For small and medium business owners, bookkeeping is usually seen as one of the toughest parts of a job that needs to be done without any glitches. The tiresome and monotonous task of maintaining the books can take up valuable hours of your time which can be put into the things for which you started the business in the first place.
The main reason where most small business owners don’t keep their bookkeeping up-to-date on a monthly basis and this is the biggest bookkeeping mistake done by business owners.
As monotonous as it sounds, bookkeeping can be the source of your success and the biggest driving factor when it comes down to growth and management. It’s the accurate measurement of a business’s financial performance that can effectively expand your business.
But are you worried about your messed up business bookkeeping? Don’t worry about it. Almost every business owner make bookkeeping mistakes. But fortunately, bookkeeping errors can be easily solved if you catchup them timely.
Maintaining accurate books are essential as business owners tend to make decisions based on the financial records of their business.
Here’s a list of 11 common bookkeeping mistakes small business owners make and the ways to avoid them.
1. Inaccurate records:
Poor or inaccurate record-keeping can be the foremost common bookkeeping mistake in business. To forget about small expenses or loose receipts is common and seems impossible to remember everything. Maintaining proper records of financial transactions on a monthly basis can save a lot of your time and money. It provides the essential documentation for IRS audit purposes and saves on your taxes. The potential audit can save you a hefty amount which can be done by providing well-maintained records.
2. Improper categorization of expenses:
In case you do not have enough knowledge of formal bookkeeping or someone you hired lacks the knowledge for the same can become a big problem. Tracking income and expenses accurately under proper categories certain the proper scaling of profitability. It facilitates understanding of tax treatments for every income and expense category which leads to saving a significant amount in taxes as well.
Not having backups can be a serious problem in future prospects of the business. We are the part of the world that heavily depends on technology. Technology dependence can arise errors. There is always room for uninvited chaos which can affect your data for which you need to be prepared. To avoid any bookkeeping error due to data loss, it is essential to keep proper backups for your data and evade potential losses.
4. Not reconciling bank accounts:
Your business can face some serious problems when not having separate bank accounts. Personal and business accounts need to be separated for tracking and reconciliation purposes. Recording financial transactions accurately keeping the business expenses separately from personal expenses.
In case providing documentation to auditors, you may require to offer full records of business-related activities that are kept separate from personal accounts. Make certain that your bank account statements are reconciled on a monthly basis. This will avoid the possibility of error and let you identify loopholes.
5. Lack of Communication:
Bookkeeping mistakes included a lack of proper communication within the organization. it is vital to have robust communications between employees and bookkeepers. Integrate with organizational activities and keep your bookkeeper completely involved to know what’s happening inside and outside the business. This facilitates the bookkeeper to make financial statements that will reflect the rightful operational requirements of your organization.
6. Proper classification of employees:
Businesses have a workforce combined with full-time employees and contractual basis employees. Be certain that these are properly classified in order to avoid overpaying taxes and misfiling tax returns.
7. Neglecting to track reimbursable expenses:
Many if small business owners pay for expenses from their personal repository. As time passes by, there is a risk that these expenses will be forgotten and overlooked which results in the failed account for these reimbursable expenses. This leads to loss of money and lost tax deduction. To avoid such a situation, best to create a policy to make it simple for the business to track and record the reimbursable expenses with ease and consistency.
8. Poor cash management:
One of the major small business bookkeeping tips is to keep the track of your cash flow. Quite often, business owners tend to operate with a small amount of cash with very little knowledge to track it. To avoid such bookkeeping errors, ensure to set up a system which lets you track the cash handy for the business and what is used. Purchasing a petty cash lockbox and keeping receipts could be a good start for all disbursements.
9. Overlooking sales tax:
Small businesses at times neglect to report sales tax. In many businesses, not accounting and not reporting sales tax is a commonly found bookkeeping error. Oversight in reporting sales taxes and collection can lead to notable penalties and fines. On the other hand, incorrect data entry might result in an overstated sales tax and an amount higher for total sales.
10. Wasting out on valuable time:
Small business owners believe in doing their bookkeeping on their own or avoid taking any professional help they need and end up making bookkeeping mistakes. However, we all know how much valuable time bookkeeping demands and putting your time into doing your books on your own, especially when you are not proficient enough for the job.
Time is money, we all will agree with this, and it’s best to take professional help or else hire a professional bookkeeper to complete your accounting books. This way you can save lots of your valuable time, and spend it on the things you started your business in the first place. Leave the tiresome and time-consuming job of bookkeeping to the experts. They know how to record, when to record and what to record.
11. Recording transfers as income:
When you receive payments from different modes via multiple accounts, like PayPal or TransferWise, you preferably transfer the money into business accounts. When you do this, be conscious that your accounting software will normally record that transfer as income. This is important as when you transfer that amount the balance of your business account increases.
To avoid any misunderstandings, make sure you log in and update it immediately in your books as a transfer and not as income. This practice will eliminate any risk of miscalculation in your books while bookkeeping.
Now that you have gone through all the possible bookkeeping mistakes and how one can avoid making those mistakes, look at your business and identify whether they apply to your business. Turn the monotonous tasks of bookkeeping into a successful business weapon and let your company thrive.