10 Accounting Mistakes Small Business Owners Make – And How to Fix Them

Managing your business finances is no small feat. It requires a careful balance of accuracy, strategy, and compliance. Unfortunately, even minor accounting errors can snowball into costly problems down the line. Here are the top 10 small business accounting mistakes to avoid—and how you can steer clear of them.

1. Failing to Separate Personal and Business Finances

Mixing personal and business expenses can lead to a bookkeeping nightmare. It’s essential to open a dedicated business bank account and use it exclusively for your business transactions. This not only simplifies record-keeping but also ensures accurate tax reporting.

Extra Tip: Use a phone app for receipt tracking to keep personal and business expenses clearly separated.

Example: A small business owner pays for office supplies using their personal credit card. At tax time, they struggle to identify which purchases were for business use, leading to missed deductions and extra stress.

2. Neglecting Regular Reconciliation

Skipping bank and credit card reconciliations is a common pitfall. Regular reconciliation helps catch discrepancies, identify fraudulent charges, and ensure your records match your actual financial activity.

Funny Note: Let’s face it, they didn’t teach us reconciliation in school—and we probably rolled our eyes when our parents insisted on balancing their checkbooks. Turns out, they weren’t dinosaurs; they were onto something.

Example: A company’s bank statement shows a $500 charge they don’t recognize. Because they hadn’t reconciled in months, it’s too late to dispute the charge with the bank.

3. Poor Expense Tracking

Failing to track expenses diligently can result in missed deductions or inaccurate financial reports. Utilize tools like expense tracking apps or accounting software to record every expense promptly.

Short Reminder: Don’t forget mileage! Use an app or a simple log to track your business miles—it’s an easy deduction that’s often overlooked.

Example: An entrepreneur forgets to log their travel expenses from a business trip. Without receipts, they miss out on valuable tax deductions.

4. Misclassifying Transactions

Misclassifying income and expenses can distort your financial reports. Be consistent in how you categorize transactions and regularly review your chart of accounts to ensure everything is aligned. If QuickBooks is your software, we provide QuickBooks training to help you. Reach out to us here!

Example: A restaurant owner accidentally categorizes a $2,000 kitchen repair as an operating expense instead of a capital expenditure. The result? Their financial reports paint a picture of lower profits—and they miss out on valuable depreciation benefits. That’s one costly mix-up for the books!

5. Letting Unpaid Invoices Pile Up

Letting unpaid invoices pile up can cripple your cash flow. Develop a system to monitor accounts receivable, follow up on overdue payments, and maintain healthy cash flow.

Example: A landscaping business neglects to follow up on overdue invoices, creating a cash flow crunch that forces them to delay payroll. Trust us – nobody is happy if the payroll gets delayed.

6. Not Keeping Backup Records

Relying solely on digital data without proper backups can lead to disaster if your systems crash or data is lost. While we’re all for the paperless trend, it’s crucial to make sure your systems are being backed up regularly—both locally and in the cloud. Services like Carbonite, Backblaze, or iDrive offer easy, secure options for cloud backups, so you never lose important financial data.

Example: A retail shop’s computer crashes, erasing all of their accounting data. Without backups, they must recreate months of transactions from scratch.

7. Overlooking Tax Deadlines

Missing tax deadlines can result in penalties and interest. Keep a calendar of key tax dates and consider working with a professional to ensure timely compliance.

Example: A consultant misses the quarterly estimated tax payment deadline and is hit with an unexpected penalty during tax season.

Our tip: No wonder our Verity team (and accountants everywhere) are so doggone busy when January and February hit—we’re helping our clients meet these precious deadlines!

8. DIY Accounting Without Expertise

While DIY accounting might seem cost-effective, lack of expertise can lead to errors that cost more in the long run. Consider outsourcing your accounting or working with a Fractional CFO for complex tasks.

Example: A small business owner decides to handle payroll on their own without fully understanding tax withholding requirements. A year later, they’re hit with a hefty bill from the IRS for unpaid payroll taxes, plus penalties and interest. The stress of dealing with angry employees and thousands owed to the taxing authorities could have been avoided with professional guidance.

9. Failing to Monitor Cash Flow

Cash flow is the lifeblood of your business. Neglecting to monitor it can leave you unprepared for financial shortfalls. Regularly review cash flow statements to stay ahead of potential issues.

Example: A marketing agency overspends on advertising without tracking their cash flow, leaving them unable to pay vendor bills on time.

Verity Can Help: At Verity, we provide customized financial dashboards, scorecards and KPIs to track cash flow for our clients. We provide clear, actionable advice to help business owners avoid financial bottlenecks. With our insights, you’ll always know where your money is going and how to keep it flowing smoothly.

10. Skipping Professional Help

Accounting software is a great tool, but it’s not a substitute for professional guidance. Partnering with an accountant or financial consultant can help you make informed decisions and avoid costly mistakes.

Example: A growing e-commerce business uses accounting software but fails to properly account for sales tax across different states. A consultant could have helped them navigate these complexities and avoid compliance issues.

Conclusion

Avoiding these common accounting errors can save you time, money, and stress. At Verity Business Consulting, we specialize in helping business owners take the guesswork out of accounting so they can focus on what they do best — running their businesses.

Need help getting your books in order? We take care of it. Contact us today to schedule a consultation and gain clarity in your finances!