12 Common Accounting Mistakes That New Business Owners Often Make

Today, I want to talk to you about a topic that might seem a little intimidating at first – accounting. Now, I know what you’re thinking – Accounting? That sounds complicated! But don’t worry, I’m here to break it down for you and show you that it doesn’t have to be as difficult as it seems.

As a new business owner, it’s important to understand some of the common mistakes that people often make when it comes to accounting. By being aware of these pitfalls, you can avoid them and set yourself up for success. So, let’s dive in and take a look at 12 of these mistakes:

1. Neglecting to keep financial records: Ignoring the importance of maintaining accurate financial records can lead to major issues down the line. Keep track of your income, expenses, and other financial transactions right from the start.

2. Mixing personal and business finances: It’s crucial to separate your personal and business finances. Opening a separate bank account for your business will help you keep things organized and make it easier to manage your finances.

3. Failing to save receipts: Don’t underestimate the power of receipts! Keeping track of your expenses by saving receipts will make it easier for you to claim deductions and support your tax filings.

4. Not budgeting properly: A budget is like a roadmap for your business. Without one, you might find yourself overspending or not allocating enough funds to important areas. Take the time to create a budget and stick to it.

5. Misclassifying expenses: Classifying your expenses correctly is crucial for accurate financial reporting. A mistake in this area can lead to misleading financial statements and unnecessary headaches.

6. Forgetting about taxes: Taxes can be a headache, but they’re a part of doing business. Don’t forget to set aside money for taxes and stay on top of your tax obligations to avoid penalties and fines.

7. Overlooking deductible expenses: Did you know that there are certain expenses you can deduct from your taxes? Make sure you do your research and take advantage of all the deductions you’re eligible for.

8. Not reconciling bank statements: Reconciling your bank statements regularly helps you catch any errors or discrepancies and ensures that your financial records are accurate.

9. Not having a backup system: Technology can fail us sometimes, so it’s important to have a backup system in place to protect your financial data. Regularly back up your files to avoid losing important information.

10. Failing to plan for emergencies: Life is unpredictable, and emergencies can happen. Make sure you have a financial plan in place to handle unexpected expenses and keep your business running smoothly.

11. Ignoring financial reports: Your financial reports provide valuable insights into the health of your business. Take the time to review them regularly and make informed decisions based on the information they provide.

12. Not seeking professional help when needed: Sometimes, things can get overwhelming. Don’t hesitate to seek the help of a professional accountant or bookkeeper to ensure that your accounting is accurate and your business is on the right track.

So, there you have it – 12 common accounting mistakes that new business owners often make. By avoiding these pitfalls and keeping your finances in order, you’ll be setting yourself up for success. Remember, accounting doesn’t have to be daunting. With a little knowledge and some good practices, you can handle your business finances like a pro!

Starting a new business is tough. If I want to make sure mine succeeds, I need to have enough money coming in and a good system to keep track of it all. But here’s the thing – a lot of new business owners make mistakes when it comes to handling their finances for the first time.

Fortunately, there are some simple ways to avoid or fix these mistakes and keep my business thriving. To help me out, I asked a group of experienced entrepreneurs about the most common accounting mistakes new business owners make, and how they can be fixed. Here’s what they had to say:

1. Just Looking at the Big Picture

When it comes to running a business, it’s crucial to focus on the actual profit and cash flow. Many new business owners make the mistake of only looking at the overall revenue that comes in. But this can be misleading because there are so many expenses to consider, like the cost of goods, staff wages, and fixed costs. These expenses can significantly impact the net profit that ends up in your pocket. So, it’s important to not just focus on the revenue coming in the door, but to analyze your profit as well. – Lisa Song Sutton, Sin City Cupcakes

2. Dealing with Classification Challenges

As a new business owner, you might find it difficult to classify your purchases as either personal or business expenses. This can have implications when it’s time to file your taxes. Depending on how you classify certain expenses, you may end up paying more or less. It’s crucial to get this right. If you’re not sure how to categorize something, it’s always a good idea to reach out to a professional accountant who can help you keep your finances in order. – Chris Christoff, MonsterInsights

3. Neglecting the Need for Outside Help

Accounting is a big deal for running a successful business. It involves keeping track of your money, like how much you spend each month, keeping records of all your financial transactions, and looking at statements to see how much money you’re making and spending. It’s a lot of work that needs careful attention. If you’re not good at accounting, it’s important to get help from someone who knows what they’re doing. They can focus on these tasks while you’re busy building your business.

