A detailed and updated bookkeeping process is crucial for the success of any business. No matter what type of business you run, you should have a thorough understanding of the best bookkeeping tips. It will ensure that the finances of your business remain controllable – now and in the future.
Unfortunately, many small business owners mess up at bookkeeping. To them, it seems like a simple enough task. However, one small mistake in managing the finances can cripple the entire foundation of your business. It may even lead it towards insolvency. To avoid the same fate happening to your business, it is important that you avoid the most common bookkeeping mistakes.
What are they?
Let’s find out!
Table of Contents
1. Not Keeping Records
Many small business expenses don’t make it to the record books. And truthfully it doesn’t seem like a big deal to note down the couple of dollars you spend on meals and stationary. However, these small transactions can become a large sum if ignored continuously.
Moreover, you wouldn’t want the government to trouble you regarding claimed expenses. Having a record of every dollar spent will help you give evidence to justify your expenses.
Make it a habit of recording your expenses as they arise. The best way to maintain expenditure records is to keep a box or folder to stash receipts. This way you will have a record in hand to keep track of your cash flow. There are also plenty of digital accounting apps that let you take pictures of such receipts. These apps also help to organize your small business finances accordingly.
2. Mixing Personal and Professional Finances
Since many small business owners handle the books independently, they often combine their personal and business finances. However, this is a big ‘no-no’ and can make the accounts very confusing. Combining both the accounts will also prohibit you from clearly seeing how your business is performing and what is the actual operating cost of your startup.
The best remedy for this situation is to keep different records for your business and personal expenses. Bank accounts and record books should be kept completely separate to save yourself from the trouble of segregating them in the future.
3. Being Over Dependent on Software
In today’s digital era, it is necessary to keep all your business records in cloud storage. However, keeping hard records is also necessary. This is because tax authorities such as the IRS prefer to see proper documentation of records. So keeping appropriate hard copies of your financial records is vital.
In addition, technical glitches are a common occurrence in the digital world. In case of a fault, there is a good chance that you will not be able to access your data or even worse – lose it altogether. Moreover, you should not overlook cybersecurity risks.
To save your business records from technical problems, we suggest you create and maintain both – a hard copy and a digital backup of your complete data.
4. Misclassifying Employees
These days business operations are not limited to full-time, on-site employees. Now we also have part-time workers, consultants, and even freelancers working alongside the team. In this case, it becomes very difficult for the business owners to determine who is a staff member and who is not.
If you incorrectly classify your employees, it can lead to a lot of trouble including misfiling taxes and even penalties and lawsuits. To bypass the potential issues, it is best that you work closely together with your bookkeeper and work out the details. A competent bookkeeper will walk you through the differences between a 1099 and W2 employee to ensure that your business is compliant with the law.
5. Failing to Reconcile
Settling the financial records of your business with the bank statement each month is important to determine your financial health. Reconciling will also help you identify how much money you have in hand and pinpoint any errors that may become big obstacles in the future.
Reconciliation of accounts is a pretty straightforward task. All you have to do is compare your record books with the bank statement you get each month to ensure there is no discrepancy. In case you do find an error, we recommend getting in touch with your bank to resolve the issue. You can also go through your previous transactions to point out the disparity.
Perform this process every month in a consistent manner to make sure any bookkeeping errors are successfully mitigated before they become major financial hurdles.
6. Failing to Deduct Taxes
With the emergence of eCommerce, collecting and deducting sales tax has become a complex issue for small business owners. Previously, the only mistake they made was failing to deduct sales tax from the total sales. As a result, they would have to pay a penalty on the pending taxes.
The same is still true. But recent changes to federal law demand stricter action for tax defaulters. In fact, if you don’t pay your taxes in a timely manner, you can end up with a lump-sum surprise at tax time.
To ensure you remain safe from the wrath of tax officials, make sure that you deduct taxes accordingly. It is also a good idea to familiarize yourself with the latest rule changes, so you remain in compliance with the current tax law.
7. Wearing Too Many Hats
Small business owners have a lot on their hands and insist on doing everything themselves. However, sometimes they don’t have the skills to manage accounts and that can really mess up the financial records of your business.
If bookkeeping is not your strongest forte, we suggest hiring a professional bookkeeper. A competent bookkeeper will have the required skill set to do the job quickly and more efficiently. They will also have the talent to indicate any errors in your books that you may have missed. Eventually, having a set of second eyes on your financial records will be extremely helpful. It will save you a lot of time, money, and effort in the long run.
8. Not Making Books A Priority
Truthfully, maintaining financial records is not a glamorous task but it needs to be made a priority. It’s crucial for your small business to maintain financial records accurately as even the smallest of errors can cost a lot in the end.
So make sure you go through the books at least once every month. Communicate with your bookkeeper and financial advisor on a regular basis to keep tabs on your financial health. Reviewing the books periodically will ensure that there are no serious issues down the lane when it comes to your finances.
From single-person establishments to multi-million dollar corporations – no business can escape the mundane task of maintaining the financial books. But even the most competitive business person can make business mistakes, including one of the common bookkeeping mistakes highlighted above.
To avoid these blunders, follow the bookkeeping tips laid out in this article, and make sure you learn about bookkeeping or hire a professional to help you out. Good luck!
- The 8 Top Bookkeeping Mistakes Made By Small Businesses - July 8, 2021