3 Misconceptions About Small Business Accounting

Warren Buffet once said “Accounting is the language of business and you have to learn it like a language. Your accounting reports are like your scoreboard for your business. If you can’t read the scoreboard, you don’t know the score. If you don’t know the score, you can’t tell the winners from the losers.”

Do you know what your scoreboard looks like? Are you winning? If you have concerns about your accounting process, you are reading the right article. Without organized records, businesses can experience a variety of complications, from lost profits to higher taxes. This generally leads to an overall  misunderstanding of the cash flow of your business.

At Integrated Management & Accounting, LLC, we aim to help small business owners in any way we can, because our success is ultimately linked to your success!

Misconception #1: Record keeping is not important

Poor records can often lead to a variety of business issues. For instance, without knowing the balance of your checking account, it can easily be overdrawn. A couple overdraft fees could cost you more than monthly bookkeeping would, not to mention upsetting your vendors or employees. Additionally, poor records lead to omitted business expenses and ultimately higher taxes.

Having a business structure and an accounting system in place can help keep your business organized and on a budget. This will lead to more profit and cash in your pocket! An organized system also ensures you are capturing tax deductible expenses and minimizing your tax liability. Good structure also includes having an audit trail that can be easily followed and can prevent potential headaches if your business were to ever be audited.

Misconception #2: Accounting is unnecessary and expensive

It is common for most small businesses to focus on cost reductions as money is often tight. Your accountant should function as a partner and assist you in decreasing expenses while also growing revenues. A good accountant will provide you with professional guidance and insight so you, as the business owner, can make increasingly educated and beneficial decisions.

As the business owner your time is the most precious commodity you have. Therefore, less time should be spent creating accounting reports and more time should be spent reviewing those reports with your accountant. Ultimately you should spend less time on bookkeeping and more time growing sales and servicing your current customers.

Misconception #3: Profits = Cash Flow

Too often business owners associate cash (or lack of) with profit. Accounting on the cash or accrual basis can make a big difference, with accrual-based accounting leading to more departures from the underlying cash flow. A growing Accounts Receivable balance results in a higher accrual profit than cash basis profit. Cash has not been given to you, but your financials and tax return report it as income.

In the same regard, a vendor bill can be counted as a deduction before you even pay. Many times, business owners will purchase inventory or supplies on credit. These purchases are generally tax deductible and reduce profit when the goods are delivered. However, because they were purchased on credit the cash balance remains unaffected (or artificially elevated). Later as these bills become due the profit is unaffected, but the cash flow is reduced.

Another example would be larger equipment or vehicle purchases. Businesses frequently buy equipment on credit and accelerate the depreciate for tax purposes. This reduces the profit in the purchase year with little to no effect on the cash flow in the current year. However, in subsequent years these loan payments decrease the cash flow without affecting the taxable profit. Without proper accounting, this can catch business owners by surprise at yearend when they file their taxes. Their expected profits based on their cash flows are significantly different than their taxable income.

As mentioned earlier, our team at Integrated enjoys helping other small businesses. Whether you need assistance with bookkeeping or understanding your financial statements or tax return, we aim to provide value in whatever business endeavors your company pursues with our firm.