If you’re a small business owner, you want your company to do more than survive – you want it to thrive! Unfortunately, to make sure that customers are happy and the lights stay on, there are a lot of details that need attention, and some may end up being overlooked. The intricacies of accounting are neither sexy nor fun, and most business owners don’t have the training or background that’s needed for this vital area of operations. To help make sure that you’re doing everything you can to maximize your profits and fiscal responsibility, here’s a list of six accounting problems small businesses encounter. By addressing each, you’ll go a long way toward assuring your business’ success and growth.
1. Not Using Accounting Software. There are a lot of benefits to using accounting software, and the most obvious of these is that if you try to do all the necessary calculations by hand, you’re at risk for making a small mistake that can lead to a giant headache. There is a fantastic selection of software available – it may even feel overwhelming when you first begin doing the research – but if you take your time, read reviews and look for something that is designed to meet the needs of your particular type of business, you’re sure to end up satisfied. I suggest you try QuickBooks. If you’re not sure what to look for, make sure the software you choose can track sales, provide financial statements and balance sheets, generate invoices, manage your contacts and history, allows you to accept credit card payments, provides inventory management, does payroll, provides taxation information and more.
2. Not Knowing How to Use the Software You Have. It may seem odd, but the second common mistake that small business owners make in terms of accounting is also about accounting software – it’s having the software in-house but not using it, not using it the right way, or not really knowing how to use it. Like the treadmill that sits in the corner of your bedroom and slowly becomes something to throw your clothes over, having invested in accounting software and then not actually using it (or not using it the right way) is a reason for regret, and so much more beyond that. When you’re not using your software the right way, you leave yourself vulnerable to making mistakes. And, more importantly, you end up taking far too much time on bookkeeping tasks that it could do for you quickly and efficiently. Most of the packages available come with tutorials, but if you need help, contact an accounting professional and ask them to run through bookkeeping basics with you so that you can use it to its best benefit.
3. Failing to Produce Monthly Financial Reports. A lot of small businesses tend to minimize the importance of financial reports, feeling that if they produce some snapshot every few months or even twice a year, it’s good enough. The truth is that if you have financial backers or are interested in getting additional investment in your business, having a monthly report is an essential tool for them, as well as a sign that you’re taking their investment seriously. More importantly, the more closely you monitor your company’s financial activities, the faster you can pick up on issues as they develop, including slow-paying clients, oversights in your accounts payable and more.
4. Having the Numbers, But They’re Wrong. There are a lot of things that can lead to your financials being incorrect: it can be not using accounting software (or not using it correctly); failing to update data; inputting wrong data; and more. Whatever the cause, the result is never good and can cause problems significant enough to close your business or scare investors away. Worse yet, it can leave you vulnerable to people who can use the inaccuracy to perpetrate fraud.
5. Mixing Your Personal and Business Accounts. Even if you are operating a pass-through business, it is essential that you keep separate books, credit cards and banking for your personal needs and your business needs. Failing to do this will make it nearly impossible to determine what expenses are deductible, what investments generate profit and more. Small oversights are more likely to occur in accounting for out-of-pocket expenses, and this generally leads to paying more in taxes than you need to. Worse, if you face an audit, it will lead to a nightmare of having to separate and justify accounting measures that have been taken.
6. Failure to Properly Manage Your Payroll. Payroll is one of the most complex areas of running a business. Not only do you want to make sure that you’re paying your employees correctly, but you need to be sure that essential areas like payroll taxes and withholding are being done accurately, too. When in doubt, it makes sense to bring in outside professionals for assistance.
Since we are on the subject of accounting, now is a great time to start getting organized for next year’s taxes. If you engage the services of independent contractors, and you pay them $600 or more for the calendar year, you are required to issue that person a Form 1099-MISC. Payments to independents are referred to as non-employee compensation (NEC). Because fraudulent returns were being filed right after e-filing opened in January and before the old 1099 due date at the end of February, the IRS moved the filing date for 1099s to January 31 and no longer releases refunds for returns until the NEC amounts can be verified. The due date for filing these forms and mailing them to their recipients for 2018 was January 31, 2019, so I hope you have already done it.
It is not uncommon to have a repairman out early in the year, pay him less than $600, use his services again later in the year, and have the total for the year be $600 or more. As a result, you may have overlooked getting the needed information from the individual to file the 1099s for the year. It is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all your contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts.
The government provides the IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS. If you have payroll, tax or other accounting questions or issues, we are here to help. Call NTA at (562) 279-0557 or visit www.ntassoc.com today.