While bookkeeping isn’t most business owners’ favorite task, it’s a critical component of running a successful company. Accurate and organized financial records allow you to make informed decisions, manage cash flow effectively and qualify for tax deductions.
Mistakes in your books can be easy to overlook, but catching and correcting them can save you time, stress and money.
1. Not keeping good records
A solid bookkeeping system is a key part of running a small business. It helps you monitor cash flow, qualify for tax deductions and make savvy financial decisions. But if you’re not doing it correctly, you could end up with big problems.
It’s easy to shrug off the little expenses that pop up here and there, but if you don’t track them properly, it can throw off your numbers and give you a false picture of how your business is doing. It’s also important to back up your records, so if you have a technical glitch, you won’t lose all of your data.
Another common mistake is mixing personal and business expenses together. This can cause trouble for a number of reasons. It makes it difficult to keep track of business expenses, and it can also lead to tax complications. For this reason, it’s crucial to have separate bank accounts for your business. Having a separate account will make it easier to reconcile and audit your books. It will also ensure that you don’t spend business money on a personal purchase, which could have a negative effect on your company.
2. Not implementing a system
One of the biggest mistakes business owners make is not implementing an accounting system. This can lead to a lot of problems for your business. For example, without a clear workflow and data definition, it will be difficult to build reports that are meaningful for your business. It can also be hard to determine whether your system is performing as intended and if the company is meeting its goals.
Another common mistake is failing to track all of your reimbursable expenses. This can be a big problem for small businesses because it can lead to losing money and not qualifying for tax deductions. To avoid this mistake, create a system that makes it easy for employees to log all expenses and income. It is important to train employees on the new system to ensure they are comfortable using it.
Having a good bookkeeping system can be the difference between a successful business and an unsuccessful one. Whether you have a dedicated accounting professional or are handling the books in-house, it’s critical to understand the most common bookkeeping mistakes so that you can avoid them. By avoiding these mistakes, you can be sure that your financial records are accurate and up-to-date.
3. Not doing reconciliations
Reconciliation is an accounting procedure that compares two sets of figures to ensure they agree. This allows you to see if there are discrepancies that need to be explained or a warning of fraud.
Reconciliating your bank accounts should be done on a regular basis, typically monthly but it can be as often as weekly or even daily for businesses that have more transactions and cash receipts. If you use automated software (such as Xero or QuickBooks) that can categorize business expenses for you, this process will be much faster and easier to do.
There are a number of reasons why you might have discrepancies between your financial records and your bank statements. These may include duplicate entries, missing transactions or mismatched amounts. Some of these discrepancies can be easily explained such as bank fees or taxes, but unexplained ones may be a sign of fraud or cook-the-books accounting.
Manual reconciliations are a huge burden on accounting teams, adding to the workload and potentially creating burnout. The right automation can help to streamline the process, so you can get to the bottom of those unexplained discrepancies. This will allow you to make better decisions for your business.
4. Not hiring a professional
There comes a point when a small business grows to the point where it’s no longer feasible for a founder to handle all of the bookkeeping responsibilities. It may be time to hire a professional.
It’s important to remember that financial records need to be accurate in order to monitor cash flow, qualify for tax deductions, budget future expenses and make informed financial decisions. Even a minor mistake can have serious consequences.
For example, a misclassified expense could mean that you miss out on a valuable deduction or fail to qualify for a loan. It’s also a good idea to have separate bank accounts for personal and official business spending. This helps prevent mixing up personal and professional transactions, which can lead to costly auditing problems.
Ultimately, hiring a bookkeeper can help you avoid common mistakes and save you time and money. Professionals like The Bottom Line Denver Bookkeepers can also provide you with invaluable strategic insight and advice for your business, which is something that you won’t have if you manage your books yourself. So the next time you’re tempted to take on the task yourself, remember that it is possible to get things wrong and pay a price later.
5. Not paying attention to cash flow
Often in the early days of business, entrepreneurs handle as many day-to-day tasks as possible themselves, including bookkeeping. This is a good idea in some cases, especially in an effort to save money. However, it’s important to recognize that as your business grows and evolves, some of those day-to-day tasks become much more complicated. As a result, mistakes are more likely and some of them can be extremely costly.
One of the biggest mistakes businesses make with their bookkeeping is failing to pay attention to cash flow. Profit is great but it means nothing if your accounts receivable aren’t keeping up with your expenses. That’s why it’s crucial to regularly review cash flow statements (and ideally have an accountant do this for you).
A cash flow statement will give you a clear picture of the money moving in and out of your business. It can help you identify problems like overspending or paying for expenses at unstrategic times and nip them in the bud. Also, it can help you determine if there are ways to speed up payments from clients, reduce inventory purchases, or reduce capital expenditures. It’s also a great way to see whether you are getting behind with vendors, which is a red flag that it’s time to start addressing the issue hard-core.
6. Not asking for help
When it comes to bookkeeping, mistakes can be costly. They can throw off your numbers and give you a false snapshot of how your business is doing. That’s why it’s important to avoid these common mistakes and to have a professional take care of your books. This will ensure that your numbers are accurate and can help you file taxes, qualify for deductions, understand your financials, and budget for the future.
Asking for help can be hard for some people. They may view it as a weakness or an admission of error. However, it’s important for you and your team to be able to ask questions and receive feedback. It’s also crucial to have a system in place for double checking the accuracy of your books. This can be done by tagging teaming or having someone check the numbers on paper as well as in your accounting software.
It’s also a good idea to have your team regularly bring issues to your attention like overdue balances or charges that don’t seem right. Bringing these items to your attention can prevent fraud and keep your finances in tip-top shape. You can also institute reports that compare month-to-month or year-to-year to help you spot trends and identify areas where the business may need some extra attention.
