Many small business owners balance their own books, particularly if the company is young. If you aren’t careful, though, this practice can lead you into trouble. Not only can you misread your company’s revenue situation, but you can easily run afoul of the Internal Revenue Service. Here are some troublesome situations you can find yourself in if you aren’t careful with keeping your books.
1. Cash Crunch
One of the most immediate traps you can fall into if you manage your own books poorly is a cash crunch, which is when you need to pay out expenses but don’t have enough in your bank account. This situation means your revenue flow is out of sync with your expenses. Failing to pay line items like payroll or vendors can lead to huge trust issues; consecutive cash crunches can spell disaster for your small business. With better bookkeeping practices, you can time your cash flow to avoid going broke, or you can better estimate when outside funding is needed.
2. Unpaid Invoices
Unpaid invoices are an all too common scourge for small business owners, especially freelancers or sole proprietorships. Unfortunately, in most cases, you can’t just do the work required—you need to submit an invoice to get paid. And clients of all sizes have been known to be slow to pay. If you aren’t careful, these unpaid invoices can quickly mount and push into a devastating cash crunch. Keep records of your invoices, and don’t be afraid to send out reminders if your clients are delinquent.
3. Missing Receipts
Without a consistent system, you may find every surface in your home and office covered in business receipts. This lack of organization makes keeping them almost pointless because if you can’t find a receipt, it’s about as good as it being nonexistent. Plus, if your receipts are crinkled up and smashed, the ink can easily wear away. It is much better to keep your receipts in one place so you can easily access them. It might even be helpful to snap photos of each receipt or record the specifics in an easy-to-use database. That way, you can keep your receipts together and only access them if someone requires documentation.
4. Unnecessary Bank Fees
Just like receipts, bank statements can easily become a disorganized pile of data in just a few short months. If you aren’t on top of your bank balances, you could be slapped with fees and fines, like overdraft or low balance fees. Keep as few bank accounts as possible, and always know what is going on with each one—you can spot theft or fraud quickly this way.
5. Mixing Business and Personal Spending
It is very easy for small business owners to mix up your personal and business expenses—you could pull out the wrong credit card, or maybe you just add an item or two for yourself when you’re out shopping for your company. When it comes time to balance the books, though, these little mix-ups can add up to a huge headache and could even cause issues with the IRS. Always strive to keep business and personal spending separate, and if you make a mistake, keep on top of yourself so you notate the books accordingly.
6. Limited Funding Options
Unfortunately, if your bookkeeping is a mess, your ability to apply for outside funding becomes extremely limited. A traditional term loan from a bank will require detailed income and expenses statements dating back months or longer. Lenders are skilled at sniffing out fraud or bad bookkeeping practices every day. Even if you don’t need a loan now, you should keep your books in sterling condition in case you need one in an emergency.
7. Tax Time Nightmares
Tax time doesn’t have to be a period of nagging anxiety. If your books are in order, it can be a relatively painless experience because you have all the data at your fingertips. Furthermore, good bookkeeping should give you an idea of what you’ll owe the IRS, lowering the chance of any unpleasant surprises. If you’ve recently been through a painful tax time, think hard about what information would make the process easier. Strive to pay attention to these specific deductions or expenses throughout the year. If you found yourself paying a surprising amount, determine how much you’ll pay next year and start preparing for it the whole year long.
Of course, the scariest tax time nightmare is an audit. This misery happens when the IRS thinks something massively erroneous or fraudulent is going on with your taxes. The agency will require documentation, which is why good bookkeeping practices will be your life raft in this uncomfortable situation. If anything, avoiding an audit by the IRS should be motivation enough to get your books in order.