Did you know that there are more than 582 million entrepreneurs in the world?
Running your business is as fulfilling as it is nerve-wracking. From getting a chance to help your community to scheduling your work hours, starting your business allows you to be your own boss. However, there is more to owning a business than service or product creation and marketing.
While your products and services represent your brand, keeping tabs on your finances is essential in running a successful enterprise. This is why bookkeeping should be a priority for every business owner.
To effectively meet your company’s bookkeeping needs, you need to know what can hinder your progress. Below are some business bookkeeping mistakes that you should be aware of and how to avoid them.
Not Keeping Accurate Financial Records
Inefficient business financial records management can lead to costly consequences. These include:
- Cash flow issues
- Trouble tracking expenses
- Audit risk
- Difficulty preparing tax returns
- Missing out on tax deductions
- Inaccurate financial statements
- Legal implications
- Filing for bankruptcy
To avoid these issues, you need comprehensive and accurate financial management. This means keeping complete and up-to-date records of all your financial transactions. While it may seem like a daunting task, it is an essential part of business bookkeeping.
Having detailed and exact records will allow you to maintain normal and efficient operations within your company. What’s more, it ensures your business can keep up with a growing client base and adjust to necessary changes.
Not Separating Business and Personal Finances
As a business owner, you may decide not to separate your personal and business finances, thinking it will save you time. But it can lead to more financial problems in the long run. When you mix your business and personal finances, it can be challenging to keep track of business expenses and income.
This can lead to overspending, missed deductions, and increased audit risk. Also, it prevents the protection of your personal assets in case your business experiences financial hardship.
Separating your business and personal finances with separate bank accounts can be beneficial. By having an account that only caters to your business, you have a clearer picture of your expenses and cash flow.
Apart from setting up a business checking account, you can also get a separate business credit card. Additionally, you can mark your business bank cards so you don’t confuse them with your personal cards.
Failing to Track Your Inventory
Your inventory is an important asset that plays a major role in your ongoing business operations. It contributes to revenue generation. But if you manage it incorrectly, it can lead to a lot of financial problems.
Without accurate inventory records, you may not have the expenses and cost of goods sold allocated appropriately. This can inflate your gross profit and inventory assets. As a result, it can lead to cash flow issues.
A lack of detailed information can cause you to spend money on items that aren’t profitable for you. It also makes it difficult to manage your finances.
You can avoid this business bookkeeping mistake by ensuring you keep clear records of items in your inventory. The inventory information should include barcode data, SKUs, suppliers, and more.
Not Paying Attention to Your Sales Tax
Unless your business is located in a state that does not impose sales tax, you should never ignore your sales tax. If your business doesn’t stay up-to-date in sales tax collection and reporting, you may be subject to interest charges, penalties, and fines. In extreme cases, you may face criminal charges.
Aside from neglecting your sales tax, entering incorrect sales data can also mess up your bookkeeping. This is because inaccurate total sales can lead to the wrong amount of sales taxes due.
To ensure your sales taxes aren’t neglected, hire a bookkeeper. They’ll ensure you get correct and up-to-date reporting of accrued total sales and the exact amount of sales tax you should pay. What’s more, they’ll ensure you pay your sales tax on time.
Ignoring Petty Cash Expenses
Most businesses tend to keep petty cash on hand to meet small incidental expenses like office supplies. But just petty cash withdrawals are small and insignificant doesn’t mean you should neglect to keep tabs on them. It can lead to a lot of accounting mistakes down the road.
Without a clear record of where the petty cash is spent, you won’t be able to maintain accurate business financial records. Apart from leaving you with an incomplete and erroneous picture of your company’s financial situation, it may also lead to wasteful spending, theft by unscrupulous employees, and faulty accounting.
This is why you should keep tighter controls over how your business uses petty cash. You can achieve this by setting a spending limit, knowing who has access to the petty cash, and keeping receipts for purchases made.
A simple solution can be to arrange them in a folder and keep them away in a designated drawer. Also, there are mobile applications that help in taking pictures of such receipts and organizing them accordingly.
Not Classifying Your Employees Properly
Business operations are no longer just limited to full-time, on-site employees. Today, your company can have part-time employees, freelancers, and even consultants. In this case, it can be challenging for you to determine who is a staff member and who is not.
But part of managing business finances is being able to know the number of employees you have and the classification that they hold.
When you classify your employees the wrong way, it can lead to misfiling of taxes, tax penalties, and even lawsuits. Working with an experienced bookkeeper and labor and employment lawyer can ensure your finances are in order and maintain your business compliance.
Overlapping Expenses Categories
One of the most common bookkeeping issues is creating overlapping categories for expenses. Maintaining a clear record of expenses is vital for more efficient bookkeeping. While most costs incurred at a business are usually straightforward, you can fail to enter expenses under the right category or create duplicate categories.
