Accounting Mistakes Small Businesses Should Avoid

Casey Chung is the founder of Casey Chung Coaching, an online coaching business focused on helping entrepreneurs and finance professionals reach their peak performance in life and their careers.

Casey is also a professionally trained CPA and spent over seven years working for one of the Big Four Accounting firms, KPMG. He shares with us the five accounting mistakes that small businesses commonly make.

Mistake #1: Avoiding Your Bank Balance

So the common mistakes that I typically see in small businesses is #1, not looking at cash. Not looking at the bank balance or at the cash flow that’s coming in and out.

This usually comes from a place of being scared to see the money, avoiding or confronting that you might be losing money. Or you’re earning a lot of money in your business and you think, “I should be okay.”

If we’re not regularly looking at our bank balance and our cash inflows and outflows, we’re not making fully informed decisions. What this could lead to is overspending and poor budgeting. More importantly, when we do start to look at our numbers and whether you have a bookkeeper, work on your own or with an accountant, we have more peace of mind so they can actually make calm informed decisions on how to be navigating the growth of your business.

Mistake #2: Ignoring the Fundamentals

The most important part of money management or cash flow management is to pay attention.

Pay attention to your bank balance, your spending and your earnings. Especially if you are a small business owner and you have other cash flow generators you want to start distinguishing, “how is this particular project or business operating?” It’s really important that we understand the fundamentals of money management.

I like to compare this to driving a car. Your bank balance could be represented as the fuel in your tank.

If you have a full tank, you can so you can start driving your vehicle, you can start operating.

If your balance or fuel tank is at zero, you need to fuel up. How you fuel up is by earning money or selling products or services, i.e. cash inflows. Your cash inflows will increase your ability to spend and provide more value to your customers.

Depending on your business, product and/or service you will also have to spend money to earn money. Cash outflows then can be thought of as you driving your car and using your resources.

If you’re running low on fuel, you’ll have to fill up. Or start being very mindful of how you’re using your fuel.

If you’re not feeling confident or aware of your finances, it’s most likely because you’re not keeping track of them and our fuel level. We’re also not tracking how much money is coming in and out.

If you’re not tracking how much money you’re bringing in on a monthly basis and how much money you’re putting out, then we don’t know how effective your business is operating. Start by looking at your bank account to track your cash inflows and outflows.

Once a month, look at your bank statement and pinpoint whether or not each item is a cash inflow, outflow, or a business vs personal expense. This helps you keep track of your profits or losses for the month.

This is a practice that I recommend all business owners to get into as soon as you can. The more clarity that you have on your “fuel” the better decisions you can start making.

Mistake #3: Setting Budgets That Don’t Work

The most important part of budget setting is:

1. Setting a budget
2. Testing the budget
3. Create another budget

As a small business owner it’s really hard to predict your revenue or cash inflows. It’s a bit easier to predict your expenses, i.e. how much you’re going to be spending each month or quarter.

When building a budget, it really depends on how much you’re willing to put into the business for the expenses. When you’re just starting out, it can be daunting to think, “I need to put away $1000 for product development, inventory, or a new subscription.”

Instead, while you’re managing your cash flows, I like to think of spending as investing my money into my business. From this perspective, I then feel comfortable investing my money into products and services that will help you generate revenue. You can then start to look at a budget as the minimum spend that I need to make per month just to keep this business running. This is called a base-case budget. As you start to grow, you may wonder, “what else can I spend my money on?”

For revenue budgeting, it’s important to take a conservative, base-case and optimistic approach as well. Revenue budgeting is the minimum revenue you need to make per month, to cover your expenses.

“Your expenses should align with your revenue goals.”

As we know in business, not everything works out according to plan. That’s why a budget should act as a guide: have an idea of where your business is heading for that month, test and track what’s working, and then recreate a budget that works best for you.

If we expect too much or too little out of ourselves and our businesses we’re going to have challenges in aligning our mindset with the results we’re actually getting vs expecting. It’s really important [when budgeting] to use real data, review past months and then build your budget from what you’ve actually seen happen in your business.

Mistake #4: Mixing Business & Personal Expenses

Why should you keep your business and personal expenses separate?

First of all, when I was starting my business, I wanted to know if my business was actually operating efficiently.

At the beginning, I didn’t set up a business bank account. I kept all of my business spending and earning in my personal account. I wasn’t able to look at my account and know how much I made from my business that month.

If you don’t have a separate bank account, then it’s really important to track your business and personal spending separately.

Pro Tip: Luckily, we’ve built TrulySmall Expenses for this reason. 

When we don’t have clarity on what’s business or personal related, it can become tricky when making financial decisions. Especially when you are serving clients and customers and need to make an investment for your business.

Through this separation, I started to realize that some of my personal spending wasn’t really necessary. It made me reconsider my purchasing decisions to focus on spending in order to grow my business.

It’s important to keep these types of expenses separate because the biggest implications will be on your taxes. The government will ask you how much money did you earn from your business, how much did you spend, what is your net income, etc? The answers to these questions will determine how much you pay in taxes.

Spend some time at the end of the month highlighting on your bank statements which expenses were business or personal.

Mistake #5: Being Unprepared For Your Tax Return

To best prepare for your tax return, knowledge-building is key. Go online and start reading resources on taxes for business. There will be different rules depending on the state, province and country that you live in.

It can be overwhelming, take it piece by piece and really focus on learning as much as you can.

There’s the educational part and the practical part of managing your business finances and taxes. Through this process you’ll be able to know how much you’re making (sales), how much you’re spending (expenses) and how much you owe in taxes. However, it’s very important throughout all of this to maintain proper documentation of your receipts. 

You can keep the physical receipts or store them in folders digitally. You need these receipts so that you can review this information and look at past purchases. I recommend doing this once a month and storing them somewhere safe. If you work with an accountant, it can be as easy as supplying them with this documentation of receipts. If you don’t, you can put this information into the tax system you use yourself. Get into good habits for tracking receipts.

If you are still unsure, start asking questions to more tax professionals. One of the biggest skills you can have as an entrepreneur is to ask questions to experts that know more than you. This way you can learn from them and potentially have them do the service for you.

For more details on what we discussed above, watch the full video with Casey.