Tax Advice
The 6 Most Common Accounting Mistakes That Put Your Business at Risk
When you own a small business, a single error, whether large or small, can seriously harm your financial health. And it can take a serious amount of time (and sometimes money) to fix and untangle an accounting or bookkeeping mess.
Accounting errors affect business owners of all kinds, from solopreneurs to scaling businesses. We’re all human, after all. But if you can avoid some of the most common mistakes business owners make with their bookkeeping, you’ll hopefully save yourself some of the biggest headaches, too.
To help you avoid those potential errors, we asked 3 accounting professionals and members of the FreshBooks Accounting Partner Program, to share the most common accounting mistakes they’ve seen when working with small business clients.
Accounting Mistake #1: No Proper Accounting System in Place
“When you don’t have a basic system or accounting process for recording and reporting your business finances, it’s really hard to manage day-to-day bills and payments or make informed short- and long-term decisions,” says Nayo Carter-Gray, EA, MBA, and CEO of 1st Step Accounting in Baltimore, Maryland.
Without a system for balancing your books and keeping them up to date, it’s more challenging to scale your business and delegate financial tasks within your team or to external bookkeepers, accountants, or tax professionals. And if you don’t have any automation, compliance tasks like tax planning are more time-consuming.
Solution: Use Accounting Software
Nayo encourages business owners to use online accounting software to help automate everyday business processes like accounts receivable and to make it easier to work with an accountant or bookkeeper. Accounting software stores all your financial information in one place and automatically pulls data into financial statements you and your accountant need, like your general ledger and balance sheet. It also helps to ensure your business is following generally accepted accounting principles.
But I’m not an accountant!
No problem. Most accounting software makes it easier even for non-accountants to keep track of their bookkeeping. And some accounting software (ahem, FreshBooks) has even been designed with small business owners in mind.
Take advantage of software features like recurring invoices, integrated time-tracking, and bank account connections that let you import expenses and payments. These automations reduce your chance of data entry mistakes. Streamlining your data entry also makes your key financial statements, like your cash flow statement, balance sheet, and profit and loss statement (income statement) more accurate, giving you a clearer perspective on your business’s financial status.
“Once you’re on top of those numbers,” says Nayo, “not only will you sleep well at night, you’ll be more prepared at tax time or anytime. And you’ll also be in a better position to make important business decisions.”
Accounting Mistake #2: Following Tax Advice From Social Media
“The problem with following tax advice from social media, like Twitter or Facebook,” says Nayo, “is that taxes are not a one-size-fits-all solution.”
Your particular tax situation is often unique to your business, which means, Nayo warns, “following this advice could actually cost way more money than you were trying to save.”
“The U.S. tax code is about 7,000 pages long—and that doesn’t even cover the Internal Revenue Service (IRS) publications and guidelines.” And, Nayo adds, that doesn’t even include state tax guidelines. There’s just no way a 60-second video can cover all of that and how it relates to your particular business.
Solution: Consult a Tax Professional
“Follow the advice of a trusted tax or accounting professional and make sure this tax professional is truly a professional.” Nayo explains what that means: “Look for CPAs, enrolled agents, tax attorneys, and registered tax professionals in the IRS tax professional directory. Some states also have a listing of registered tax professionals.”
Include all the financial stakeholders for your tax situation in key conversations, because they may have questions or insights that will help tailor this tax advice even further.
Accounting Mistake #3: Mixing Business and Personal Finances
It might seem easier, especially when you’re starting out, to use your personal accounts for your business. But, if you do, says Chris Hervochon, CPA, CVA, “You are opening yourself up to a huge amount of liability because your business and personal records are one and the same.”
For instance, says Chris, “If someone were to sue your business, they might also be able to come after your assets as well.”
A second reason (among many!) that you don’t want to mix your business and personal finances is that it makes it very difficult to have a clear financial record at tax time. “And when I say ‘difficult,'” Chris clarifies, “what I really want you to hear is ‘cha-ching, cha-ching, dollar signs!'”
At some point, someone will have to untangle the web you’ve woven, and it will be time-consuming and expensive.
Solution: Open a Business Bank Account
Chris advises small business owners to open business bank accounts and use them for business purposes. Then, be diligent in keeping your financial transactions separate. If you’re using FreshBooks, you can also connect your business bank account and credit card statements to your FreshBooks account to help track expenses and income.
