5 Accounting Mistakes to Avoid When Getting Your EIN
You just got your EIN from the IRS, so you’re ready to turn your business idea into a success. Before you get ahead of yourself, stop to consider these five accounting mistakes new entrepreneurs often make after getting their EIN Numbers. Knowing how to avoid them could save your business from penalties and failure.
1. Mixing Personal and Business Finances
As a small business owner, you may feel that you have to pour your money into the company to make it successful. While you can use your own money as startup cash, you have to keep your personal and business accounts separate.
If you don’t have separate accounts, you can’t tell whether your business is reaching its goals. The problem becomes even bigger at tax time.
When you form your business, open a checking and credit card account for it, even if you’re still responsible for paying the credit card bill. If you ever have to use your own money, make note of it so you can get the tax benefit.
Forming an LLC when you get your EIN also helps build a barrier between your personal and business finances.
2. Throwing Away Receipts
Businesses should keep all expense receipts to ensure accurate records and justify deductions on tax forms. If you throw away your receipts, you won’t have a way to double-check your account entries to make sure they are correct. Plus, the IRS may disqualify deductions that you cannot prove in case of an audit.
If saving and organizing paper receipts takes too much effort, you should at least make digital copies for your records. It’s still best to keep those paper receipts, though, since they’re the original documents.
3. Misunderstanding Cash Flow and Profit
Your company’s cash flow and profits are two different things, so don’t get them confused. To put it simply, cash flow is money coming into and leaving your business accounts. It’s money that you’re using to operate your company.
Profits are what you have left after you subtract your company’s expenses from its revenue. It is, essentially, excess money that you have at the end of the quarter or fiscal year.
Take time at least once a month to review your revenue and expenses. This gives you a better idea of whether your company is generating profits. If your expenses are higher than your revenue, then your profits are suffering.
Remember, even a profitable company can go out of business when it mishandles its cash flow.
4. Not Making Backups
Keeping all of your accounting records locally is a bad idea, even if you store them on a computer. Plenty of companies lose their records in storms, fires, and other natural disasters. There’s also the possibility that a software glitch could erase pertinent data from your system.
Backing up your account information on an off-site server is one of the most effective ways to keep your records safe. Store the information with your EIN Number so you will always have a backup available.
5. Trying to Do It All Yourself
Starting a new business takes an unbelievable amount of work. Even if you have some accounting experience, chances are, you won’t have enough time and energy to do the job yourself after getting your EIN. Eventually, something will slip. You’ll either make accounting mistakes or skimp on your duties as owner.
If your business doesn’t have enough money to hire a full-time or part-time accountant, you can outsource tasks to a certified public account (CPA) in your area. You can also use accountants who work for multiple clients online, there are some great platforms for that like Bench. It will save you money while you focus on building your business.
While nothing can guarantee a business’s success, making smart choices improves your chances. Bookkeeping plays a crucial role in not only success but survival, so stay away from these five common mistakes made by new business owners.