Today I’m sharing 5 Accounting Mistakes that Creatives are Making. I see this time and time again and so much so that it’s worth sharing.
Cash Basis vs. Accrual Basis
When I first started my business I knew going in that I would be using the Cash Basis for my accounting method. If that alone threw you for a loop, then keep reading!! There are two main methods for business accounting. Cash and Accrual-based accounting. For many small businesses and especially, those of us in the creative industry, a cash basis makes the most sense and will be the easiest to use. Yes, accrual based accounting can be very beneficial and possibly more accurate since it records your income and expenses when they occur, even if no monies has been paid at that time. However, let’s be honest here — who’s got time to run their own creative business AND deal with accounting that requires much more time and detail? Yup, didn’t think so. Cash it is.
One Giant Pot of Money
I realize that for some folks, you may only just now be starting your business and it’s quite small. But keeping your business finances separate from your personal finances is an absolute must! If you are super organized and love bookkeeping and manage your finances on a daily basis, then sure….go for it. But if you don’t, it becomes a huge nightmare and hassle when it does come time to working on your finances. Hence, the dreadful procrastination of tracking expenses and managing your business checkbook. Don’t let this happen! Separate your finances.
Keep UP
Yes, it sounds super easy but you’d be surprised! In fact, I’m willing to bet that most of you reading this have not touched your finances since tax time and probably won’t again until tax time next year. Am I right?
Reconciling your finances on bi-weekly or monthly basis will save you so much heartache and keep you on track. Don’t you want to know how your business is running and if you are successful one month vs. the next? And don’t worry, I’ve totally fallen behind in the past and it’s not pretty when I do. I once didn’t reconcile my finances for 5 months and found out that there was fraud on my account 4 months prior. I caught it SO late and luckily was able to fix it. But just imagine if I had let it go longer and the fraud charges damaged my credit or sky rocketed!?
Getting Paid does not equal Profit
This is a biggie! One that I’ve seen so so so many people make. Even those that are NOT in the creative industry. Just because you’ve gotten paid — does not mean that that is profit. Money coming in is simply “cash flow”. Cash flow is the total…keyword total…”total” amount of money being transferred into and out of a business. You must keep in mind that there are other things to think of. If you are a custom dressmaker and are paid $500 in full to design and make a gown, that doesn’t mean that you’ve just “made” $500. You still need to account for raw materials, time and labor, overhead etc. And when you take that cash flow and spend it as if it’s profit?? You are putting yourself in a big predicament at the end of the year when it comes time to pay taxes or even paying bills at the end of the month.
Not Saving Itemized Receipts
My first year in business I was horrible. I thought to myself…hey, I can just save my final receipt of what I paid and that’s good, right? WRONG. There were lots of business expenses that I couldn’t expense because I didn’t save the itemized receipt. So the next time you take a client out to lunch, be sure to ask for the itemized bill along with your credit card receipt. You’ll need to be able to show that you ordered “x” meal and your client ordered “x” meal and the total came out to “x”. Taking just the credit card receipt isn’t enough, so keep those items!
Not Paying Sales Tax
Umm…yes, we have to pay sales tax. So often, creatives forget this. If you sell a necklace for $25 and don’t charge sales tax? Guess what — you will end up paying sales tax for that $25 out of your own pocket later. And if you don’t pay it, you’ll be penalized and let me tell you from experience, they will NOT waive interest costs on the overdue sales tax amounts. And that can sometimes add up to more than what you owe on sales tax.
LEARN MORE ABOUT BUSINESS/ACCOUNTING ESSENTIALS ALONG WITH BRANDING/STYLING YOUR BUSINESS, CONTENT CREATION AND MORE.
Geared to creatives in their first two years in business. Get going on your foundations today so that you can build a profitable tomorrow.
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