Common Agency Accounting Mistakes (and How to Fix Them)

Running an agency usually means making some common mistakes, like opting into one to many business subscriptions or buying slightly more office supplies than necessary. While mildly irritating, these types of errors have minimal business impact over a long time period.

Accounting process mistakes, however, are a different story.

Even the most simple accounting errors, like duplicate journal entries or various entry errors, can have significant consequences that can lead to financial losses and even tarnish an agency’s reputation. In this post, discover the most common accounting mistakes agency owners make, with actionable tips on how to fix — and avoid — them.

1. Not separating personal and business expenses

One of the most common errors that business owners make is using one account to pay for personal and business expenses. Often referred to as commingling funds, mixing both expenses not only complicates your bookkeeping efforts for any given accounting period but it also makes it increasingly difficult to determine the profitability of your agency over time. The longer commingling occurs, the harder it is to fix.

Think about the sheer number of receipts you incur over the span of three months. Now, imagine if none have been classified as personal or business expenses. When it’s time to claim tax deductions on business expenses, you’ll need to individually sort through all those transactions to determine which are applicable — and risk shuffling through hundreds of receipts in the event of an audit.

To fix this mistake, never deposit payments from clients into your personal bank account or use your personal credit or debit card to pay for business expenses without clear documentation. Likewise, do not use your business account to pay for personal expenses. It’s helpful to use one account for business expenses, like office rent and supplies, so it’s easy to track costs over time.

2. Poor record keeping

Another common accounting mistake in bookkeeping is failing to maintain proper accounting records. Agency owners manage a high volume of financial transactions, whether client expenses, employee expenses, vendor invoices, or office fees. Poor record keeping can mean failing to track these transactions, mis-categorizing them, or worse, duplicating them. All of these can lead to potential errors in your chart of accounts. 

For example, failing to track expenses like payroll can find your agency in violation of the Fair Labor Standards Act (FLSA) if an employee claims they’re owed unpaid wages. To prevent this mistake, use reputable payroll software, like Gusto, or a PEO, like Justworks.

Similarly, miscategorizing expenses — like personal versus business expenses — can be problematic during tax time. Likewise, remember to attach detailed documentation of each financial transaction, such as bank statements and receipts, and reconcile accounts regularly.

3. Failing to regularly reconcile accounts

Speaking of reconciling accounts, failure to do so — especially on a regular basis — can land your agency in hot water. Account reconciliation refers to comparing two financial records, like bank statements and balance sheets, to ensure they match and identify (and fix) any discrepancies, omission errors, or fraudulent activities.

Being that most agencies allow several employees to access financial accounts, such as paid admin specialists, it’s vital to confirm that the amount of money spent matches the amount shown leaving the account. 

The easiest way to fix this mistake is to commit to regular account reconciliation. Whether it’s weekly or monthly, automated or manual, routine reconciliation of bank statements, credit card statements, and other financial records helps proactively find and fix other accounting mistakes.

4. Not saving enough money each month for taxes

If your agency is profitable, you will be expected to pay business taxes. Failure to pay your taxes on time and in full can expose your agency to potential fines, penalties, or legal action from the HRMC or Internal Revenue Service (IRS). If you don’t save enough money each month for taxes or fail to pay at all, you’ll owe the IRS back taxes plus interest and penalties. 

For example, let’s say that you had a tighter second quarter than usual and failed to save the appropriate amount for taxes each month. When it’s time to pay, you’ll need to either pay in full by taking out a business loan (which can put you deeper in the hole), take out a payment plan with the IRS (and pay the interest on it), or opt to not pay at all (and risk a host of legal repercussions).

To fix not saving enough for taxes, refer to your financial records to determine the amount of income you’re averaging each month. Next, make it a point to set aside 30% to 40% of your business income — or 25% minimum in slower periods. From here, ensure that you take advantage of tax deductions and credits, assessing your books for what can be claimed, to lower the owed amount.

5. Failing to pay quarterly taxes

When we discuss saving money for taxes, it’s impossible to avoid talking about quarterly taxes. U.S. agency owners must pay estimated federal taxes at the end of each quarter based on what was made or estimated to be made during that period. Beyond federal taxes, owners must also pay state and local income taxes in one or more states, depending on where the agency does business.

Picture this: You pay your first tax bill as an agency owner in April, just to receive a bill in the mail for thousands of dollars a few months later. The reason? Failing to pay your quarterly taxes. The penalties and interest owed on the amount only compound the longer you wait to pay it.

To avoid this dilemma, pay your estimated taxes quarterly. For agency owners with steady income throughout the year, calculate annual income and deductions, determine the taxes owed, and divide the amount into four even payments to learn what you’ll need to pay. For agency owners with fluctuating income, calculate on a per-quarter basis based on your current financial position. 

6. Not paying yourself a proper salary

Agency owners sometimes become so caught up in the operational aspects of running a business, they neglect their own personal finances and fail to pay themselves a proper salary. While you may think you’re saving on business expenses, in reality, you’ll face a lot of difficulty when attempting to separate business revenue from personal expenses or have to borrow against the business in a bind.

