It's (almost) that time of year – tax filing season! Here's how you can avoid many of the accounting pitfalls first-time business owners make.
In running a business, accounting is one of those things that can go really wrong, really fast. Not everyone is gifted with numbers and balancing your accounts can be a pain. Outsourcing the job doesn’t always solve the problem. There are still receipts to collect, records to keep, and paperwork to file with the BIR. How can you avoid accounting nightmares that you hear about (or may have experienced yourself)?
Most accounting errors are a result of ignorance.
According to Julius Chua, CEO of Excellence Management Services Inc., “One of the most common mistakes by SME owners or their staff is filing their taxes based on new requirements that the Bureau (BIR) has implemented in recent years.”
In his 13 years working on accounting for SMEs in the Philippines, Julius has observed that issues around BIR filing often appear when they take over the bookkeeping for a client.
“It’s either their previous accountant was not able to consistently file their tax returns, or they couldn’t understand how their previous accountant computed their taxes and Financial Statements, or worse, the previous accountant didn’t properly report where they spent the money endorsed for tax and other government payments.”
According to Julius, some documentary requirements that SMEs often get wrong are –
To avoid these kinds of errors in accounting for small businesses, ask your accountant, external auditor, or your tax lawyer of any new regulation that has been passed.
A common mistake entrepreneurs make is failing to reconcile their books of accounts with their bank balances. Cross-checking your actual bank balance against your books is a good way to see if you’ve missed anything.
Sometimes small transactions don’t get recorded in your expenses even when you’ve withdrawn the money from your bank account. When you cross-check ending balances and they don’t tally, you’ll realize expenses or sales that weren’t recorded properly.
Business owners should do financial reconciliation on a monthly basis. After all, you don’t want to start digging up receipts from three months ago (or maybe longer).
One common mistake first-time business owners make – especially sole proprietors – is that they mix their personal finances with the business finances. This happens when you bootstrap (or self-fund) your business. You think of it as just moving money from one pocket to the other.
The problem with that is you will soon lose track of how much money the business really has, and how much of that money is from your personal funds. Eventually, you might start using business funds for personal expenses. Here are tips to track your accounts well:
We’re human and we (or our people) make mistakes. Sometimes it’s a data entry error, sometimes it’s just the math. These things happen more often than we’d like. It’s always a good idea to double-check entries on a regular basis.
If you don’t have the time, you can assign another person to audit the books for you, or you can do random spot checks yourself. This keeps everyone on their toes. Create the habit so that you’re sure data entered into the books are accurate and updated.
One major advice from Julius for business owners is to be more hands-on in their accounting. “They should take the extra mile to understand and monitor their accounting, not just internal reporting,” he says.
Many entrepreneurs fail to recognize that their books of account are a reflection of the health of their business. According to Julius, if you can keep your books and financial statements accurate and understandable, you’ll have a healthy representation of the business over the years.
Finally, who you hire to do your accounting can make or break your financial reporting. “Business owners can avoid many common mistakes by choosing an accountant whom they can effectively communicate with,” Julius advises. “They should meet their accountant at least once or twice a year, depending on the complexity of their business’ accounting needs, to properly align as the company’s accounting needs to grow.”
Accounting shouldn’t be a pain in the neck when you know small business accounting mistakes to avoid. With the right tools, mindset, and partner, you can steer clear from many of the common mishaps SME owners make.
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