Many businesses owners try to double as a bookkeeper and end up making mistakes. While it might be easy to brush these mistakes off as no big deal, bookkeeping mistakes can cost you in time, effort, money, and sometimes your entire business. If you’re sweating over how you’ve been handling your books, you’re not alone, and we’re here to help.
Great bookkeeping is the foundation of positive cash flow, and since 82% of small businesses fail because of cash flow problems, an experienced bookkeeper is an essential component to your success. We understand that being a business owner is more than a full-time job and taking on the additional role of a bookkeeper can be too much to handle for anyone. To make it a little easier, we’ve got seven bookkeeping mistakes you need to avoid so you can focus on helping your business thrive.
1. Spending Too Much Time on Bookkeeping
When bookkeeping takes too long because you’re not trained for it, spending time quickly becomes wasting time. By working without a knowledgeable bookkeeper, with systems that aren’t customized for your business or without an understanding of how to classify your expenses, to name a few, you will face numerous setbacks.
Each mistake on this list results in spending too much time on bookkeeping. If these sound familiar, don’t worry, with the help of a skilled bookkeeper you can take wasted time and turn it into something valuable for your business.
2. Avoiding Reconciliation
Reconciliation is the process of checking that your books match your bank statements. Because the process can be tedious, it’s often overlooked or ignored until the last minute. For well-managed finances, reconciliation should be performed on a monthly or even weekly basis.
When you avoid reconciliation, your business becomes susceptible to misreported information. And without reconciliation, you miss out on the opportunity to catch mistakes or even fraudulent activity. A national survey by WePay SMB & Money found that 25% of business owners experience fraudulent or disputed transactions. Missing these transactions can lead to financial loss, and multiple missed errors can really add up.
3. Mixing Personal and Business Expenses
One in five business owners makes the mistake of mixing personal and business accounts. While this might not sound like a big deal, blurring the line between your personal and business expenses only makes the role of bookkeeper even more challenging.
Mixing personal and business finances can lead to difficulties when filing taxes, missed expenses and write-offs, more time spent on bookkeeping, and vulnerability if your business is ever audited or sued. By mixing business and personal expenses you also make it harder to develop a clear understanding of your business finances and it can hurt your personal finances too.
4. Improper Categorization
A successful bookkeeper understands the importance of organization, and for your finances, a big part of being organized is implementing proper expense categorization. Proper categorization keeps your books accurate so you have a clear picture of your financial situation and can make effective choices based on your numbers.
Two main forms of improper categorization are having too many similar categories and having the wrong categories. When you have too many categories that are similar — like a category for office supplies, other supplies, and general materials, for example — your books become chaotic and overwhelming to deal with.
If you have the wrong categories, then you’ll end up with inaccurate books that cause unnecessary stress and confusion. With incorrect categorization, you won’t be able to successfully see business trends and you might end up claiming the wrong deductions. It’s essential to understand your categories, keep them accurate, and make sure they don’t become too excessive.
5. Poor Invoice Management
Invoice management is a big component of cash flow because it determines how and when you get paid. Research shows 41% of small business owners say payment collection is their biggest cash flow management problem. When it comes to getting paid for the hard work you do, there’s more to it than just sending out an invoice.
Common invoice-related mistakes that many businesses make are:
- Not creating clear and easy-to-pay invoices
- Not maintaining an invoicing schedule
- Not enforcing late fees or deposits
- Not initiating reminders
- Not establishing maximum client debts and managing them closely
These mistakes can lead to American business owners spending over $5,000 a year on chasing down payments.
6. Not Keeping Proper Records
Keeping detailed and accurate financial records is imperative to a successful business. Two record-keeping mistakes many business owners make are throwing away receipts and improperly storing invoices.
As a business, you want to keep your receipts, bills, and invoices for as long as the IRS can audit you. Remember, you don’t have to keep stacks of hard copies, all records can be maintained electronically. In the unfortunate event of an audit, you can’t just rely on your bank statements and without well-kept records, you’ll struggle to effectively prove your expenses to the IRS.
7. Not Staying Up-to-Date
If you still use the shoebox method, then it’s time for an upgrade. For effective bookkeeping, you have to keep up with the best systems. Today, there are tons of software choices that do more than just hold your records. On top of keeping organized records for your business, the right software can help you prepare financial statements and projections, help you run your day-to-day finances, and much more.
Growing Your Business: Get a Bookkeeper
Whether you’re starting a new business, are feeling lost handling your own business finances, or just don’t have the time anymore, the help of an experienced bookkeeper frees up your time to focus on the parts of your business you love. And while it’s hard to face an added expense, the right bookkeeper or bookkeeping service will save you more than you spend in both valuable time and money.
You’re great at what you do, so don’t let common bookkeeping mistakes keep your business from thriving. Let Founder’s CPA handle the bookkeeping so you can focus on the more exciting stuff. Contact us today for a free consultation and see how outsourcing bookkeeping needs can help your business grow.