For any small business owner, the ride is an intoxicating concoction of passion, product development, and winning new clients. But in the midst of business-building chaos, there is one key area that is often overlooked: bookkeeping. It’s not the sexiest task, but keeping sound financial records is the lifeblood of a good business. I have found that bad bookkeeping can lead to problems with cash flow as well as with taxes and make poor decisions that hinder growth or even put a company out of business. The more you can predict your common mistakes, the more successful you will be in establishing a strong financial foundation. Here are the most common bookkeeping mistakes small businesses make — and how to steer clear of them.
1. Mixing Business and Personal Finances
This is the greatest mistake of small business bookkeeping. The misunderstandings around the use of a personal checking account or credit card for business purchases (or even the reverse) simply create a tangled web of confusion to unsnarl when tax season arrives.
- The Risk: You leave yourself as absolutely guessing as possible about your true business profitability, your true eligible tax deductions, and your capability of defending them all in case your expenses are subjected to audit scrutiny. And it dilutes one of the legal protections offered by structures like LLCs.
- How to Avoid It: Open a separate business checking account and obtain a business credit card as soon as you launch your business. You should pay for as many of your business expenses as possible from these accounts – and not incur any personal expenses on them. This simple separation saves countless hours and headaches.
2. Neglecting to Reconcile Accounts Regularly
Reconciliation is the act of ensuring that your internal financial records (e.g. in your accounting software) match your external records (such as your monthly bank and credit card statements). For many owners, it’s a tiresome task that they let fall by the wayside for weeks.
- The Risk: Unreconciled accounts are a breeding ground for errors. Unauthorized transactions (perhaps there were too many for you to easily notice?), duplicate payments, or bank errors: any number of these could slip right by you. Your cash balance will never be what you think it is, which can mean making big financial mistakes based on the wrong information.
- How to Avoid It: Set a standing time once a month to reconcile all accounts, and stick to it as a non-negotiable appointment. Modern accounting software such as QuickBooks or Xero offers built-in tools that reduce the time investment required to perform this the way it used to be done. Consistency is key.
3. Poor Documentation and Receipt Management
A shoebox full of receipts is not a bookkeeping order. Not properly writing up transactions — or discarding receipts entirely — is a one-way ticket to trouble.
- If you have no documents to back up your business expenses the IRS may disallow the deductions in the event of an audit, and penalties can be substantial. And it’s hard to keep a record of what you’ve paid and who owes you money.The Risk: If you don’t have proper documentation, you can’t prove to the IRS in an audit that you were entitled to the business deduction, which could result in disallowed deductions and hefty penalties. It is also not easy to keep tabs on what you paid for and who owes you.
- How to Avoid It: Go digital. Take pictures of receipts on your phone when you make a purchase. 4-Use apps integrated with your accounting software to log and categorize expenses for you automatically. Set up an organized digital filing system for invoices, receipts, and other financial documentation.Go digital. Take a picture with your smartphone or scan the receipt as soon as you purchase them. Leverage applications that integrate with your accounting system and will automatically record and classify expenses. Dedicate a digital filing system to invoicing, receipts and financial records.
4. Misclassifying Employees as Independent Contractors
This is a complex but critical distinction. It’s too expensive — and has too many potential legal downsides — to get wrong. Workers are entitled to payroll taxes, benefits, and overtime pay; independent contractors are not.
- The Risk: The IRS. has extremely stringent rules on classification. Classifying an employee as a contractor by mistake, you could be on the hook for back taxes, penalties, and omitted benefits. And the cost can be high enough to put a small company out of business.
- How to Avoid It: Read the IRS rules on classification, which turn on behavioral control, financial control, and the type of relationship between the parties. If it still feels too confusing, taking a step back and having a chat with a good accountant or HR representative is likely a good idea to make sure you’re going to be making the right call.
5. Trying to Do It All Yourself (The DIY Trap)
A lot of entrepreneurs do a little bit of everything, going between CEO and marketer and customer service rep at the drop of a hat — and while a can-do attitude is friendly and all, doing your own, detailed bookkeeping without the know-how is just asking for trouble.
- The Risk: Failing to understand accounting can cause errors in categorization, missed deductions and inaccurate financial reporting. The hours spent grappling with spreadsheets and software is also time away from revenue-producing tasks like strategy or sales.
- How to Avoid It: Recognize the limits of your genius. Spending on reliable bookkeeping assistance often means investing in the financial health of your business and yourself, and can preserve your sanity as well. The resulting clean and accurate financials also free up your time – time to be you, the boss.
6. Ignoring Accounts Receivable
You’ve performed the service or sold the product and sent the invoice. The job is done, right? Not if you don’t get paid. If you are not aggressively managing your accounts receivable (money owed to you), it’s a direct attack on your cash flow.
- The Risk: Failing to understand accounting can cause errors in categorization, missed deductions and inaccurate financial reporting. The hours spent grappling with spreadsheets and software is also time away from revenue-producing tasks like strategy or sales.
- How to Avoid It: Recognize the limits of your genius. Spending on reliable bookkeeping help often means investing in the financial health of your business and yourself, and can preserve your sanity as well. The resulting clean and accurate financials also free up your time – time to be you, the boss.
Conclusion:
Ultimately, good bookkeeping is the unseen engine of a small business’s successes, turning raw data into a guiding principle that informs policy-making, legality, and profitability for the future. Otherwise, business owners can protect their businesses from potential failure and build the financial base upon which to succeed by recognizing the primary issues that plague the early stages and taking the necessary action to minimize their occurrence. For so many, one of the strongest sources of clarity and confidence comes from relying upon support from a trusted provider of reliable bookkeeping assistance is an investment that provides peace of mind and allows leaders to direct their attention to expansion and creativity, knowing that their financial operations are in capable hands.
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