• BRW Tax & Accounting

8 Accounting Challenges Almost Every Small Business Faces


Small businesses often have to bear the burden of the same accounting challenges as major corporations. But small business owners don’t have the luxury to indulge in extraneous expenses or take unnecessary risks. While the lack of financial resources can create certain hurdles, an error-free accounting mechanism, on the other hand, can resolve a number of problems.

The operational activities of small businesses, for instance, rely on flawless accounting. In fact, it could be fatal for these ventures to leave key accounting challenges unattended. Moreover, without help, profitability, efficiency, scalability, operational activities, and sustainability, the survival of your business could be in jeopardy.

The accounting problems associated with the small businesses are, in fact, unique. Keeping that in mind, here are 8 most common challenges majority of the small businesses regularly face:

1. No Foundational Knowledge

Having a fundamental understanding of accounting is vital for small businesses to learn to swim in a ruthless competitive capitalist market. Small businesses, for instance, do not necessarily have to exhaust their energy and resources to figure out everything about accounting. Instead, basic knowledge will help you assess complicated numbers and even make analyses.

Conversely, small businesses should not hesitate to seek the help of an accountant to get detailed explanations and sort out technical complexities.

2. Budget Control

Controlling the budget ultimately helps you run your business operations efficiently and adopt industry standards to render quality products or services. Not to mention, effective budgeting can help you make insurance payments on time, as well as cover all other expenses.

That said, there is a reason why small business owners do not have a continuous flow of funding. And that is mainly because of budget constraints. Unnecessary business expenses, for example, can lead to financial turmoil and even result in business failure.

One of the key reasons budget management gets out of control is when your business goals are not in alignment with your current resources. You need to balance the availability of resources, total cost, infrastructure requirements, and operations to counteract budget limitations.

3. Inadequate Use of Accounting Software

Keeping a comprehensive accounting record is not an easy task. However, to run smooth business operations, small businesses often find themselves in an ocean of numbers. Similarly, the installation of an accounting system is not enough. You have to take an active interest in the financial health of your small business to utilize accounting software effectively.

In addition, self-sustaining accounting systems have become the norm. Apart from getting authentic figures, they allow small businesses to grow in a competitive market and make sound decisions.

4. Irregular Cash Flow

As small businesses strive for market growth, the management of liquidity and investment opportunities can be a major accounting challenge. In simple terms, cash flow refers to the total amount of available cash. Without a well-organized cash flow, it would be hard to manage balance payments and accounts receivable.

If you are starting out as a small business, you will have to deal with upfront expenses. Ultimately, there is a good chance it will affect your cash flow. And that is because small businesses tend to make large purchases without considering alternative capital sources.

5. Ineffective Method

Sure, accountants lean more towards the accrual basis method to manage and track finances. However, your customers would prefer a cash basis method to make things simpler.

The accrual method helps record earned expenses and revenue items, such as an invoice. The cash basis method, on the other hand, is suitable for recording actual payments. This method, however, does not include your accounts receivable and accounts payable.

If you were to ask a professional accountant, he or she could attest to the fact that the accrual basis method can create irregularities in cash flow. What is the solution? Though it depends on the nature of your business, a combination of cash basis and accrual method seems to work well for small businesses to clarify finances and manage cash.

6. Payroll Management

Although you can make ample improvement when it comes to payroll management, small businesses struggle to find the organizational consistency and capacity to fill the positions. In fact, it could involve several problems such as over or under due payments, faulty tax filing, incorrect accounting software, employee tracking, compliance, and administrative issues.

The ground reality is that business owners find it hard to undertake responsibilities as HR experts to manage the payroll process. Besides, not knowing tax codes can create even more problems for new employees.

7. Combined Bank Accounts

A number of small businesses make the mistake of combining business accounts with personal accounts. And when there is no separation whatsoever, it gets practically impossible to keep track of all of your clients’ finances.

The same rules apply when small businesses get confused between personal and business expenses. In fact, it is one of the major accounting problems that lead to fraud or even bankruptcy.

8. Tax Returns

Small businesses must meet federal tax requirements. However, it is equally important to make the most out of applicable tax deductions and tax credits. Naturally, you want your business to remain competitive and ensure growth in the market while saving resources

Small businesses should seriously think of investing in a professional accounting firm to understand intricate accounting details of the business. Furthermore, you can influence your clients regarding all the benefits of getting the services of an experienced accountant.

What’s more is that filing annual taxes on your own can be overwhelming. Therefore, it makes sense to hire accounting professionals to handle tax filing without errors. Additionally, there’s a good chance that doing so will help you avoid a possible tax audit.

The Importance of Hiring a Trained Accountant

Accounting is a specialized and dedicated area of expertise. And when small businesses learn to utilize the professional proficiency of accountants, it boosts the financial health altogether.

Small businesses need to grow, and growth means additional management of business operations. Contrary to misguided perception, small businesses shouldn’t undertake the entire accounting responsibilities. Instead, hire an accounting specialist that can help you solve accounting challenges with due diligence.

Final Thoughts

Small business owners have to be cautious about market conditions to evaluate the unbiased and unprejudiced financial situation. Furthermore, the uniqueness of your business can create unforeseeable problems. However, numerous accounting problems resemble on the outer surface but ultimately require a different approach.

Essentially, small businesses can address rudimentary accounting challenges to retain existing clients, attain new ones, and gain the trust of clients for an extended period.

#accounting #smallbusiness

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Colorado Springs, CO 80903

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