Misplacing receipts for petty cash purchases or failing to make note of small expenditures may not seem like a big deal right now, but they will ultimately lead to inaccuracies if you attempt to analyze your business’s performance. These inaccuracies may result in you losing out on tax deductions or give you a flawed view of your business’s assets, performance, expenses and cashflow.
Some of these issues can be rectified in the future, but others are harder to track down after the fact. It’s much better to have a disciplined record keeping and bookkeeping system in place now rather than try to retroactively determine how much was spent on what.
If you want to use different measures of income and expenses to better analyze your business’s profitability, it’s important to properly categorize those various expenses. Profitability ratios, like gross profit margin, operating profit margin and net profit margin can only be calculated if you have accurate measures of your operating income, gross profit, net income and revenue.
Business owners, especially sole proprietors, frequently fail to separate their personal finances and business finances. If one day you or your business is audited by the IRS, they will expect to be given complete business records separated out from your personal financial activities.
Correctly reconciling your monthly business bank statements is also a good way to catch discrepancies or little problems that could potentially snowball into much bigger problems down the road.
Plumbing floods, fires, theft or hard drive failures are all things that can potentially wipe out your business’s records. We can’t overemphasize just how important it is to have backups of your important business records and bookkeeping information. Making backups is affordable and easy, with many automated systems available that will do it automatically on a schedule without you ever having to think about it.
You may think sales tax is a rip-off or the numbers are so small that no one will notice if it sometimes doesn’t get added to invoices. Unfortunately, hoping no one will notice is not adequate defense if state tax revenue collectors ever come knocking on your door. You’ll spend less by accurately reporting sales tax than you will by dodging it and eventually having to pay fines and penalties.
There are significant tax liability and accounting differences in the way contractors and employees are treated in terms of a business’s legal and tax obligations. It’s not uncommon for businesses relying on DIY bookkeeping to make categorization mistakes that result in avoidable tax overpayment. If you’re worried about this issue for your business, you should consider consulting with H&H Accounting Services.
Most business owners are familiar with the concept of opportunity cost. You fail to realize some profits because you decided to invest resources into a less lucrative alternative. It’s the measure of choosing to do one thing instead of doing another, better thing – the loss associated with a missed opportunity.
This theoretical measure can be applied to a lot of things in life, including your time. There’s an opportunity cost to trying to do your own bookkeeping rather than relying on a vendor.
For the sake of the hypothetical, let’s assume it takes you three times longer to do bookkeeping yourself rather than hire a professional. You also make a number of avoidable mistakes or fail to use QuickBooks to its full potential, resulting in missed savings opportunities.
Maybe you save $1,500 a year, after the cost of the software, by doing your own bookkeeping. If you had invested those hours into your actual business, you would have made $3,000 of revenue.
That $1,500 opportunity cost, plus whatever tax incentives or operating inefficiencies you missed by doing it yourself, is a loss from a business perspective.
This hypothetical is just an example and the numbers may not be representative of the reality for your business. It’s also difficult to estimate some of the tax credits or write offs you may have missed that a CPA could have found or utilized on your behalf.
Business owners from Chandler and Gilbert to Glendale and Avondale can trust the bookkeeping professionals at H&H Accounting Services for accurate and efficient accounting services. We’re ProCertified in QuickBooks and can provide an array of other value-added services like business consulting, tax planning and preparation and even help with employee benefit packages.
If you think you may be making bookkeeping mistakes or just want some advice on improving your business’s cash flow, our CPAs and accountants can help. Call us at (480) 561-5805 for a free one-hour consultation.
