Even for a business experiencing exponential growth, it is crucial to adhere to sound accounting principles. Poor accounting practices can ultimately lead to the downfall of a thriving enterprise. Your company is actively working towards achieving specific goals and generating profits.
However, if you fail to effectively manage cost-related opportunities, attaining your objectives will prove to be challenging.
Fortunately, many of these poor accounting practices can be easily identified and rectified with minimal effort. Here are eight accounting practices that your business should immediately cease in order to safeguard it from potential failure.
1) Equating Cash Flows To Profits
It’s crucial not to conflate cash flows with profits and avoid prematurely recording project income before its completion. Cash flows can often lead to additional expenditures. For instance, certain projects may take longer to finish, resulting in increased project costs.
Therefore, labeling every income as profit can paint an inaccurate picture of your business. Instead, it is advisable to assess your balance sheets once the project is finalized to gain a comprehensive understanding of your expenses and revenues.
2) Ignoring Small Bills And Payments
Often, business owners find themselves perplexed about which expenses should be meticulously tracked. However, it’s essential to recognize that nearly all business expenses are eligible for tax deductions. Ignoring these expenses could result in overpaying taxes.
Furthermore, disregarding small bills and payments can accumulate into substantial amounts. Neglecting them can introduce errors in balance sheets and financial reports, leading to unnecessary stress when filing tax returns. Therefore, it is crucial to diligently account for these expenses to ensure accurate financial records and mitigate tax-related challenges.
3) Mixing Personal and Business Finances
Business owners sometimes assume that since the finances are ultimately theirs, there’s no need to maintain separate personal and business accounts. However, they overlook the consequences of commingling funds, wherein personal expenses are paid from project budgets. This practice can complicate matters significantly, especially during IRS audits.
It is crucial to establish a distinct business account for all your business transactions. Additionally, consider setting up separate accounts for different projects to effectively segregate and manage funds. This approach ensures proper financial tracking, simplifies tax reporting, and enhances overall financial transparency.
4) Delaying Tax Payments
It’s evident that business owners juggle numerous daily operations. Due to time constraints, they often procrastinate on tax-related responsibilities. Unfortunately, this leads to a last-minute scramble to gather all the necessary bills and receipts on the tax filing deadline.
Delaying paperwork and tax filing can result in substantial fines and may even subject your business to increased scrutiny from the IRS. If any errors are discovered, an audit can place your business in a challenging position. It is crucial to prioritize timely tax management and ensure all records and filings are in order to avoid unnecessary penalties and potential audits.
5) Failing To Track Labor
Keeping track of labor is crucial not only for ensuring accurate payroll payments but also for maintaining the trust of your staff. Regular audits can provide valuable insights into various aspects. They can reveal whether a project is taking more hours than necessary or if employees are not logging in and out at the appropriate times.
Additionally, labor tracking can shed light on decreased productivity, signs of employee burnout, or excessive workload. By identifying the underlying reasons, you can take timely measures to protect your business from significant losses. Prioritizing labor tracking enables you to optimize workforce management, improve efficiency, and maintain a healthy work environment.
6) Not Keeping Financial Documents For Up To 7 Years
Complying with IRS regulations regarding tax record retention is essential. While in some cases, retaining tax records for 2 or 3 years may suffice, there are instances where business owners may choose to retain financial documents for up to 7 years. As a general guideline, it is advisable to keep financial records for a maximum of 7 years.
Maintaining these documents can prove invaluable during times of crisis and can also streamline the process for your accountant, ensuring they have access to all the necessary information in one place. By adhering to proper record-keeping practices, you can enhance your financial management, facilitate audits, and mitigate potential challenges in the future.
7) Not Hiring Experienced Professionals
While it may initially seem appealing to handle your business’s finances on your own to save money, it can actually prove to be more costly in the long run. Engaging the services of an accountant may involve a higher upfront cost, but their expertise can assist you in filing an error-free tax return and uncovering deductions you may have been unaware of. Ultimately, this can lead to greater savings for your business.
Furthermore, when you hire an experienced accounting professional to manage your finances, it is essential to keep your documents organized. Since many accountants charge by the hour, maintaining organized records can help you save money on their services. By providing them with well-organized and readily accessible documentation, you can maximize the efficiency of their work, reduce billable hours, and optimize your overall financial management.
8) Using Inappropriate Software For Business
In the market, there is a wide range of accounting software available. However, it’s important to note that these software applications are designed for businesses of different sizes, offer varying sets of features, and cater to the specific needs of different industries.
While these accounting software can automate many manual tasks and save time, it’s crucial to select software that aligns with your business requirements. Therefore, it’s recommended to first list out all your business needs and consider them when choosing an accounting software solution.
In addition to avoiding the aforementioned poor accounting practices, it’s essential to consistently update and implement best practices within your accounting department. By doing so, you can enhance the overall efficiency of your business and ensure that your accounting processes remain effective and accurate.
