7 bookkeeping mistakes to avoid
Keeping track of all your finances and making a record of every transaction may not be the most exciting part of running a business, but it’s critical for success. It’s hard to overstate the importance of bookkeeping, particularly for small businesses that are more susceptible to cash flow problems. Statistics in the US show that 82% of small businesses that failed listed cash flow problems as one of the primary causes.
When running a business, bookkeeping needs to be given the respect it deserves. While there are best practices to follow and plenty of bookkeeper tools to take advantage of, there are also many pitfalls to avoid. Listed below are seven common bookkeeping mistakes to avoid.
#1. Poor record-keeping practices
Bookkeeping success comes down to maintaining a single, comprehensive, accurate record of all the money coming in and out of your business, as well as moving between various accounts. Losing receipts, failing to label online transactions accurately, or keeping records in an ad-hoc, often incomplete manner is an easy way to cause bookkeeping problems down the line.
The ideal solution is to make electronic records for every transaction using accounting software. This makes all the difference, saving you time, preventing missed payments and late fees, and getting you in the best position to deal with the taxman.
Effective record-keeping means you have all the documentation needed to prove your business’s income, whether it is quick and accurate tax filings or handling an audit.
#2. Tracking reimbursable expenses
One of the most obvious ways poor record-keeping can cost your business money is by failing to track all of your reimbursable expenses. Nobody likes paying taxes but paying more than you need to because of a bookkeeping error feels even worse.
Running a business can be hectic, and we often quickly pay for something without realizing or recording it for reimbursement later. Small business owners might pay reimbursable expenses out of their personal accounts and then forget, paying more tax than they should, or having to spend hours combing through their transactions to reduce their tax bill.
With accurate books that include every tax-deductible business expense, you get all the tax benefits you’re entitled to.
#3. Nothing personal, just business
Losing track of reimbursable expenses is one of many reasons why you should keep business and personal accounts separate. When starting a small business, you might choose to skip the fees associated with business accounts and run everything from your personal account.
However, this leads to extremely messy bookkeeping, with business transactions lost in a sea of personal payments. Using a personal account for business makes organizing your business’s finances significantly harder, leading to wasted time and an increased likelihood of errors occurring.
#4. Misclassifying employees
Nowadays, it’s simpler than ever to outsource work and find freelancers online that can help your business. Some independent contractors may become a long working relationship, making it easy to mischaracterize their employment status.
Mistakes when classifying employees can lead to misfiled tax returns, potential overpayments, and maybe even lawsuits. Ensure your books properly reflect who is on the payroll and who is being paid as an independent contractor.
#5. Getting the books and accounts on the same page
Reconciling your books and accounts is critical to running a business and needs to be performed regularly. Reconciliation ensures the expenses from your bank account match those recorded in the company books. Any discrepancy means something has gone wrong.
A common mistake can be recording expenses twice, once when the bill is received and again upon payment. Reconciling helps you catch these errors early and rectify your books to match the true finances of the business.
You know exactly how much money is available with accurate reconciliation of your books and accounts, plus you can quickly remedy any mistakes before they snowball into something serious.
#6. Not making the most of your accounting software
Accounting software packages are excellent tools for bookkeeping. From reconciling invoices with the corresponding payments to connecting online payment solutions or payroll software, it’s much easier to track business finances with technology on your side.
However, every piece of software has a learning curve. You need to know what it can and can’t do and how best to integrate it with existing processes. We often get a new piece of software, skip any tutorials or accompanying documentation, and muddle our way through, learning on the fly to try and get it to do what we want.
This can lead to only half solving the problem and missing a range of functionality that could potentially streamline our bookkeeping practices. If you’re going to pay for software, make sure you take the time to learn all it can do.
#7. Taking on more than you can handle
Bookkeeping involves a lot of repetitive mundane tasks which aren’t typically the ones you look forward to when you go over your schedule. While many people who start small businesses have a DIY attitude and cover as much as they can without paying others, the best approach for some tasks is often to bring in outside help.
With a dedicated bookkeeper to track the company finances, you’re free to focus on other tasks that may be better suited to your skillset or add more value to the business. Leaving it to an experienced professional also reduces the chances of costly mistakes.
Learning from mistakes
Every business, regardless of its size, should keep up-to-date and accurate books. An excellent way to ensure this practice is to learn from common mistakes other businesses make. Looking at these seven easy-to-make mistakes, you can determine if any apply to your existing business practices and keep them in mind for the future.