A recent report revealed that the number of companies restating results or revealing accounting flaws surged more than 150% in 2023, proving that even large companies struggle to manage their finances effectively.

For small companies, maintaining accurate financials can be even more problematic. Company founders are usually focused on selling to customers and overseeing the delivery of product or services, which leaves them little time to focus on the accounting side of the business. 

Kevin Gilbert has reviewed the financials for hundreds of small businesses in his role as Executive Vice President of Credit Administration at AR Funding, which gives him a unique insight into the areas that can be problematic.

“The businesses we work with are often in manufacturing or staffing,” Gilbert explained. “These industries have high up-front expenses coupled with longer customer payment terms, so healthy cash flow is critical. But the owner is usually focused on selling or delivering products and services, so they’re not keeping track of the daily costs of running the business.”

In this article, Gilbert shares the four mistakes he sees small business owners making most frequently and offers tips on how to avoid them.

Incorrect payroll taxes 

Many small business owners are surprised by the complexity of the paperwork required to hire and manage employees. The majority of employers are required to remit the 941 tax return, which is used to report the income taxes and payroll taxes that the business withheld from employee wages, on a quarterly basis. 

“One of the biggest problem areas we see when conducting a financial review of a potential customer is that they are failing to report payroll taxes accurately,” said Gilbert. 

For the majority, these are honest mistakes that involve a simple miscalculation. According to the IRS, other frequent mistakes made by employers include entering the wrong number of employees, claiming credits they are ineligible for, and claiming credit amounts that exceed the limitations.  

Incomplete financial statements

The companies AR Funding works with generally have simple financials because they have no fixed assets, don’t yet have substantial equity or retained earnings, and have little available cash. But Gilbert says that even these types of businesses need to maintain monthly financial statements. 

“If a business doesn’t track its financials each month, it’s a red flag, because it means they’re really not paying attention to cash flow or profitability,” Gilbert said. “Over time, that can lead to situations where the company doesn’t know its true cash position, which can lead to serious financial trouble.”

When reviewing a company’s financials, Gilbert looks for these elements at a minimum:

• A balance sheet that tracks what the business owns (including cash) and what the business owes. This helps the business owner track the business’s financial position over time. 
• A profit and loss statement that tracks the money the business earned and the money it spent. This helps the business owner determine whether the business is profitable.  
• A cash flow statement that tracks the actual cash the business earned vs. the sales it made on credit. This helps the business owner see how much money they have on hand. 
• An aged receivables report that tracks who owes the business money and when it is (or was) due. This tells the business owner when it’s time to pursue payment from customers. 
• An aged payables report that tracks who the business owes money to and when. This tells the business how much cash they need on hand to meet their obligations.

Undefined business costs

Owners of newer businesses are generally focused on selling products and services and growing the business. As a result, they don’t always keep adequate track of the costs of doing business, which can have devastating results. 

Often, Gilbert talks to business owners who see strong sales numbers and assume they’re making a profit, but haven’t actually calculated the cost of manufacturing the product or providing the service.

“A lot of small businesses are started by someone who is great at what they do. They have a great reputation, good connections, expertise, but they really don’t know how to price something to make a profit,” said Gilbert. “You may be selling a widget for $100 and seeing sales grow each month, but if it’s costing $106 to produce, it’s not a success story.” 

One of the costs that business owners forget to factor into the equation is the cost of financing, whether that’s interest on a traditional loan, online loan, or merchant cash advance or fees for invoice factoring. 

Lack of oversight

For owners with a business partner or a key person who manages the financials, fraud can pose a significant risk. Implementing a dual control system in which a second individual is required to verify, approve, or release money transfers over a specific amount can help to mitigate that risk.

“As you start to grow your business, you don’t want one key person to have total control over the cash,” Gilbert explained. “I’ve seen so many situations where someone has robbed the company to pay off personal expenses, and the owner never knew it.”

How to avoid financial mistakes

Gilbert says business owners need to prioritize financial record-keeping, even during the earliest stages, and it doesn’t have to involve a costly, high-tech solution.   

“Record keeping is the key for any small business, and you don’t even need software necessarily. You can track financials in a three-ring binder if it lets you see your cash in and cash out.”

He also has a simple rule when it comes to hiring financial support.

“You can manage your own financials as an owner-operator, but when you start hiring employees, you need to either employ a good financial person in the company, or have an outside CPA who can look at the financials on at least a monthly basis. It won’t just keep the business out of trouble, it will help it become more profitable and successful.”

Build healthier cash flow

If lengthy customer payment cycles are making it difficult to create predictable cash flow for your new or growing business, find out how invoice factoring can help.