4. Not Paying Attention to the Difference Between Cash Flow and Profit

I think the biggest mistake that a lot of new businesses make is not paying attention to the difference between cash flow and profit. Let’s say you sell a product for $1,500, but what happens if the buyer doesn’t pay on time? Even though you made a profit on paper, you might not actually have the cash in hand. That’s why it’s so important to keep track of your sales and expenses accurately.

Another mistake that many business owners make is reporting on a cash basis instead of an accrual basis. When you use a cash basis, you only record money when it’s received or spent. But when you use an accrual basis, you record the sale or expense when it actually happens, regardless of when the money actually comes in or goes out. If you ever plan on selling your business or seeking funding, people will only look at the accrual basis. So it’s important to keep that in mind for the future.

6. Not Keeping Track of Expenses and Deposits

One big mistake I see business owners make is forgetting to record all their expenses and deposits. This can cause major problems when it’s time to balance your books at the end of the week or month. It can also be a real headache if the IRS or your tax accountant starts asking questions. So, it’s important to stay on top of this and keep everything properly recorded.

7. Neglecting to Have an Emergency Fund

Another common accounting mistake that new businesses often make is not having an emergency fund. Having some money set aside for emergencies can be a lifesaver if your business has to temporarily close or face unexpected financial challenges. Start saving a little bit each month and build up your emergency fund to protect your business in case of unforeseen circumstances.

8. Forgetting About Future Taxes

As a new business owner, I’ve learned that there’s one accounting mistake I need to avoid – not keeping track of upcoming taxes. Sure, I can estimate how much money I’ll make and set some aside for taxes, but I also need to stay on top of when they’re due. If I don’t pay my taxes on time, I could end up with extra charges like interest and penalties. Trust me, it’s better to stay organized and avoid any unnecessary costs.

9. Watch Out for Underestimating Expenses and Overestimating Revenue

One thing I’ve noticed is that many new business owners make accounting mistakes because they don’t have much experience or knowledge. They might struggle to calculate the correct tax rates or simply be unaware of the different types of taxes they have to deal with. The biggest and most common mistake is underestimating their monthly expenses and overestimating their monthly revenue. This can be a problem because it means they’re not investing enough in their business, and that can lead to serious financial trouble – even bankruptcy. It’s important to be realistic and keep a close eye on the financial side of things to ensure long-term success.

10. Balancing Work and Personal Spending

When you’re starting a new business, it’s natural to blend your personal and work expenses. You might go to the store to buy office supplies and end up adding a few personal items to the same bill. However, this can become a problem when it’s time to do your taxes, as you might miss out on deductible business expenses. To avoid this hassle, it’s important to always keep your business and personal finances separate by using different accounts. – Shu Saito, All Filters

11. Not Tracking Small Expenses

You know what? One of the mistakes that I see a lot of new business owners make is that they don’t keep track of all their expenses, even the small ones. It may not seem like a big deal at first, but trust me, it can really pile up and cause some serious financial trouble. So, my advice to you is to start tracking every single expense right from the beginning. It may seem tedious, but it will help you stay on top of your finances and keep your business on solid ground. – Tonika Bruce, Lead Nicely, Inc.

12. Don’t Forget to Keep an Eye on Everything

You know, another mistake I see a lot of new business owners make is that they don’t pay enough attention to their finances. They don’t keep a close eye on how money is coming in and going out, and that can lead to cash flow problems and other financial issues later on. It’s really important to learn the basics of reading financial statements and tracking your company’s progress. Trust me, it will help you avoid making this mistake. – Syed Balkhi, WPBeginner