There are two methods for small- to mid-sized agency owners to earn money: a traditional salary or an owner’s draw. A traditional salary involves determining a set wage and issuing yourself a monthly paycheck like a regular employee. If you have an S Corp, you have to pay yourself a reasonable salary each month to stay compliant.

On the other hand, an owner’s draw involves withdrawing funds from the business for personal use at set intervals, such as monthly or quarterly, or whenever fiscally necessary.

7. Misclassifying employees and contractors 

Agency owners typically work with a variety of full-time employees, independent contractors, and freelancers. Agencies that misclassify employees as contractors cause federal and local governments to lose out on revenue like unemployment taxes, FICA taxes, and income tax withholding. Those who get caught can face tax penalties and labor law violations, such as payroll fraud and wage theft.

For example, in the state of New York, misclassifying employees is considered a violation of the Fair Play Act. Agency owners can be subject to civil penalties of up to $2,500 per misclassified employee for a first violation and up to $5,000 per misclassified employee for a second violation within a five-year period. The state may also subject owners to up to 30 days in jail and up to a $25,000 fine.

The best way to fix this mistake is to review IRS guidelines to learn how the government would classify the individuals you work with, whether they’re full-time or contracted. Likewise, maintain continuous labor records, like W-2 forms for full-time employees and W-9 forms for contractors. In the event your agency is audited, these records will serve as evidence for employee classification. 

8. Slow to send invoices

Most agency owners issue invoices at the first or end of the month. If you make the mistake of slowing down the invoicing process, you risk not only forgetting to bill for certain items but also failing to get paid promptly. So, if your agency fronted campaign spend, you’ll be in the red until you’re finally paid. Plus, your agency may come across as unprofessional to your clients. 

Pretend your agency just signed a contract with a new client that includes a monthly $10,000 retainer set to be billed on the first of every month. By the fifth business day, the client still hasn’t been invoiced. Your agency hasn’t been paid, and your new client has a terrible first impression. 

To fix this mistake, commit to consistent invoicing. Make it a point to tell clients when invoices are sent and when they must be paid. It’s often best to create an invoicing schedule with each client, whether it’s monthly, weekly, or as necessary for one-off projects, to ensure everyone is aligned. Similarly, it’s helpful to outline the invoicing schedule and payment terms in each client contract.

9. Bad payment terms

Though it may seem tempting to offer clients longer payment terms or remain lenient with late payments, your business will pay the price. You risk not having enough cash on hand to pay your overhead expenses, like office rent and payroll. You may not be able to maintain current ad campaigns. Even worse, in the event of an emergency, you may not have access to the proper funds.

All of the above can tarnish your credibility in the market. After all, imagine if you had to pause a well-performing social media campaign because the client hadn’t paid in three months. Not only will the client be displeased with the sudden halt, but your agency may lose out on the funds spent.

If you’ve been offering net-60 payment terms instead of net-30, update your terms on your next invoice cycle and modify your contracts if necessary. Notify clients there will be a late fee for invoices that are not paid in full on time. To further avoid bad payment terms, consider offering incentives for quick payments, such as a 3% discount for invoices paid within 10 days. 

10. No or poor cash flow forecasting

Cash flow forecasting, also referred to as cash flow planning, is the process of estimating future cash inflows and outflows for your agency. A forecast predicts how cash will move through your agency in the coming months. While not perfect, this process allows you as an agency owner to get a better grasp on your finances — plus, you can gauge your preparedness for unforeseen expenses. 

Pretend there’s a sudden equipment failure in your office and employees need new computers to maintain business. Without cash flow forecasting, you’d have no idea how much money you would have in your accounts to handle hypothetical emergencies. However, with cash flow planning, you can handle contingencies, pay your dues, and maintain vendor relationships efficiently.

The easiest way to fix the issue of no or poor cash flow forecasting is to invest in accounting software, like Xero or QuickBooks, which can automate the process based on real-time income and expenses. It’s also helpful to optimize your accounts payables and receivables, so you understand what’s due and what’s being deposited by when. Likewise, keep an eye on agency costs over time. 

11. Not establishing a reporting cadence 

Another one of the most frequent unintentional mistakes that agency founders make is not regularly reviewing their financial statements. Elements like proper bookkeeping, reconciliation, and even cash flow forecasting all rely on recurring financial reports to maintain accuracy and identify trends or errors.

For example, your agency requires a current balance sheet, income statement, and bank statements to reconcile accounts. Without a current balance sheet, there’s nothing to compare current income, expenses, and liabilities. Similarly, without ongoing reporting, there’s no way to set a baseline for agency performance. How can you gauge month-over-month or year-over-year growth without data?

To fix this mistake, set a monthly cadence for financial reporting. At a minimum, you should be generating a balance sheet, profit and loss statement, and a cash flow forecast once a month. From here, you’ll be able to more accurately gauge performance — and avoid other accounting mistakes. 

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These are some of the most common accounting and bookkeeping mistakes that we see agency owners make. 

Want help setting up proper agency accounting systems and staying on top of your books? Schedule a free call to improve your cash flow and get more confident in your numbers.