Accounting is a critical business function. When done well, it operates largely under the radar. But when done poorly, it can truly harm your business. Fortunately, many accounting errors —even common mistakes— can be avoided with proper planning and tools.
It’s critical that business owners proactively familiarize themselves with common accounting mistakes and best practices to prepare for potential financial risks, and save time and money.
To help, this guide explores 5 common business accounting myths and how to avoid them.
Accounting Myth #1: I Don’t Need to Look at the Numbers
False! Even if “numbers aren’t your thing,” you should still be familiar with the numbers behind your overhead, income, and expenses. This is especially true for startups looking to grow quickly or attract future investors.
A recent study by CB Insights found that “running out of money” was the second most cited reason why startups failed (29% of all failures). Does that mean that business owners need a constant line of sight into their books? Not necessarily.
Start by monitoring cash flow and set weekly cadences to review balance statements and profit and loss (P&L). Startups that are growing will want to go beyond that and track key financial metrics. These metrics can include cash burn, recurring revenue, customer acquisition cost (CAC), and customer lifetime value (LTV). Having visibility into current finances will help you make sound business decisions and stay competitive.
Accounting Myth #2: Payroll Only Involves Payroll Calculations and Taxes
Another misconception about business accounting is that payroll only involves processing paychecks and taxes. The IRS issues penalties to 1 in 3 businesses every year for payroll errors, reinforcing how complicated payroll processes can be.
After determining a pay schedule and employee wages, businesses must abide by the relevant federal and state laws. Geography can affect everything from overtime laws to hourly minimum wage, to mandated paid sick leave.
Classifying workers correctly and tracking proper time off are also necessary to run a tight ship. On top of this, the IRS expects businesses to maintain detailed records and have them available for potential audits.
Despite having to comply with the Department of Labor, Internal Revenue Service, and specific state laws for employees, many small businesses still maintain paper payrolls. Payroll and time card mistakes cost between $4-$9 each pay period, and that adds up over time. Use reliable accounting technology and time tracking tools to both save time and ensure accurate numbers.
Accounting Myth #3: I Don’t Need Accounting Software
Similar to payroll misconceptions, accounting encompasses more functions than most people realize. From billing customers to paying vendors, to tax accounting and reporting, accounting is what powers your business. The numbers don’t just need to be accurate, they also need to be readily available. This is why you can’t just rely on spreadsheets. To maximize your time and accounting data insight, you really need accounting software.
A cloud-based accounting solution gives you visibility into critical aspects of your finances through dynamic dashboards and reporting features. You can automate invoicing and recurring bills through billing automation. Manage credit cards, accounts payable, and different purchasing requirements seamlessly from a single interface.
Accounting software can also help alleviate the anxiety around tax compliance. The IRS considers some expense items invalid unless they’re accompanied by supporting documents. Accounting software keeps all critical financial data consolidated and provides an audit trail for easy tracking and more.
Studies show that companies who invest in accounting software add five times more clients than companies who don’t implement these tools. In 2020, 58% of large companies and 78% of small businesses use cloud accounting software. On top of that, businesses that use cloud accounting services showed 15% year over year revenue growth.
Accounting Myth #4: Accounting Only Matters Before Tax Time
Tax time is inherently stressful for small businesses, but the tax period isn’t the only time accounting matters. Having a grasp on your finances is critical for building a go-to-market strategy. You do this by constantly monitoring and managing your financial health at all times. This also helps you make tax-efficient choices year-round.
In a survey conducted by Wasp Barcode Technologies on small business accounting practices, a majority of business owners identified accounts receivable and daily cash flow as their biggest accounting challenges. These issues require daily monitoring, not just at tax season, to keep a business running efficiently.
Creating structure around your accounting processes will benefit you as you plan for the following scenarios:
- Forecast Planning: Having a grasp on your numbers today will help you make educated financial decisions for your future.
- Navigating Growth: Business finances ebb and flow, but leveraging existing data can help your business prepare for times of heightened or stagnant growth.
- Preparing for Audits: Your books should always be ready for any unforeseen situations. Businesses are subject to periodic audits from the IRS, so plan ahead and have your accounting records ready at a moment’s notice.
Get in the habit now of creating sound accounting processes so your numbers can be reliable and accessible at any time.
Accounting Myth #5: Accounting is Expensive
This remains one of the most common accounting myths. While it is true that accounting services are an investment, they can also lead to exponential cost savings and help you avoid potential risks.
The national average for outsourced accounting services is $50/hour, but this can vary based on geographic location and scope of work. Determine if you need annual accounting support or a year-round bookkeeping service. A bookkeeper can help with recording daily transactions, processing payroll, invoicing your customers, and help balance the books. Accountants support more advanced tasks like filing taxes and analyzing costs, but can also perform the same tasks as a bookkeeper.
If you plan on outsourcing your accounting support, remember that most offer free consultations and only bill at the end of the job. Understand the full breadth of services you need before starting your search for accounting services so you only pay for what you actually use.
Accounting Done Right
Prioritizing and understanding your business’s accounting and bookkeeping needs is fundamental to business success.
If you don’t have an accounting system in place that takes advantage of quality accounting software, now is the time to implement one. Doing so will yield exponential gains for your business and help you avoid sticky situations with state and federal regulators.
Dean Mathews is the founder and CEO of OnTheClock, an employee time tracking app that helps over 10,000 companies all around the world track time.
Dean has over 20 years of experience designing and developing business apps. He views software development as a form of art. If the artist creates a masterpiece, many people’s lives are touched and changed for the better.
When he is not perfecting time tracking, Dean enjoys expanding his faith, spending time with family and friends, and finding ways to make the world just a little better.
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