Small business owners and managers routinely wear many hats, especially in Orange County where you have to make every penny count. As a result, accounting duties are often left unattended for and that can lead to business problems down the road.

This is an unfortunate scenario and one that can be prevented by growing awareness of potential accounting issues before your business goes bust. In this post, we’ll cover the top 5.

1. Not understanding basic accounting

Understanding the basics of accounting is crucial to know how well your business is doing. It is common for the terms bookkeeping and accounting to be used interchangeably and while the two are essential business functions, there are differences.

Bookkeeping is the process that provides the data by recording and organizing financial transactions such as income and business expenses. The accuracy of your bookkeeping will directly impact the quality of your financial information.

Accounting is the process of interpreting and analyzing the data the bookkeeper or business owner has compiled. The reports generated are used to give you a clear picture of your finances such as profits or the amount of tax you owe so you can make informed decisions.

If you decide to do keep your own accounts it’s crucial to keep accurate, complete and readable records for your company because this is a financial obligation. If your business structure is an LLC or a corporation, then you more than likely are an officer in your business and therefore legally responsible for the accuracy of your financial reports.

Additionally, if in doubt or accounting seems overwhelming to you, it’s best to seek help early on. This will not only free up valuable time to focus on your business but also give you peace of mind knowing your finances are in good hands.

2. Poor cash flow management

Cash flow is the lifeblood of any business, “cash is king” as they say. Knowing what is flowing in and flowing out at all times could mean the difference between your business doors being open or closed.

A survey of small business failures in the US overall shows that 82% were due to poor understanding or lack of cash flow management. The situation is pretty much the same in Orange County.

By keeping track of cash flow, you will be able to identify potential issues before they develop into major problems such lacking the funds pay your creditors or covering unforeseen expenses. A competent bookkeeper will be able to tell you about potential cash flow problems before they become a bigger issue.

3. Managing Payroll

Handling payroll appropriately requires knowledge of several rules as well as all facets of reporting. You’ll need to know what tax code to put your new employees on, how to stay compliant with payroll tax reporting and how you’re going to pay them.

Common payroll problems that occur within small businesses include the failure to pay staff on time or correctly. This affects staff motivation, morale and loyalty if they fear you are having liquidity problems. You may also have inadequate backup systems of crucial payroll history and records.

Businesses that fail to stay compliant could incur penalties and interest, which would negatively affect your company’s cash flow and operations. Using payroll software can make the reporting process easier by automatically calculating tax and paying your payroll tax liability automatically.

Managing payroll can be a major accounting challenge because of the administrative strain and compliance burden it places on a small or growing business. If you have been handling your own accounting so far — ask yourself if payroll is really something you want to take on or continue doing.

4. Mixing Business and Personal Spending

Everyone knows that it’s bad form to mix business and personal expenses. Categorizing those expenses can be very time-consuming come tax season, especially if you’ve been ignoring them all year. But mixing personal and business expenses actually comes with more costs than just tax season headaches.

Billing personal expenses to your business account (or vice-versa) can lead to incorrect assumptions about the financial health of your business.

5. Lack of Capital

Whether you’re looking take your business to the next level or are just trying to manage your day-to-day operations. Having sufficient capital available is crucial to the viability of your business and preventing your company from failing, especially if you are an Irvine start-up.

Without it, you could be missing out on opportunities or not have enough to replenish inventory in order to conduct business.

A good rule of thumb is to save up three to six months’ worth of funds available to cover immediate obligations like rent, inventory, supplier bills and short-term debts. Additionally, you also want to make sure you can cover your accounts receivable, that is customers you’ve invoiced but haven’t paid you yet. How much capital you will need depends on your situation and your goals.

If you have a lot of money tied up in accounts receivable and your customers have a longer paying cycle there are options to free up capital. One of them being invoice finance which comes in two forms.

The first is referred to as “invoice factoring” whereby a business owner will sell unpaid invoices to a “factoring company” for a percentage of their total value. The second is called “invoice discounting” and is the process of using the unpaid accounts as collateral to secure a loan for a percentage of their value.

If you want to schedule an appointment on how you can change your bookkeeping strategies to improve your business, book an appointment by clicking this link. I am local to Orange County and will be happy to meet over Zoom, your local coffee shop, or at my office.

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