underpayment when you file your taxes.
State and Local Taxes
Many states also have taxes the small business must pay annually and throughout the year. Your business may be responsible for corporate income or franchise taxes; sales tax, product specific taxes, employment taxes, property taxes, etc. These taxes all have separate tax rates, tax filings, and payment requirements. Failure to file on or all could result in penalties, interest, and possibly suspension by the state.
Mistake #4: Not Preparing for Capital Investments
At some point in its operations, the business will purchase equipment, land, buildings, and other capital investments. It is important for the small business owner to understand the ramifications of these purchases for profitability, tax purposes, and sheer ability to purchase. By recording your financial information throughout the year, equipment and building purchase decisions become much simpler. When making the decision, you will have financial statements to help you decide if you have ability to purchase at all, purchase using cash reserves, or the ability to take on a loan.
Mistake #5: Letting Daily Operations Overshadow Bookkeeping Needs
For many small business owners, especially those just starting out, maintaining financial records is just one hat too many with everything else they must do in the business. By the owner, being the sales person, marketer, manager, production worker, and everything in between regular bookkeeping just becomes shuttled to the side. The small business owner may simply decide knowing what checks they have written and the amount of money in the bank is sufficient. Unfortunately, the owner will eventually find out this system is not adequate to run the business properly.
The small business owner will be confronted with bills they did not plan for, taxes that were not paid on time or paid at all; unnecessary bank charges for bounced checks when funds drop too low; the list goes on. Perhaps the biggest issue will be under payment, late payment, or non-payment of taxes. As we all know, the IRS is not very forgiving when you are late or do not pay them money owed. The IRS has a variety of actions it may take to collect money due up to and including seizing business assets.
Starting up a business is fraught with various decisions influencing the organization’s present and future activities. One major decision involves the bookkeeping needs for the company. It is vital a small business maintain their records on a continuous, consistent basis to avoid penalties, late fees, and poor capital investment decisions. By maintaining the books on a regular basis, either through their own work or outsourcing, small business owners can avoid unnecessary headaches.