Without appropriate categorization of expenses, you are more likely to group the wrong items. As a result, it may lead to miscategorization or over-categorization of expenses.
For proper categorization, utilize general bookkeeping guidelines for standard categorizations and clean up your books. This way you can get a clear picture of your financial position and save a lot of money.
Not Budgeting or Forecasting Properly
Bookkeeping for budget planning affects how predictive your forecasting ends up being. It makes it easy for you to solve problems when they come up. What’s more, you can use it to reduce your tax burden.
But if you fail to create a budget, it can be hard to control your expenditure. This can affect your bookkeeping records. You won’t have a clear understanding of your cash flow. As a result, you can end up overspending and fall into debt.
Additionally, inaccurate bookkeeping can lead to poor budget estimations in the future. To avoid messy bookkeeping records, you should create a proper budget. This will ensure that your books are in order so that you are on track to achieve your financial goals.
Not Having a Secure Records Backup
Bookkeeping has gone digital. You can now keep your records online via a local server or the cloud. Digital bookkeeping allows you to save time, cut costs, and keep consistent records. But improving bookkeeping systems comes with its challenges.
When dealing with the cloud, technical issues can arise. Your system may acquire a virus and fail. Also, you may face potential fraud from hackers. This can cause you to lose your financial data. Not having a secure backup means you won’t be able to recover your data.
Having backups is essential for your business to bounce back faster after losing your bookkeeping records. As a business owner, you should consider backups either on the cloud or on separate hard drives. In addition, ensure you keep your paper records safe.
Neglecting to Review Financial Statements
Financial statements contain important information about your business’s health. It also helps internal and external stakeholders to make key management and investment decisions with confidence.
Another common bookkeeping mistake business owners make is neglecting to review their financial statements. This can cause you to make poor financial decisions. What’s more, it may throw off investors willing to invest in your business.
As an entrepreneur, make it a habit to go through your financial statements. If you don’t understand the cash flow statements, income statements, and balance sheets, ask your bookkeeper to explain everything. This will ensure you stay up-to-date on how your business is doing financially.
Not Keeping Track of Expenses
Failure to keep track of your expenses is a major business bookkeeping mistake. Not only can it create cash flow issues but it can also lead to inflated profits and increase the risk of an audit. It can also make you lose out on tax deductions.
To avoid these issues, it is important to keep timely and careful track of all your expenses as you accrue them. From employee salaries to costs of products and services, make sure each expense is traced back to the record books. This will also make it easy to trace your profits.
Not Reconciling Accounts Regularly
When you fail to reconcile your accounts, it leaves you running your business just off of intuition. This means you won’t be able to make informed data-based decisions. As a result, your business may fail.
Reconciling your books according to the recent bank statement is a fundamental task if you want to make ROI-efficient decisions. Ensure you carry out the reconciling every month so you can know the current state of your financial health.
With a regular and comprehensive reconciliation, you will be able to know how much money you have on hand anytime. In addition, you can discover any errors made by banks before they become major hurdles in your financial plan.
Throwing Away Receipts
Some businesses make the mistake of throwing away a great number of useful receipts, especially if the amount is $75 or less. If you don’t keep your receipts, it can be challenging to file your business taxes. Also, it can be hard to back up the deductions you made on your tax return during an audit and may lead to fines.
One way to ensure proper bookkeeping is to save all your receipts. With a little organization, keeping receipts doesn’t have to be stressful. You can file the receipts or take pictures of them on your phone and store them in Dropbox, Google Drive, or Evernote.
Trying to Do it All
About 60% of business owners say they aren’t confident enough to maintain finance and accounting books. Most of these business owners try to maintain their books, despite having little to no understanding of finance.
While bookkeeping is vital in running a business, not everyone is good with numbers. You may not know how to record each transaction and it may lead to costly errors. This is why you should consider hiring a professional bookkeeper to sort out your business finances.
They have the needed skill set to perform accounting tasks fast and efficiently. You can also take a bookkeeping class to understand the fundamentals.
Once you hire a bookkeeper, it is essential to foster good communication with them. Ensure you involve and integrate them with the on-goings within your business. Not only can they keep track of your financial dealings, but they can also manage your budget, inventory, and payroll.
Also, make sure your bookkeepers have open communication with other employees. It allows them to speak directly to the concerned party when an issue arises.
Avoid These Business Bookkeeping Mistakes
As an entrepreneur, you cannot escape the task of maintaining your books. To avoid the aforementioned business bookkeeping mistakes, you should consider hiring Klean Books.
Our experts are dedicated to maintaining your books and providing accurate and timely reports that help grow your business. Get in touch to get a free live consultation.