Love it or hate it, we have more technology at our fingertips than ever before. This means more methods of automation, new tools to keep our finances straight, and additional ways to keep ourselves fiscally accountable.
However, mistakes can still happen.
While some errors are small and can easily be corrected, others may have serious and long-lasting consequences that can affect your business’ financial future. Below we discuss the 5 most commonly made accounting mistakes and how to avoid them.
1. Glossing Over a Mileage Log
By not claiming your work-related travel expenses, you’re losing money that could be invested in future projects or that could be bulking up your profit margins.
If you use your personal vehicle to earn business income, you can write off a good portion of your vehicle expenses come the tax season. This is based on the mileage you accumulate for business purposes and includes expenses such as fuel and maintenance costs.
A mileage log is a record of your business travel for the entire year. A detailed mileage log should include:
- The date
- Your starting point
- Your destination
- The purpose of your trip
- Your starting mileage
- Your ending mileage
- Total kilometers driven on the trip
You can keep a physical tracking journal in your vehicle for easy access. Or, if you prefer an electronic record, another option is to download an app. No matter what your preferred method, make sure you’re keeping track. It’s critical to keep a detailed record of your mileage to write off your business travel expenses at the end of the business year.
2. Accidental Overspending
Many businesses are guilty of going over their pre-established budget or not tracking expenses that are only partial write offs.
Unfortunately, the little things can quickly add up. You can quickly find yourself out of hundreds and thousands of dollars if you’re not keeping track of where your business is unintentionally leaking money. Limit oversights by adhering to these smart financial principles:
- Create a fiscal budget and stick to it. This creates a visual reference for what percentage of your funds should be allocated towards certain projects. It also curbs the likelihood of overspending.
- Ensure that you’re keeping receipts for your business expenses, and that they’re logged appropriately so that your budget remains up to date. Failing to track your expenses in a timely manner (or at all) will cost you not only money, but time and resources down the line when you need to fill in the gaps.
- Educate yourself about the write offs you’re entitled too, and whether they’re full or partial returns. You can find more information about tax write-offs on the CRA’s website here. Again, make sure you’re keeping and logging your receipts. This way you can maximize returns and prevent financial oversights come year end.
Going into a venture without any idea of how much you can afford to spend is an easy way to end up paying far more than you intended. Take the time to do your homework and budget appropriately. Your bank account will thank you for it.
3. Lack of Planning for the Upcoming Year
Waiting till year-end, arguably the busiest time of the year, to tackle next year’s business plan is a recipe for disaster.
Creating an annual plan requires strategic development that integrates your company’s past performance with your projections for the future. It will require time and your undivided attention, something that you may not be able to give at the same time you’re trying to navigate a crazy year-end.
Planning for the coming year should begin after your Q3 results are in.
Review your current finances, including your income, sales reports, marketing efforts, expenses, and returns. When these numbers have been collected, you can start creating projections for next year. This will be based on what you experienced this year, and the market trends projected for your product/service in the future.
Once you have a projection, you can begin creating your annual master budget. This should include your projected income and expenses, a cash flow statement, a profit-and-loss statement, and a balance sheet.
Take special note of your estimated year-end profit and whether it aligns with your financial goals. If it doesn’t, look at areas where you may be able to lower your costs, increase sales targets, or explore any additional tax credits and/or strategies at your disposal.
4. Not Setting Aside Funds for Taxes
Nobody likes a tax bill at the end of the year. But what can make that experience unbelievably more stressful is not having the funds available to pay said bill when it does arrive.
A common mistake that many business owners make is not setting aside money each month for their taxes. By not preparing these funds in advance, they’re often left scrambling when they end up owing a large lump-sum of money to the government.
To avoid this, it’s suggested that you set aside a minimum of 30% percent of your monthly income for federal and provincial income tax, as well as other contributions such as to your RRSP and CPP and any GST payments you may make.
For a list of the federal tax rates for 2022, you can reference the CRA’s resource page here.
For a complete guide to Alberta’s 2022 tax rates, click here.
By referencing your yearly tax rates and setting aside money each month to account for them, you mitigate the chance of any surprises come year-end. And you can rest easy knowing the funds are readily available when the tax bill arrives.
5. Forgetting to Back Up Your Data
Did you know that any documentation that you have pertaining to your taxes should be saved for at least seven years?
The CRA can audit you anytime within that time frame so it’s important to make sure you have a secure system in place where you can access any paperwork you may need from previous years. This includes recordings of your business tax returns, payroll tax records, employee information, business ownership records, records from your accountant, and any operational records.
With electronic filing and bookkeeping being the primary method of storage these days, it’s never been more important to back-up your information on an external hard drive or cloud system.
Keep in mind that if your primary storage device gets lost, hacked or stolen, and you don’t have an accessible back up, it can cause major financial burdens down the line. Especially if the CRA issues an audit that requires you submit detailed documentation.
Failure to do so can result in costly penalties and fines that can quickly eat into your savings and profit margins. Avoid this by backing up your electronic date and making sure any paper documents are kept in a cool, dry storage space.
Need Help? Trust Our Chartered Professionals
You can’t avoid what you don’t know. That’s why it’s always advisable to work with experts who can make sure that your accounting systems are working well and your numbers are correct. Let one of our Chartered Professionals help you avoid any potential financial pitfalls by letting us look over your finances.
We’re happy to lend you our years of experience and expertise to keep you on the road to financial freedom.
