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Updated Mar 12, 2024

The Top Accounting Challenges Small Businesses Face

Alika Cooper, Community Member

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Most small business owners wear several hats ― marketing manager, human resources (HR) director and customer service representative, among many others. However, managing the company’s business accounting is perhaps the most significant challenge many small business owners face. 

Small business accounting involves recording, summarizing and analyzing the financial transactions in your business. While it isn’t always easy to navigate your business’s finances, understanding common problems and their solutions is well worth the effort.

Editor’s note: Looking for the right accounting software for your business? Complete the questionnaire below to have our vendor partners contact you with free information.

Top accounting challenges for small businesses

Here are the top 12 accounting challenges most entrepreneurs face and some accounting tips that can help you overcome them.

1. Managing cash flow

Poor cash flow management can be deadly for small businesses. Many small business owners find it challenging to earmark funds to cover recurring costs and keep the business alive. 

Solution: To stay on top of cash flow, analyze your bills carefully and be thorough about collecting customer payments. A robust accounts receivable process is key. You should also pay close attention to your monthly expenses and cut business costs wherever possible. Additionally, if you have equipment you no longer use, consider selling it to generate cash quickly. 

Did You Know?Did you know

Many seasonal businesses struggle with cash flow problems due to demand fluctuations. Careful budget planning and financial forecasting can make handling an irregular cash flow easier.

2. Covering unexpected expenses

If a retail store earns $150,000 per year after expenses, it may seem to be in good shape. It probably is ― until an unexpected expense or emergency arises.

For example, say an employee slips and falls at work and your business doesn’t have adequate workers’ compensation insurance coverage. The medical costs and potential lawsuits could easily cost your business over $1 million. 

Even smaller expenses, such as a one-time government tax on all businesses in a particular area or a vendor’s price hike, can affect a company’s bottom line significantly.

Solution: Optimize your existing credit to manage short-term expenses. It’s also essential to monitor your long-term profitability to ensure cost changes don’t threaten your overall liquidity.

3. Reporting finances

For many businesses, one of the biggest challenges is keeping up with the financial disclosures required by the United States Securities and Exchange Commission. It can be hard to stay on top of reporting requirements and ensure you document this information correctly in case your company is audited.

Solution: The best way to ensure you meet reporting requirements is to outsource some of the work. Hire a bookkeeper or accountant who specializes in small business financial concerns to ensure your books are up to date.

4. Filing taxes

Federal and state taxes are stressful for everyone but they can be especially challenging for small business owners. While your business structure will determine your tax obligations, most businesses must pay income, unemployment and payroll taxes

Additionally, businesses are required to pay estimated quarterly taxes if they expect to owe $1,000 or more when their taxes are filed. Failing to pay your estimated quarterly taxes can result in fines and penalties. 

Solution: Taking advantage of deductions can drastically reduce your bill come tax day. If your small business is home-based, home office deductions are crucial considerations. Section 179 of the tax code allows you to deduct the cost of business property depreciation instantly and that investment cost can be reinvested into your company. 

TipBottom line

Tax consultants can help you identify applicable tax deductions and help you find ways to lower your tax liabilities legally.

5. Staying on top of policy changes

One reason it’s so challenging to stay on top of your taxes is that tax laws are changing constantly. Tax code and policy changes can impact your company significantly. If you aren’t prepared, you could end up overpaying taxes at the end of the year.

Solution: Again, professional help can be critical. Consider hiring a certified public accountant (CPA) to manage your taxes. CPAs are already well-versed in tax law and can advise you about using them to your advantage.

6. Regulating payroll

Playing the role of an HR or payroll expert is incredibly challenging ― errors in these areas come with serious consequences. For example, if you don’t correctly classify new employees, you could incur costly penalties. Additionally, you must ensure taxes are filed correctly, pay employees accurately each pay period, properly track employee time off and deal with a host of HR compliance challenges

Solution: The best online payroll services can remove many of these headaches for your small business. Check out our review of Paychex and our Gusto review to learn about affordable payroll services that can handle HR functions.

7. Updating expenses

Business owners and professionals must track receipts and recurring expenses to claim them as small business deductions. Business deductions will lower your taxable income and help you understand your company’s profits and losses. However, the IRS requires documentation and it’s easy to misplace receipts and forget to track your expenses.

Solution: Today, financial tracking tools help you digitize receipts and record recurring expenses. Additionally, many excellent accounting software platforms can help your office go paperless and digitally store all documentation. 

8. Analyzing your finances 

Reconciling your books can be grueling, especially if you don’t have good accounting software and try to do the process manually. It’s easy to make accounting mistakes that lead to incorrect data. 

