Many small business owners view bookkeeping as a necessary evil. But the truth is, bookkeeping can either be your greatest friend or your biggest foe.
When done correctly, accurate financial records can be used to measure success and guide future business decisions. When done incorrectly, however, the consequences can be severe, with penalties that may include fines, lawsuits, and/or uncollected tax deductions.
Below is a list of eight bookkeeping mistakes that can cripple small businesses.
Mistake #1: Mixing Business with Personal Finances
It is imperative that entrepreneurs have a separate bank account for business-related expenses. Combining business and personal finances can result in miscategorizing expenses, which can land you in a lot of trouble with the IRS. What’s more is that, once mixed, these expenses can be difficult to untangle.
Mistake #2: DIY Bookkeeping
In an effort to save money, many small business owners choose to do their own bookkeeping. However, they may be costing themselves in the long run due to not having the expertise and skills required to do the job accurately and efficiently. For example, you may be unaware of tax laws that could save you substantial amounts of money.
Mistake #3: Falling Behind
It’s easy to fall behind on bookkeeping when you’re trying to manage all the other day-to-day operations that come with running a business. However, a huge backlog of data can cause a major headache down the road when the information is no longer fresh in your mind. Another reason to stay current is that it makes it easier to spot and reconcile errors as they occur.
Mistake #4: Management by “Bank Balance”
Lots of business owners tend to run their business by just looking at the bank balance to “see how they’re doing,” but you miss a lot of crucial information that way. By having proper bookkeeping, you can review a true profit and loss (P&L) statement that allows you to track your actual income and expenses and see how well your business is performing over time. With this kind of detailed accounting, you can optimize your business to be more profitable and do much more accurate growth planning and goal setting.
Mistake #5: Not Tracking Reimbursable Expenses
Not tracking reimbursable expenses is basically like throwing money down the drain. Using an accrual-based accounting system is the best way to ensure that you’re getting every tax deduction you’re entitled to.
Mistake #6: Receipts Based Bookkeeping
Many business owners spend a hell week or two before tax time trying to pull out every receipt from the last year and add them all up to hand over to their CPA. Inevitably, this leads to problems. Receipts are easy to lose, can fade, or might have come from the wrong account. This is a sure-fire way to miss out on valuable deductions and create a lot of stress. A proper bookkeeping system, based on reconciling all the transactions from your statements, ensures nothing is missed and avoids that paper tornado or shoebox nightmare.
Mistake #7: Misclassifying Employees
Accidentally misclassifying an employee as a contractor may seem like trivial mistake, but it can lead to severe tax penalties and lawsuits. Make sure you differentiate staff members from independent contractors, consultants, and freelancers.
Mistake #8: Not Backing Up Files
Being overly dependent on technology comes with a huge liability should your data become corrupted. Always make sure to keep backup files on hand just in case.
Our advice for avoiding these mistakes? You probably guessed it: hire a professional bookkeeping service (click here to view our flat rate pricing plans). You’ll be surprised by how much time, money, and resources it saves you in the long run.