Managing finances is crucial for any business. But small businesses often don’t have the same resources as larger corporations, which makes managing finances even more challenging. Accurate business bookkeeping is at the heart of financial management, and you may often struggle with it as a small business owner. You might make mistakes while keeping records, find it difficult to follow tax laws, and worry about data security.
Challenge 1: Inaccurate Record-Keeping
A key challenge in operating a small company is assuming various roles to ensure efficient management and operation of the organization.
In addition to handling operations and core activities, you may frequently manage your financial record-keeping, tax preparation, and compliance duties. It can be difficult to juggle so many tasks simultaneously, which makes inaccurate reports and mistakes more likely.
Common examples of record-keeping inaccuracies include:
- Incorrectly categorized expenses. One common mistake is classifying the purchase of new office supplies as capital equipment that depreciates over several years instead of office expenditures. This error can affect your organization’s reported profits, tax liabilities, and fiscal analysis. It can also impact budgeting and planning, as the costs are misallocated over time.
- Omitting transactions. Keeping a record of your expenses is important, but it’s easy to omit minor transactions with little value. However, if you keep overlooking them, they can add up and create significant discrepancies in your records, affecting your company’s financial health assessment, budget planning, decision-making, tax calculations, and compliance.
- Typographical errors. Spelling errors can create discrepancies in the books, particularly when recording figures. For example, entering a value of $5,000 instead of $500 or typing the wrong number in a street address. Neglecting to correct these errors can impact your firm’s operational performance, recording accuracy, and tax compliance.
- Errors of principle. An error of principle is harder to detect than a typographical error, potentially carrying more severe consequences. Examples include entering correct amounts but classifying a debit as a credit or misclassifying personal expenses as company expenses. These errors misrepresent the nature of the transaction and distort the financial statements.
Source: Yuganov Konstantin / Shutterstock.com
Regular, continuous internal audits are one of the most efficient solutions to minimize record-keeping inaccuracies. Using live bookkeeping services enables you to carry out a comprehensive internal audit, offering the following benefits:
- Detect and correct errors. Audits can uncover misclassified expenses, typographical errors, categorization mistakes, and other similar issues. They provide an additional chance to rectify these errors before they impact your operations or tax obligations.
- Enhance reporting accuracy. The audit process double-checks your financial records, ensuring they accurately reflect your business transactions. Improving record-keeping accuracy is vital to fully understanding your company’s economic health and making the best management decisions.
- Strengthen internal controls. Regular internal auditing can help you find the most efficient ways to handle your finances and reduce errors. It’s also a great way to check how well your fiscal management methods are working.
Improper record-keeping can hurt your firm’s tax reporting. Although tax codes and laws can be complicated, record-keeping mistakes can have severe consequences.
Your company risks fines, penalties, external audits, and additional scrutiny from tax authorities. These risks can be costly if you run a small venture, severely impacting your ability to grow and generate a profit.
For example, an organization that makes errors while reporting its income may pay less income tax than it owes, putting the company at risk of accuracy-related penalties, interest, an IRS audit, and possible legal consequences.
The best solution to avoid tax law compliance issues is to keep yourself up-to-date on the latest tax news, changes in regulations, and applicable laws. The tax code is subject to frequent changes, making it critical to be aware of the latest developments. Here are some common solutions and resources to consider:
- The IRS newsroom. You can learn about the latest federal tax developments on the IRS newsroom, allowing you to learn about current and upcoming laws so you can prepare accordingly. New federal tax laws typically appear at least once yearly.
- Modern bookkeeping software. Using the latest applications lets you benefit from convenient record-keeping features, such as automatic updates and real-time data synchronization. They receive information about the latest tax laws and communicate with your tax filing software, making your business data more resilient to inaccuracies.
- Industry-specific news outlets. Look for relevant journals and news outlets if your organization is in a particular sector or industry. Subscribing to their news feeds is an excellent way to receive the latest and most relevant tax news.
Digital and cloud-based solutions are commonly used by millions of organizations worldwide to manage their records. While these solutions have made record-keeping more accurate and efficient, they also expose companies to data mismanagement and security risks.
Using online or cloud-based tools to manage your finances means uploading some or all of your organization’s data to the internet. Small companies often store sensitive information like bank details, customer transactions, and employees’ personal data in the cloud. However, this data is among the most common targets for cyber-criminals.
Cyber threats like phishing attacks and ransomware infections are among today’s largest data security threats to organizations. According to a Cisco report, 86% of U.S.-based organizations had at least one connection attempt to a phishing site, and 50% suffered ransomware-related activity.
While companies of all sizes are equally at risk, the consequences for small companies can be dire. They may lose crucial financial data, expose their staff’s personal information, disrupt their core operations, or suffer major financial losses. Non-compliance with local data protection laws can also lead to fines, penalties, and legal action from the affected parties.
Source: LightFieldStudios / Shutterstock.com
Bookkeeping software provides various security features to protect your firm’s sensitive data, minimize the risk of a breach, and prevent data mismanagement. These features include data encryption, access controls, multi-factor authentication, and data backup systems.
Bookkeeping software also offers auditing trails and access alerts to track any changes to your data. If you find a problem or breach, the software’s customer service team can help you find the source and fix the issue quickly.
Identifying and addressing the most common bookkeeping challenges is crucial for your company’s long-term financial success. Strengthening your internal controls, keeping up-to-date on the latest tax law developments, and using the most secure software available are necessary to protect your operations.
These measures can also help you take a more proactive approach to record-keeping, allowing you to identify and address future issues quickly.