Even for a business that is growing exponentially, it is important to follow solid accounting practices. As, poor accounting practices can become the reason for the fall of a thriving business. Your firm is working to achieve certain goals to make profits.
But, if you are not managing the cost opportunities properly, it will become challenging to reach your goals.
Most of the poor accounting practices are easy to identify and can be fixed with little effort. Here are 8 such accounting practices that your business must stop doing immediately to save your business from sinking.
Let’s explore in detail.
Table of Contents
1) Equating Cash Flows To Profits
Don’t confuse cash flows with profits, and don’t write down every project income before its completion. Many times, cash flows can also result in more expenditure. For example, some projects take longer to complete, which can increase the expenses for the project.
Thus, writing down each income as profit can present a false image of your business. Rather, review your balance sheets after the completion of the project to get a clear idea of your expenses and revenues.
2) Ignoring Small Bills And Payments
Most of the time, business owners often get confused about which expenses should be tracked. However, you should be aware that almost all business expenses can be deducted during tax time. Thus, if ignored, you can end up paying more taxes than required.
Moreover, small bills and payments can add up to form large amounts. And ignoring them can lead to errors in the balance sheets and financial reports. Hence, resulting in more stress than necessary during tax return filing.
3) Mixing Personal and Business Finances
Business owners often think that all the finances are their own so what’s the need to have separate personal and business accounts. What they ignore is the fact that mixing personal and business accounts means you end up paying for your personal needs from your project budgets. It can make the situation extremely difficult to explain when the IRS audits you.
Thus, please make sure you have a separate business account for your business transactions. Moreover, you can even create separate accounts for different projects to segregate and manage funds efficiently.
4) Delaying Tax Payments
It is no brainer in understanding that a business owner has to deal with many day-to-day business operations. They tend to keep putting off taxes due to insufficient time. However, this leads them to dig through their records for all the bills and receipts on the last day of the tax filing deadline.
The delayed paperwork and tax filing can result in heavy fines. It may also cause your business to fall under IRS scrutiny. If they find any other mistake, an audit can put your business in a difficult situation.
5) Failing To Track Labor
Tracking labor is important to pay your staff on time to maintain their trust in you. However, it doesn’t just mean tracking them to make accurate payroll payments. Doing regular audits can tell you if the project is taking more hours than required or if the employees are not logging in/out at proper times.
It could also tell you if the productivity of your staff has decreased or they are overworked and burned out. Once you know the reason, you can take timely measures to protect the business from facing much loss.
6) Not Keeping Financial Documents For Up To 7 Years
The IRS has many rules on how long you should keep your tax records. Sometimes, keeping records of the past 2 or 3 years is sufficient but in some cases, business owners might want to keep their tax documents for up to 7 years. Thus, it is safe to keep the financial documents for a maximum of 7 years.
Keeping the documents can help you at the time of crisis and also make it easy for your accountant to get all the required information in one place.
7) Not Hiring Experienced Professionals
Taking care of your own finances might sound like a good idea to save some cash, but it can cost more money to your business. An accountant might charge you a little more, but can help you file an error-free tax return and apply the deductions you didn’t know about earlier. It will result in saving more money than before.
Also, when you hire an experienced accounting professional to manage your money, it is essential to keep the documents organized. As most accountants charge by the hour, you can save some money.
8) Using Inappropriate Software For Business
There are numerous accounting software in the market, such as QuickBooks, Sage, Quicken, Xero, and more. But the software applications are made for businesses of varying sizes, provide different sets of features, cater to the needs of different industries, etc.
All these accounting software can automate most of the manual tasks to save time, but what’s the use of a software that doesn’t meet all your business requirements? Hence, you should first list all your business needs before selecting software.
Apart from avoiding the mentioned practices, you should always keep updating and installing best practices into your accounting department to improve the overall efficiency of your business.