Bookkeeping is one of the hardest aspects of running a business for many owners, yet it is also one of the most important. Of course, at BKE, we always recommend hiring a reputable, high-quality third-party bookkeeper, given the ever-increasing benefits of finance process outsourcing.
But many small businesses still do their bookkeeping in-house, and there are some mistakes that are more common – and more significant – than others.
Let’s look at several of the biggest bookkeeping mistakes we see over and over again, and how business owners and managers can correct them.
1. A DISORGANIZED CHART OF ACCOUNTS
The chart of accounts can be an extremely powerful tool, but for many small businesses they hamper rather than improve bookkeeping.
One common problem is that the Chart of Accounts was not designed for their specific type of business, nor for generating reports that show management what is really going on “under the hood” and help drive informed decisions for the future.
Another common issue is the Chart of Accounts that has become bloated and disorganized. Over time, new categories or codes have been added without regard to the initial blueprint of the chart, resulting in confusion that makes both entry of new data difficult and understanding previous data a challenge.
Check out this previous blog post for tips to create a better chart of accounts.
2. USING PERSONAL FUNDS FOR BUSINESS EXPENSES
Many small business owners make the mistake of using personal funds to cover business expenses, especially when it seems convenient at the moment. But doing so is problematic.
First, it makes tracking actual business cash flow difficult, especially if the business owner isn’t rigorous about keeping records.
Second, it can put the owner’s personal funds at risk if there is a business failure. The entire purpose of setting up an LLC, S-Corp, or other structure is to protect the owners’ personal funds in the event of lawsuits or bankruptcy, but when business and personal funds are mixed, those protections may be lost.
Make it a rule to never mix business and personal funds. Get a separate business checking account and a separate business credit card, and commit to always using them for business purposes.
3. NOT REVIEWING FINANCIAL STATEMENTS
Financial statements such as Profit/Loss statements and cash flow statements provide an in-depth view of the overall health of a business. They help owners and managers see the big picture and make informed decisions about the future.
One of the biggest benefits of accurate, informed bookkeeping is being able to create useful reports based on real numbers, so that management can answer questions like :
· “What is driving profits?”
· “Where can we cut costs?”
· “Is there any evidence of fraud?”
· “Can we invest in growth, or should we wait?”
Business owners and managers should commit to regularly generating and reviewing financial reports, at least quarterly and potentially much more often, depending on the individual business.
You can read more about generating and evaluating financial reports that make a difference here.
4. MISCLASSIFYING EMPLOYEES AND CONTRACTORS
One of the key decisions a bookkeeper must make is how to classify each worker. The IRS takes the classification of workers very seriously, mostly because so many business owners try to take advantage of the rules.
As an employer, if you misclassify a worker as a contractor instead of an employee – intentionally or not – you could be on the hook for back-taxes, penalties for not withholding taxes, and penalties for not providing benefits such as health insurance that your classified employees receive. At the same time, there are tax benefits you would have received if they had been classified as an employee, which you will not be able to recover.
Always get the most up-to-date, accurate information about how to classify workers as part of your bookkeeping process.
5. LOOSE PETTY CASH PROCEDURES
Too many small businesses take the work “petty” to heart when it comes to petty cash, but a loosely-managed system can cause real bookkeeping and cash flow hassles.
It’s important to create an organized system with clear protocols for who can handle the money, how much they can spend, and what receipts need to be submitted once funds are spent. This level of organization helps prevent unnecessary spending and keeps track of where funds are distributed so there are no discrepancies between income and expenses. Doing this on a regular basis also helps prevent fraud by ensuring all transactions are tracked accurately and reported in a timely manner.
6. HAPHAZARD SALES TAX COMPLIANCE
Keeping up with sales taxes can be difficult, but as a small business owner, you must take recording and paying sales tax extremely seriously.
Failing to collect or pay taxes on time can result in serious financial penalties from the government. Depending on your state, these penalties may include interest rate increases on unpaid taxes, late fees, or even criminal charges if intentional fraud is found. Additionally, failure to report income can lead to an audit by the IRS, which could cost your business thousands of dollars in additional fees and expenses.
Recording and paying taxes accurately is also critical for accurate reporting of income within your own business documents. Without accurate records of all taxable income generated by your company, it’s impossible to be sure how much of the cash the company has actually belongs to the company. This makes it difficult to evaluate and predict cash flow and make informed decisions about future investments or changes in operations.
Good bookkeeping is at the core of any successful business, so stop making the big bookkeeping mistakes listed above, and you’ll soon start to reap the rewards.