By Jesenia Vargas
5 Financial Accounting Pitfalls Small Businesses Should Avoid
Guest post from Xendoo: Online Bookkeeping and Accounting Services
Running a small business can be a bit of a challenge, especially when you don’t have your finances in order. That’s why we have compiled a list of top 5 financial accounting pitfalls that all small businesses should avoid.
1. Setting up your business using the wrong financial structure
Many small business owners struggle with determining the right financial structure for their business. For tax purposes, this is one of the most important determinations you can make. Whether you’re an LLC with S Election, or an S or C Corp, you must set up your business with the right financial structure for tax purposes.
For example, if you’re a business that will make more than 20K or 30K per year as an LLC, it is best to file for the 2553 S Election (unless you have investors). If you have investors, it is best to structure as a C Corp. Professional investors and financial institutions give more protection to C Corp businesses and investors around fraud. It gives investors more laws to help protect their investment and it is better on taxation.
As a small business owner, especially a new small business owner, it’s not uncommon to seek help to determine what the right financial structure is for your business. We recommend finding a trusted CPA to help you through the process to help you avoid setting up your business in the wrong financial structure.
2. Leaving your financial records unattended
Did you know that 25% of businesses are behind in their financial accounting books? The good news is, if you’re one of those business owners, you’re not alone! That said, getting your bookkeeping caught up and maintained on an ongoing basis is critical to keeping business finances in order.
Business owners that leave their bookkeeping unattended lose visibility to critical numbers that can help drive their business decisions. Without updated bookkeeping, it’s difficult to know what the cash flow is for the business. It’s also challenging to understand where your money is coming from and where it’s going.
Partnering with a team to help you remain up to date with your financial books on an ongoing, monthly basis is one of the most important investments you can make in your business. The right financial accounting and bookkeeping partner will prepare monthly reports, such as a balance sheet and profit & loss (income statement), to provide you the clear visibility you need to run a successful business.
3. Working with financial business tools that don’t integrate
There are many technology solutions available to small business owners that help maintain their business systems and processes. With a number of tools available at your fingertips, it’s important to not just select the tools that are “right” for the problem you are trying to solve but also consider how these tools work with existing software and systems for your business.
Utilizing tools that do not integrate with one another will result in a lack of efficiency and productivity for business owners and their teams. In addition, there may be important information that lives in one tool, and cannot be accessed by an outside system, leaving business owners with only a partial view of what’s happening in the business. This lack of full visibility could be costly, especially when it comes to business finances.
4. Not reconciling financial payments records
Business owners have too much on their plate when it comes to running a business and one of the top necessities is payment processing. Receiving payment from customers and reconciling those payments is an important part of running a business. Using an integrated payments platform helps simplify a business’s revenue stream and makes it easier to streamline this process.
For example, Fattmerchant provides a seamless payment processing platform that provides you a direct integration into QuickBooks Online. This integration syncs information two ways, allowing you to reconcile your payments and manage your business with ease. What’s more is that your customers, unpaid invoices, payments, and catalog items will sync effortlessly between the two systems, making your data easy to access when and where you need it. This avoids any manual work that you would otherwise have to take on and also eliminates the chance of human errors.
5. Lack of understanding your business profitability model
Business owners need to get clear on what their fixed and variable expenses are. Understanding what it takes to run your business (and your true costs) without revenue is critical to know so you can make informed financial decisions about pricing, margins, expenses, and more. Business owners get in hot water when their profitability model is not clear, and the path to success is therefore unclear.
Get ahead of this downfall by prioritizing understanding and creating your profitability model. Look at your fixed expenses, determine costs without revenue, and even do projections to help you get clear on what potential outcomes may look like. This is an important and often overlooked step for all business owners to take to avoid a financial pitfall.
Looking for help with your bookkeeping and taxes? Xendoo is your financial accounting and bookkeeping solution. Xendoo offers full-service bookkeeping and tax services to business owners virtually. With an expert, dedicated bookkeeping and CPA team, business owners are set up for success with the right financial partners. Xendoo’s monthly subscription packages start at just $195/month for basic bookkeeping with customized packages to fit your business needs. Schedule a consultation to learn more and talk with the Xendoo team