When you have a dedicated business bank account (coupled with good accounting software) it’s also much easier to perform a bank reconciliation to balance your books. Otherwise, you’ll be stuck sifting through bank statements and separating all your transactions as tax season approaches. Or (cha-ching again! 💸) paying an accountant or bookkeeper to do it.
But what if I want to build better business credit?
Sometimes business owners will open personal banking or checking accounts for their business, believing it will help build or boost their business credit rating. This doesn’t work. In fact, it can even have the opposite effect.
Business credit is measured and scored differently than personal credit. Furthermore, business banking details and financial information should be tied to the business number and not to your personal identification.
Accounting Mistake #4: Not Understanding How, When, or Why You Need to Pay Business Taxes
It’s actually pretty understandable that a lot of clients don’t understand how business taxes work, or how their business income affects their personal taxes.
“One of the biggest issues we see is the level of anxiety that comes from just not knowing,” Chris says. This can lead to all types of errors, like missed tax payments and filings or even missing a tax audit. That can result in penalties and interest, which only compound when they’re ignored. Additionally, you can’t plan appropriately because you don’t have the processes or all the data in the right place.
If you don’t address the problem, you definitely can’t solve it.
Solution: Educate Yourself on Business Taxes (and Read Your Tax Return)
It’s important to fully understand your business tax responsibilities so you can make sound decisions and avoid incorrect reporting.
Have frequent conversations with a trusted tax advisor and be sure to ask questions, like which payments are coming up and what you need to do to prepare for them.
Through these conversations, you’ll also start to learn more about what affects which taxes you pay and how much you owe. This can help prevent errors like over-reporting or under-reporting your tax liabilities.
Finally, Chris can’t stress this enough and calls it his top tax tip for business owners: Read your tax return.
“It’ll help you understand where the numbers flow, where things go and why, and it’ll help you ask better questions when you work with a tax professional.”
Accounting Mistake #5: Not Keeping Proper Documentation
Good documentation is the foundation of good accounting practices and can prevent all types of accounting errors. Here are two of the most serious issues with sloppy accounting records in the experience of Melanie Schroeder, CPA, CGA, RPC, and founder of Out of The Box Chartered Professional Accounting:
- If you don’t have the proper accounting records to validate your return, the tax agency might disallow or deny certain deductions, which makes your tax bill higher.
- If you don’t make submitting your receipts and tracking business expenses in your accounting software a regular practice, you may miss submitting these tax deductions altogether.
Solution: Create a Process
Here’s how you can keep better records, says Melanie: “Create a process for filing your documents. I recommend doing it electronically. FreshBooks users can easily scan receipts and attach them to each business expense.”
Melanie also recommends “habit stacking,” or taking a process you already do and building another habit on top of it. “For instance, when updating your bank feed and doing your bank reconciliations, you can also make this the time you upload and attach receipts so that your bills and expenses are recorded correctly.”
Accounting Mistake #6: Not Saving for Business Taxes
Failing to save for business taxes is an oversight Melanie has seen with many business owners. If you don’t plan for your taxes by having funds set aside, you’ll be even more stressed when your tax bill comes due.
It’s no fun having to come up with funds last minute. And if you have to borrow money to pay what you owe, you’ll also have interest payments to deal with and maybe even penalties on the money owed.
Solution: Calculate Taxes Regularly
Don’t live in fear of tax season. “Calculate your taxes regularly throughout the year,” Melanie advises. And save for your taxes using a separate business bank account.
If you’re not sure how to determine your tax obligation, work with a tax professional. Or, says Melanie, you can also get a good estimate by using online tax calculators.
Consult an Accounting or Tax Professional to Prevent Accounting Errors
Accountants and bookkeepers accept that common accounting errors happen, and they’re here to help. Their business is supporting your business. Many even prefer to work with small businesses.
When you work with a trusted accounting professional, you build a relationship with someone who has this knowledge and will get to know you and your business and help you make the most of the accounting software you use.
Another perk: Fewer frustrating accounting errors that can disrupt your business finances. And, if you’ve made any mistakes, they’ll work with you to move forward, correct accounting errors, and tackle any not-so-everyday concerns unique to you and your business.
This post was updated in September 2022.