Guest Blog Post: Rupal Patel from Stride Accounting Solutions
At 12five we see a lot of small businesses, start ups and early stage companies. We are a small business ourself! There are a few growing pains that almost all small businesses go through and one we see often is in the realm of accounting. Today, we present to you some useful information from Rupal Patel at Stride Accounting Solutions. We asked, what are some common accounting issues that can put small businesses at risk?
Accounting slip-ups can hinder the growth of your business and have tax implications. Unfortunately, these slip-ups are all too common. Below are insights on how to avoid making these mistakes.
1: Not Staying on Top of Receivables
Getting paid is always an exciting part of running a business. What isn’t as exciting however, is keeping track of your receivables. When you issue an invoice, a receivable is recorded—meaning that a customer owes you money. Checking your receivable listing you’ll see that customer’s balance as outstanding. As soon as you receive payment from that customer, it should be applied against the invoice to mark it as paid. In practice however, this is easier said than done, and customer deposits are often left to reconcile later on since there’s never enough time in a day.
At tax time you’re left with a bunch of customer deposits sitting in your revenue account and a receivables report that doesn’t make sense.
2: Not Focusing on Cash Flows and Working Capital
Today capital and credit have dried up, customers are tightening belts, and suppliers aren’t tolerating late payments. Cash is king again. It’s time, therefore, to take a cold, hard look at the way you’re managing your working capital. It’s very likely that you have a lot of capital tied up in receivables and inventory that you could turn into cash by challenging your working-capital practices and policies. There are many tactics that can quickly and substantially improve your cash flow including improved collections processes, vendor payment term negotiations, and financing purchase orders, invoices and other forms of alternative lending.
3: Not Keeping Expense Receipts
Many business owners fail to save copies of business expense receipts, which can result in a series of tax, accounting, and cash flow problems. How many times have you looked at your bank account statement and had no clue what that $100 charge is? Is it supplies, a business meal, equipment—or is it a personal expense you accidentally paid for using your business card? Not having an actual receipt that can give you details about the charge can result in incorrectly reported tax expenses and a high tax bill if you’re ever audited. Though the answer is simple: save a receipt of every business purchase, it is often seen as a cumbersome process. Practice only using your business credit card for business expenses, and vice versa. There are also many phone apps out there that allow for easy receipt storage by taking a picture on your phone.
4: Not Recording Cash Expenses
It is crucial for entrepreneurs to track all expenses related to running a small business so these costs can besubtracted from total income at tax time and to keep a better sense of overall profitability throughout the year. While credit cards, debit cards, and checks from your business’s bank account are easily linked together, it’s easy to overlook expenses paid in cash. Most commonly, some of these expenses are not recorded and thus forgotten—causing the business owner to overstate income for the year! Be sure to develop a method for tracking these cash expenditures.
5: Not Getting on the Same Wavelength as Your Accountant
So, you’re sitting there with your accountant, in a fancy office, listening to this: ‘EBITDA is strong, way up from last year.’ You shift in your seat. You nod. It continues, ‘Add in D & A, and your bottom line is still positive. And here’s the kicker, thanks to loss carry forwards, tax liability is nil.’
It’s the bane of many small business owners. One issue, actually, is that most small business owners are too shy to tell their accountants that they might as well speak Romulan. You’re a small business owner. You’re not a financial professional. And nowhere does it say you have to be up-to- date on all the latest accounting blather. You and your accountant should speak the same language so that you know they are part of your team. They are watching your back and providing advice you can bank on.
I think we can all agree that having a handle on your accounting and finding some allies in this space you can trust are key. A big thank you to Rupal for sharing her insights this week and hopefully we can keep some of these tips top of mind moving forward.