NFIB

Five Common Mistakes of Home-based Businesses, Part II
04/ 15/ 2002

Operating a home-based business requires dedication and planning, not the least of which is putting into place an accounting system that fits the particular business. For some home businesses, the system will be relatively simple. For others, with more complicated inventory controls and payroll schedules to manage, the system will be more complex. In every case, there are certain specific accounting mistakes that are common to home-based businesses. In last week's Workshop, Jeffrey Moses listed two of the most common accounting mistakes and showed how to avoid them. In today's Workshop, he continues with three additional mistakes.

3. Another common accounting mistake home-based businesses make is not recording the source of checks deposited. This is especially problematic if you're taking out business loans, because at the end of the year it may be difficult for you to determine which deposits were payments received for services, and which were for loans. (Of course, you could sort this out by going through your loan records, but analyzing each deposit is time consuming.) To avoid this problem, simply write in your checkbook the source of each deposit, recording the payer and check number for each check. This will help keep your records straight at year end. If some deposits contain too many checks to notate separately in you check book, you'll have to write down the details on a separate piece of paper and record it along with your other checking account records.

4. Many home-based businesses do not have adequate systems in place for billing customers, and for keeping records of overdue payments. Since these two activities are integral to a business, you'll need to set up a method to determine with great accuracy and timeliness exactly whom you've billed, and when their payments are overdue.

5. It's surprising how many home-based entrepreneurs don't have a system that allows them to easily and accurately keep track of billable hours spent working for customers. This is particularly damaging to a small business, because it usually results in having to estimate the time spent on projects. Inevitably, these estimates will be low (most small businesses don't want to offend customers by overcharging.) To keep track of billable hours, setup a reliable system that allows you to easily record the time spent on each job. Of course, no system will be accurate if you, yourself, do not make a point of recording the exact amount of time spent on each job.

There are several ways to set up systems to avoid each of the five mistakes mentioned in this week's and last week's Workshops. Perhaps most advisable is to work with an accountant who is experienced with helping small businesses. An accountant can help you establish systematic procedures, and can suggest appropriate software and other tools that will make your financial life simpler. Another way is to consult books on the subject of small business or home-based business operations. These books will suggest accounting software, and may even show you how to use it. For info about choosing tax software, please see the former Workshop "Tax Software for Business."

A few books that include information about accounting methods:

"Small Time Operator", Sixth Edition, by Bernard B. Kamoroff, about$18.

"Accounting for the New Business: The Strategies and Practices You Need to Account for Your Success", by Christopher R. Malburg, about $10.

"Day-To-Day Business Accounting (Run Your Own Business)", by John Jackson, Arlene K. Mose, Gary Downs, about $14.

These books won't give you specific information regarding the five common problems described in these two Workshops, but they will give you a foundation for setting up accounting systems that work for small businesses.

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