Accounting Mistakes That Can Drive Your Home Business to Bankruptcy

I have run a business from my home for nearly 10 years and encountered many misconceptions while talking to my colleagues. Many people believe that I don’t have any expenses or need to worry about financial management. This is a myth for any small business.

Even if you work from home, you are going to have to track expenses. Very few entrepreneurs can start or scale a business without investing money into it. If you don’t keep track of your financial expenditures carefully, your business will be doomed to bankruptcy or you may get into a lot of trouble with the IRS or your local tax authority.

Here are some of the deadliest accounting mistakes home-based businesses make. You may need to use an outsourced accounting service if you are having trouble keeping track of them on your own.


Not Being Aware of All Applicable Taxes

I grew up hearing the saying “nothing is certain in life except death and taxes.” I didn’t really appreciate the message until I went into business myself.

Taxes are the most frustrating reality of owning a business. They are 10 times more stressful if you don’t keep up with them. There are dozens of state, local and federal taxes that may apply to your business. You don’t want to find out that your business is subject to a certain tax a week after a tax is due that you were supposed to pay.

The most overlooked taxes home-based businesses have to pay include Internet sales taxes, certain importing taxes, dividend taxes (assuming you own an LLC or S Corp.) and state payroll taxes. Many New Hampshire S-Corps don’t realize that they have to pay a dividend tax on the non-payroll part of their earnings, even though the state doesn’t charge a payroll tax. Find out what taxes affect your business and set money aside for them every month.

Not Tracking Your Marketing Expenses Carefully and Cut Those That Don’t Generate a Positive ROI

If you want to scale your business, you will need to invest in a lot of advertising. Online advertising is how Facebook makes money and how many entrepreneurs increase their net revenue from $100 to $1,000 a day. Unfortunately, while advertising can be great for scaling your business, it can eat through your cash very quickly if you aren’t careful. It is important to track spending and know what is working. If a traffic source or approach doesn’t work, then you need to stop it.

Make Notes of Unpaid Invoices to Dispute 1099s

Some customers will be delinquent on their invoices. It is an unfortunate reality of being your own boss. In fact, between 1-2% of customers won’t pay their bills. There are a number of reasons they may fail to pay you. They may be dishonest, be near insolvency, feel you didn’t live up to your terms of the agreement or have made an honest mistake.

Unfortunately, delinquent customers may report that they paid you on your 1099 form. Don’t simply refuse to report the income, because the IRS will see that your 1099 doesn’t match their records. Robert W. Wood, a tax lawyer from San Francisco, states that you must contact the issuer of the 1099 and request that they correct the discrepancy. If they feel they do not need to do so, you must call the IRS and explain the situation and urge them to contact the issuer for a corrected 1099.

Why keep this? Because you may find that the company did transmit the incorrect Form 1099 to the IRS after all. This way you’ll be able to explain the situation. If the issuer of the Form 1099 has already sent it to the IRS, ask for a “corrected” Form 1099. The issuer will prepare a Form 1099 in the correct amount and check a “corrected” box on the form.

Forgetting to Keep Accurate Records of all Accounts Receivable

One of the biggest reasons company revenue falls short is they lose track of billable sales. It is very important to track your inventory and billable service hours carefully. One of my colleagues forgot to bill a customer for over $3,000, because they didn’t keep accurate records. There are a number of great invoicing tools that you can use to track accounts receivable more easily.

Failing to Calculate Your Net Liquid Asset Balance

When you want to know how much cash you have on hand, you will naturally check your bank account balance. However, this isn’t a good measure, because it doesn’t account for all of your immediate outstanding liabilities. You may have $5,000 in your business account, but you have to set aside $800 for taxes and pay $300 for your health insurance.

Always keep a running tally of your immediate liabilities and subtract them from the outstanding cash on your balance sheet. This will give you a more accurate assessment of the amount of money that can be withdrawn for personal expenditures or to be reinvested into your business.

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