Article Summary: Most small business owners don't start a business because they are excited about small business accounting, yet they need to understand some of the basics and recognize some of the common small business accounting pitfalls and how to avoid them:
- Don't put off the dirty work. As a small business owner, staying on top of the bookkeeping is a critical component of building a healthy and thriving business.
- Don't ignore it because you think it's mumbo jumbo. It's true, like most specialized disciplines, accountants sometimes speak a language all their own. As a business owner, you don't need to be an accounting expert, but you do need to understand the basics of small business accounting an how to use it in your business.
- Don't treat your accountant like a transaction. He or she has a special set of skills you can leverage to capture profits, as a consultant, they can add value to your business. Take advantage of their knowledge and expertise.
Keep reading to learn more.
When I was a small business owner, I think I knew enough about accounting to be dangerous. Like most of my small business peers, it wasn’t an excitement for the accounting process that compelled me to take the entrepreneurial leap, but once I did, I was smack dab in the middle of managing my accounts payable and receivable, as well as working through what felt like the myriad of financial data that needed to be collected and reviewed every month. What’s more, I found myself stumbling over some pretty common small business accounting pitfalls that I could have avoided.
I didn’t think I had the cash flow to hire a part-time bookkeeper (although they were available and would likely have proven to be a good investment), and I treated my tax accountant as a transaction rather than a consultant who could have helped me reap more profits out of my business. In other words, I did it the hard way.
In an effort to help you avoid some of the challenges that kept me from building a more profitable business, here are three missteps, if avoided, that will help you build a successful business without a lot of unnecessary pain:
Number 1: Don’t Put off the Dirty Work
I spent many years with a business owner who relished the time he spent doing his bookkeeping. In fact, he loved it so much he did all his accounts in an old-school ledger manually inputting the numbers, until his accountant retired and his new accountant insisted he make the change to a software program. He ran a very successful business for over 30 years (including the years I worked for him) and successfully leveraged his accounting information to find profit opportunities. Unfortunately, I didn’t share his love of bookkeeping as a business owner.
Because I viewed the process as a necessary evil, I often left it for the end of the day, which ultimately meant tomorrow, and then the next day, and then the next. Eventually I would spend a day or two catching up with my bookkeeping, which made it a chore and something I probably rushed through. This didn’t allow me to dive into the numbers and become my business’ profit expert and probably introduced errors into my accounting process.
Solution: Do the Dirty Work First
I would have been much better off dedicating some time to the accounting process first thing in the morning, when my mind was fresh and I didn’t feel rushed. It would have given me a better opportunity to dive into the numbers and recognize opportunities to reduce costs, increase profits, etc.
Number 2: Don’t Ignore It Because You Think It’s Mumbo-Jumbo
One of my best friends is a very talented CPA. We used to often talk about my business and he would usually ask about my accounting process. At the time, I thought it was all just a bunch of accounting mumbo-jumbo and shamefacedly admit that I didn’t take much of his advice as seriously as I should have in those first couple of years. I thought I knew more about my business than he did. As a result, there were many things I had to learn the hard way, and would have saved a lot of time and effort had I better listened to his advice.
Solution: Take the Time to Learn More About Small Business Accounting
I didn’t know what I didn’t know.
Understanding the accounting process is important even if you have a bookkeeper and don’t do your own accounting. I don’t think every small business owner needs to become an accountant or an accounting expert, but he or she does need to know enough about the accounting process to understand the common financial reports, be able to interpret the data, and make decisions based upon what the financial reports are revealing to you about the inner workings of your business.
Fortunately, there are resources available for anyone interested in learning more. SCORE is a group of retired executives who are anxious to help your small business succeed and are able to help you understand what you might not already know. There are volunteers all over the country—probably in your city. There is no charge for the advice and guidance they provide. In addition to SCORE, many community colleges and universities sponsor SBDC’s (Small Business Development Centers) that are also available to help business owners learn more about things like marketing, operations, sales, and accounting. There are also more online resources than you can count for anyone interested in learning more about the accounting process. Simply Google “small business accounting” and you’ll see over 500 million different listings for advice, training, and accountants for hire.
Number 3: Don’t Relegate Your Accountant to a Transaction
You CPA or tax accountant has a lot to share. If the only time you talk to him or her is at tax time, you aren’t getting everything you can out of that relationship. Leverage the specialized knowledge your accountant has spent a career accumulating to help make your business more profitable.
Be prepared, it might cost you a little bit. You should expect them to charge you something for the hour or two they regularly spend with you looking at your business and where you might be able to capture profits you didn’t recognize, but it will benefit you and your business by helping you become a more capable business owner while making your business more profitable.
Solution: Pick Up the Phone
Talk to your accountant or CPA about taking your relationship to the next level. They have an intimate understanding of how your business works and will likely welcome the opportunity to help you build a healthy and thriving business. You might even be surprised at the easy-to-implement things suggested that will yield additional profit you didn’t realize was there.
After a couple of years of doing it the hard way, I became more receptive to my friend’s advice and even took advantage of some of the options I mentioned above. I also took a small business accounting course that was very helpful. In other words, if you want to learn more about the accounting process, there are a lot of resources that are easy and inexpensive to help you learn more. If you have any suggestions to add that could help other small business owners, feel free to share them in the comments section.