It’s critical to verify all business transactions regularly. Consider checking your accounting books at the end of each day while transactions are still fresh in your mind.

Making sound financial decisions involves three steps: interpreting, analyzing and advising. Regardless of the reports you use, generating the numbers is only the first stage. What do those numbers mean? More importantly, how do you improve them?

Solution: Accounting software makes reconciling transactions and analyzing your financial data easy. At the end of the month, you can run cash flow statements and other relevant reports that reveal how your business is doing.

9. Securing your data

Every time you increase your business’s online exposure, you increase its risk of getting targeted by hackers. It’s not just large companies that must watch out ― hackers often target small businesses because they have weaker cybersecurity and risk management protocols. 

Getting hacked even once can cost your business millions of dollars and permanently stain your reputation. Companies of all sizes must start taking cybersecurity seriously. 

Solution: Run a cybersecurity risk assessment to determine your business’s level of vulnerability. Consider working with a cybersecurity professional to evaluate your business and identify areas of weakness. Then, you can develop a plan to address them.

FYIDid you know

You may also benefit from taking out a cyber insurance policy to ensure you are protected should the worst happen.

10. Do-it-yourself accounting

When it comes to your business’s accounting, trying to do it alone can be costly. You may be an expert on your business, but that doesn’t mean you’re a bookkeeping expert.

Even if you can balance your books, making unnecessary mistakes is easy. Invoices could accidentally go unpaid and you could run into cash flow problems or overpay your taxes.

Solution: Hiring a skilled accountant will ensure your books are up to date and accurate. Having a second pair of eyes on your records will reduce the likelihood of mistakes and help you identify opportunities to cut costs. It will also save you time you can spend growing your enterprise.

11. Working remotely

While many businesses offer remote work plans and respect the productivity telecommuting provides, remote work can create accounting headaches, including tax compliance risks. For example, if an employee doesn’t disclose that they’re working out of state, you may have unwittingly failed to withhold payroll taxes and could be in big trouble if you’re audited. 

Solution: You may need to consider adopting a new remote work policy for your employees. If necessary, find ways to track your employees’ work locations so you know you’re meeting tax requirements. 

12. Embracing accounting software 

Not everyone wants to implement accounting software, preferring to use old-school Excel spreadsheets that worked in the past. However, ignoring new accounting technology can put your business at risk and hinder its growth. 

If accounting software feels like an unnecessary expense, consider the time and cost savings these platforms can provide. Your increased accuracy will help you avoid potential fines and fees and your extra time can be better spent on other endeavors.   

Solution: Choosing the right accounting software is a game-changer. Find a program with the right features and functionality that won’t overwhelm you and your team. Learn the software, train your staff and enjoy the benefits. 

The best accounting software for avoiding common accounting challenges

The best accounting software makes managing your small business finances easier and can help you avoid numerous accounting and financial challenges. You can track sales, create a budget, check inventory and generate financial statements easily. 

Consider the following excellent options for small businesses: 

  • QuickBooks Online: QuickBooks Online is an accounting software leader and a great choice for companies of all sizes. QuickBooks lets you generate custom reports like aged receivables, general ledger reports and profit and loss statements. Our QuickBooks Online review explains how you can use the software to collaborate with your accountant come tax season.  
  • Xero: Xero has an intuitive interface and integrates with more than 1,000 apps, allowing you to create a customized accounting solution for your business. Our Xero review explains how all of Xero’s plans support unlimited users, making it a good choice for fast-growing companies.
  • FreshBooks: FreshBooks is a terrific option for businesses that regularly send invoices to clients. You can create branded invoices and set up recurring invoices for clients you work with regularly. You’ll be notified once the customer has viewed your invoice and can send automatic late payment notices. Read our FreshBooks review to learn how the software tracks and reconciles your expenses and includes project management features. 
  • Wave: Wave is the only free software on this list, making it an excellent option for budget-conscious businesses. Wave provides all the basic functionality you need in accounting software. Our review of Wave details how you can send invoices, reconcile transactions and generate financial reports. However, Wave may not be the best option for bigger companies with more advanced accounting needs.

Jamie Johnson contributed to this article.

Alika Cooper, Community Member
Alika Cooper works a Business Development Manager at Cogneesol, a well-renowned company offering data management, technology, accounting and legal services. She has been working with Cogneesol for the past 10 years and is responsible for branding and generating sales. While handling the projects, she has witnessed a lot of changes over the years. She has been thoroughly researching and sharing her viewpoints about these industry trends and changes on many platforms across the Internet.
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