3 Common Financial Mistakes Small Business Owners Make (and how to avoid making them yourself)
Sometimes the best intentions lead to disastrous results
As a small business owner who attempts to juggle everything, you’re probably very aware of the areas where you lack expertise. Your business started with passion and great ideas – the next thing you know, you’re bogged down with the dreaded daily tasks while your passion and great ideas wither away.
Here are three common mistakes small business owners make, along with ways to avoid or fix them – hopefully making some of those dreaded tasks a little more manageable.
And when you’re finally ready to hand those dreaded tasks off to an expert, give us a call.[spacer height=”20px”]
Lack of dedicated business bank account and/or co-mingling personal and business finances
It is essential that you open a separate bank account for your business. There’s nothing fancy needed here – many banks offer free checking accounts for small businesses with no minimum balance required. All you need is your company documentation (Tax ID # and Articles of Incorporation), personal information (your SS #, address and DOB), and some cash for your opening deposit – an amount as little as $20 will usually get the job done. Once your new business account is set up and active, make sure all business expenses and revenues run through this account and all personal expenses run through your personal account – viola, life just got a heck of a lot easier.
It is also essential that you don’t charge personal expenses to your company credit card, if you have one. This is one of the most common ways small business owners co-mingle their finances. While it’s possible to re-classify any personal charges on your business credit card to your owner’s equity general ledger account, best practice (and the best way to keep the IRS happy) is to keep everything completely separate.
Failure to submit Federal quarterly estimated tax payments and/or failure to set aside funds for taxes due
It is a Federal requirement to submit quarterly estimated tax payments if you own your business and expect to owe taxes of more than $1,000 when you file your tax return for the current year. The IRS provides a handy-dandy form (1040-ES) to help you determine if you are required to submit quarterly estimated payments and the amount of those payments.
If you pay yourself through payroll or receive a paycheck from an employer, you most likely won’t need to submit Federal quarterly estimated payments – just make sure your Federal withholding will cover your tax liability.
If you pay yourself through draws and aren’t setting aside some of that money to cover the taxes that will be due, you need to change your process immediately. You should put 25% of your draw into a personal savings account and use that either for your Federal quarterly estimated tax payments or to pay taxes due when you file your return.
Waiting until December to enter an entire year’s worth of transactions so your CPA has the information necessary to file your tax return
If you are guilty of this one, you are definitely not alone. But as you probably already know, relying on memory to enter transactions that happened months earlier just leads to frustration and errors. Entering transactions as they occur throughout the year can be a nuisance, but it saves you time and leads to better accuracy in the long run. Set aside an hour each week to get everything entered and filed away.