Managing the finances of a small or medium-sized enterprise (SME) in Canada can be challenging. As owners, you juggle many priorities, from finding new customers to delivering products and services. Accounting can often be an afterthought, done when it’s too late or with too little attention. Add the pressure to do everything yourself, and it’s easy to see why accounting errors are all too common. In this post, we look at the six common accounting mistakes Canadian SMEs make and can easily avoid.
Deciding which structure is right for your business is crucial because it affects how you report your income, the type of taxes you pay, and even how you structure your finances. The Canadian Revenue Agency (CRA) has several helpful resources to help you understand and choose the proper business structure.
In Canada, you can register your business as a sole proprietorship, partnership, or corporation, each with unique features and regulations. While sole proprietorships and partnerships are relatively straightforward, a corporation structure may be more complex and offer a more comprehensive range of options. Business owners often ask their friends or guess the appropriate structure based on their understanding. Neither is a good option. To find the right choice for your business, consider seeking professional counsel.
Just as the proper business structure can set you up for accounting success, the wrong choice will likely cost you time, effort, money, and sleep.
Common accounting mistake #5 – Not tracking income
A comprehensive income and expense tracking system is fundamental to good bookkeeping. Recording expenses in a transparent, organized system makes it easy to claim reimbursements, file taxes, and audit your business. Several business owners turn to bookkeeping software to track their income.
These systems are only as good as the data they’re fed, so without someone to monitor accuracy and regularity, no tool can solve the problem of an ineffective tracking process. Several small business owners even attempt to record their income using homespun methods instead of professional help, which can make tax filing season a nightmare.
As a founder or owner, you want the majority of your time spent working on your business, not in your business. Unless you have the budget to hire someone in-house to manage your finances, outsourced professional help to track your income is a great (and cost-effective) option.
Common accounting mistake #4 – Mixing business and personal expenses
Mixing business and personal expenses – Another common error small business owners make is confusing business and personal expenses. This confusion usually results from using the same bank account or credit card for both. The easiest way to solve this problem is to open a business checking account for all business-related activities. Ensure you keep both expenses separate and always remember to keep your receipts. That lunch you want to expense might not qualify in the eyes of the CRA, and when a question is raised, you’ll want to be prepared.
Many other questions come up, too – is a payment to yourself a business expense or personal income? What if you take your contractors out to a meal on the weekend? Can you expense the laptop you use at home as a business expense? What about rent?
Your business accounts are no place for speculation. Remember, when in doubt, seek professional guidance. Even when not in doubt, seek professional advice to check you’re doing everything right. A mistake costs much more than the effort saved from DIY accounting work.
Common accounting mistake #3 – Using incorrect categories for expenses
Keep track of all your expenses, tag them as personal or business, and decide if you want to deduct them. If you have professional support, the process is much easier. All you need to do is send your accountant your expenses; they can work out precisely what you can deduct.
People often think small businesses can expense anything. That’s not the case. The CRA has clearly defined categories for expenses and defined rules for each. A simple rule of thumb is that you cannot deduct a cost unrelated to generating business income. Understanding what these are and where your expenses belong to avoid confusion when filing your taxes.
Common accounting mistake #2 – Using an informal accounting approach
It is easier to be casual about tasks like invoicing and setting payment terms when starting off, but you shouldn’t. Generating income is your main priority, as it should be, but that makes it easy to stay caught up in other areas. Adopting a professional approach to your accounting from the outset can set your business up for success, allowing you to scale your operations quickly whenever you feel ready.
Whether dealing with friends, family, or even a professional contact you’ve known for years, follow a documented process that complies with the latest rules and regulations. While relatively consistent, tax policies and compliance requirements may have subtle changes every year. Not keeping up could cost your business significant penalties and many sleepless nights.
Common accounting mistake #1 – Not working with a professional accountant
Here is the most common and damaging accounting mistake SME owners make – trying to do everything themselves. It’s never too early to get your accounting in order. If you thought about your accounting from the outset, you’re in the minority. Business owners can get so caught up in their vision that they relegate accounting to the back burner. This neglect is going to be problematic. It’s just a matter of time before it affects your business differently. A professional accounting service can help set up processes, bookkeeping, and understanding Canadian tax and accounting laws.
You have already taken the brave step of striking out on your own in a challenging time. The logical next step is to do everything in your power to give yourself the best chance of succeeding.
Contact KSSP PARTNERS LLP in Markham for Your Accounting and Business Consulting Needs
At KSSP Partners LLP, we understand what small businesses need. Our experienced advisors offer a customized and personal service, guiding you at every step of your growth journey. Learn how we can help you with accounting services in Markham and anywhere else across the GTA by using our contact form or calling 289-554-5997.