If you take a look at business and financial publications in early February, you’ll be reading about taxes. Tax saving tips, explanations of shelters and discussions of the Affordable Care Act abound. Not a lot is mentioned about the core numbers – the results of your operations – that form the basis of your tax return.
This is the time of year when I am normally contacted by small business owners who lack accurate financial reporting to submit to their tax preparers. I typically see entrepreneurs, who, short on time or funding, have let the accounting basics slip. Their accounts aren’t reconciled, their expenses are not classified in a meaningful manner and their understanding of their profitability is based solely on cash flows. Most often, they have either neglected to hire, or hired an underqualified, bookkeeper. And they are just now realizing that this is no way to save money!
Among the problems I typically see:
- Banks DO make mistakes! Posting errors happen all of the time – and if you don’t report them, they won’t be corrected.
- Credit card charges are not reflected on the income statement. Companies will often record a check to ‘American Express’ and neglect to enter each specific charge. In doing so, they have not accurately classified their expenses, including those with special treatment on a tax return.
- Personal funds and company funds are commingled. This is a biggie for small business owners! When charging business expenses to your personal card, owners might miss some valuable deductions on your return. When charging personal expenses to your business card, the income statement does not accurately reflect the operations and profitability of the business.
- Income and expense items recorded in the wrong accounting period. Business owners should be conducting trend analyses of their companies’ performance. Unexplained spikes in any category from month to month should be examined. When items are recorded in the wrong period (stay tuned for a blog post on cash vs. accrual accounting), it isn’t possible to perform the trend analysis and business owners lose a valuable management tool.
To learn more about how an accounting cleanup can help your business, contact us today!