By Lauren Rosson, Thrive Outside Consultant and CPA at Rosson CPA
Every business owner knows there’s no room for costly mistakes. Continuing with our countdown, avoid these final two mistakes to prevent financial loss in your business:
2. Cutting Corners in Your Accounting System– There are three key reports that every business owner should keep. Most people are familiar with a profit and loss statement. Yes, this report is important. But in addition, you should also be preparing a balance sheet and cash flow statement. There are major differences between all these reports and keeping them up to date and accurate can supply you with valuable information.
Clients ask me all the time how they should organize their records. There is not necessarily a right or wrong way (unless you are putting your receipts in a shoebox!) to do this. If I provide you with a complicated way of keeping your records, you won’t do it. Working with your financials and accounting records needs to be done in a systematic way that makes sense to you.
Your records should be consistent. Simply stated if you handle things differently each month, then the reports you produce won’t be accurate. Once you implement a system, stick with it. If you have to, expand on it but don’t change it regularly.
Once you have your system in place to create your financials, learn how to read and understand the data. The reports can provide you with a lot of information to help you make informed decisions about your business.
1. Being Unprepared for an Audit– Business owners are fearful about being audited by either the IRS or state agency. My heart still jumps when I receive a notice from the IRS, so I can imagine the stress it must cause others who receive the same notice.
Sometimes there is no way to prevent an audit. However, there are steps every business owner should implement to sail through an audit with a no change outcome.
Good record keeping is essential. Don’t work with a shoe box of receipts. You need to be able to substantiate all the deductions you take on your tax return. The only way to do this is to keep records in a good order and report what is accurate. Rounded numbers to the IRS is a red flag because it demonstrates that you are not keeping accurate numbers.
During an audit, the IRS will ask for financial statements. These financial statements should be accurate and correspond with the tax return. Not every deduction on a financial statement is deductible for your tax return, but that is a logical explanation. For example, your profit and loss statement might have meals expense of $200, but for tax purposes you can only deduct 50%.
When preparing your business tax return, you want to prevent the red flags. To everyone’s dismay, there is not a magic ball that tells us what will cause an audit, but there are some key expenses that are constantly looked analyzed. For example, meals, travel and entertainment expenses are always subject to exposure. Don’t worry if these are legitimate expenses. An audit flag might be caused by your profession and not necessarily the expense. For example, an electrician might have large auto expenses (a legitimate expense), however a retail store operator probably will not have large auto expenses. Furthermore, your profession may include a lot of travel because you make sales in multiple states. Even though the expense is large, it is completely accurate. Again, a retail store or a restaurant owner probably will not have the same volume of travel expenses.
Most people focus on their deductions, but don’t overlook your income. You want to report all of your income. Don’t think that just because you didn’t receive a 1099 from a client or customer, you don’t have to report the income. If your records are accurate you won’t have to rely on what a 1099 might show.
Having losses, higher than average expenses, and low income can be a common red flag. Know your exposure and maintain the correct documents to support the numbers.
Adjusting your financial systems may be time consuming the beginning, but making the right changes can save you time and money in the future. Don’t be afraid to ask questions, seek advice from other business owners and accountants to find the best financial practices that work for you.