DIY accounting mistakes can be very costly for your business.
Accounting and bookkeeping for your business can be a bit tricky and often overwhelming. But is a necessary part of running your successful service trade business. Without an accounting background or direct access to someone with one, it is really easy to start to feel like you might be in over your head when it comes to managing the finance part of your business. At that point the work will just pile up and before you know you are too far behind to feel like you can catch up. This does not have to become a reason for your business books not to be in order or to have a great handle on the financial health of your business.
Doing your books yourself is always an option, and with that in mind, we’d like to share some of the most common mistakes that we see our contractor clients making when it comes to the financial piece of their business.
Co-mingling your business and personal expenses
This may seem like a very obvious fact to many, but it is nonetheless something that is fairly common when we take over a contractors accounting tasks for them. It is not a mistake that does not come with an easy fix however. To correct this in your books, simply categorize the past personal expenses as an ‘Owner’s Draw’. Doing this will correct them on the books so they are not mistakenly taken as an expense.
Moving forward, be very aware of co-mingling and make sure to keep separate accounts for personal and business needs. Your business should not be paying for your personal expenses. This can create some issues if you were to get audited that may take additional time and expense to clear up with the IRS. But let’s face it, what’s done is done and you can only correct how you do this moving forward so starting today, be aware and careful not to co-mingle.
Beyond the issues co-mingling causes with the IRS, it can also cost you more time and possibly more money to get it cleared up and corrected. This is one of the simpler DIY accounting mistakes to fix.
Categorizing Payments to the Owner as a business expense when not a salary
Regardless of how your business is structured, you are more than likely paying yourself from your business in some fashion. If this is not through a traditional payroll set up then you are taking what are referred to as owner’s draws or distributions. These amounts are not considered a business expense as they are a draw on the profits. Since you are taxed on the profits for your personal income this can be misleading.
An Owner’s Draw account is an equity account. When looking at your Quickbooks account, an equity account will not show on the profit and loss but rather on the balance sheet as it should. Setting this account up and correctly allocating the draws here will help you have a better overall financial picture for your business.
Not Reconciling your accounts each month
This is one of the most common mistakes we see when we start working with a client. And truthfully one of the most headache causing mistakes a service trade business can make.
Monthly reconciliations are important for a couple reasons.
First- it saves you a lot of time at year end when you are trying to tie up all the loose ends to file your taxes. Doing this monthly may only take an hour or two a month but waiting to do a full year can result in a weeks worth of time for some of our clients.
Reconciling your bank accounts, simply put is balancing the bank account. It is a process that allows you to check and verify all your monthly expenses and deposits were entered correctly offering peace of mind that your bottom line on your profit and loss is correct.
This allows you to make accurate financial decisions. With some dedicated time, reconciliation DIY accounting mistakes can be easily remedied.
Not Managing Receipts
Should you get audited you are going to be asked to produce receipts as proof of the expenses. The bank statement is often not enough evidence for a tax auditor. If you use Quickbooks online you can install the mobile app on your phone. This will easily scan pictures of your receipts and then attach them to the expenses keeping them electronically.
I also recommend saving them in a second form (not paper) so you always have them in two places as a precaution. This can be time consuming for a busy contractor who spends their day between clients homes and picking up supplies and parts. There are many apps out there that can help simply this process for you as well.
Not having a long-term focus
Running your business comes with its own unique set of headaches. Deadlines promised to clients. Unexpected delays for things beyond your control. Cost variance for supplies from when the job was quoted to when materials are purchased. And the list goes on. For most of our clients in the service trades, this takes up the majority of their days and the big picture is not top of mind.
Accounting is not just about the day-to-day financial activities of the business. It is also about the future of your business. Using projections of profitability and cash management are just as important. These are the items often overlooked by not having a long-term focus.
By taking time now to focus on these, you will get into a different mindset for your business. A mindset that allows you to see beyond the jobs on the books now and lets you really plan for the long-term growth strategy for your business.
These can be the key to growing and staying profitable vs. growing and going in the red immediately.
Not hiring an accounting professional when it becomes needed
Cash management is a crucial part of the industry when you work in construction and trades. Often you are footing a portion of the bill to complete the job before you ever get paid. This can become a creative balancing act.
Think of it like balancing a 12 foot 2×4. If you are not holding it just right, one side is going to tip. Often in business it is the finances.
The most common concern is whether or not you can afford to hire this out. A second concern is if the benefit outweighs the cost.
The right person will be able to do what you are currently doing in half the time. If you take your hourly rate into consideration and compare that against their hourly rate, you actually make money.
Additionally, the right person in this role becomes a dedicated part of your team. They are committed to seeing you succeed and because of that help you keep things in line.
Beyond basic bookkeeping and tax help, the right person will also help you to see trends in your business. They assist in planning for slow periods. Managing cash flow is a priority. The contacts they have will prove to be invaluable to you throughout the course of your business. Their understanding of you, your business and your needs in the professional relationship will be beyond your expectations.
Some DIY accounting mistakes will require an accounting professional. Knowing when it is time to bring that person onboard is key to continued successful growth.
With all that said accounting is one of the most important tasks in your service trade business. It is one role that can help to ensure long-term success. If one thing is off, it could portray an incorrect picture of the financial health in your business. This could be what you base a financial decision off of and that can be dangerous and scary.
If you are making any of the above DIY accounting mistakes take some time to correct them quickly. If you need some help and are looking for the right fit to be on your team contact our accounting team today to get on the right track and move forward in your business with financial confidence and security.