Small businesses are the backbone of the American economy. They create two out of every three new jobs and account for half (49.2%) of all private-sector payrolls. Yet too many businesses fail because they don’t have a good bookkeeping system in place or they do their own bookkeeping. In fact, according to a study by Sageworks, poor bookkeeping is the second most common reason small businesses fail.
To help you avoid making the same mistakes, we’ve compiled a list of the 15 most common bookkeeping mistakes small businesses make.
1. Not Keeping Accurate Financial Records
One of the most important things a business owner can do is keep accurate financial records. This means maintaining complete and up-to-date records of all financial transactions. This may seem like a daunting task, but it is the key to small business bookkeeping.
Not keeping accurate records can lead to a host of problems, including:
– Difficulty preparing tax returns
– Missing out on tax deductions
– Trouble tracking expenses
– Inaccurate financial statements
– Audit risk
– Cash flow issues
– Inability to forecast and budget properly
2. Not Separating Business and Personal Finances
Many small business owners choose not to separate their business finances and personal finances, thinking it will save them time. However, this can lead to more financial problems in the long run. When business finances and personal finances are mixed together, it can be challenging to keep track of business expenses and income, which can lead to missed deductions, overspending, and increased audit risk. It also prohibits the protection of your personal assets in the event your business experiences financial hardship. You may be unaware of how much debt you’re actually carrying or how much you’re spending each month, and you won’t be able to track accurate business profits. It is always best to separate your business expenses and your personal expenses with separate bank accounts.
3. Many Business Owners Do Not Track Inventory
If you run a business that sells products, it is important to track inventory levels carefully. Maintaining proper inventory levels helps to ensure that products are available when customers need them, but it also helps prevent financial problems. Not tracking inventory makes it difficult to manage finances correctly. Without accurate records, you may not have the cost of goods sold and expenses allocated appropriately, inflating your gross profit and inventory assets. This can lead to misunderstanding the health of your business and result in cash flow issues. As a result, all of this can have severe implications for a business’s bottom line.
4. Neglecting Sales Tax
Sales tax collection is one of those pesky necessities that can be easy to forget or get wrong, which can have serious consequences if neglected. Depending on the state, sales tax may be due on a monthly, quarterly, or annual basis. If businesses don’t stay current on collecting and reporting sales tax obligations, they may be subject to penalties and interest charges, or even liens against the business. In some cases, state tax authorities may even pursue criminal charges. Given the potential consequences, it’s important for businesses to keep on top of their sales tax obligations. The best way to do this is to properly set up the company’s software to accurately track sales, allowing for correct and up-to-date reporting of accrued sales tax commitments and a system for satisfying sales tax payments so that it becomes part of the normal routine.
5. Ignoring Petty Cash Expenses
Petty Cash is often ignored within small businesses. Because the amount is generally insignificant and meant to be used for minor incidentals such as supplies or office needs, petty cash is often forgotten about. Without a clear record of where this money was spent, accurate expense records cannot be maintained. Internal policies should be in place within your business to limit the risk of theft or fraud. All receipts should still be kept and expenses entered, allocating the use of those funds correctly. The petty cash account should also be reconciled on a monthly basis.
6. Failing to Stay Organized
One challenge many business owners have is staying organized. There are a lot of things that you need to do to run your business and sometimes being unorganized with the finances gets out of hand. This can manifest in a number of ways, such as:
– Higher stress
– Lower Profits
– More Mistakes, some of which can result in business failure
All of these things can lead to problems down the road, so it’s important to stay organized from the start. If you are feeling unorganized and want to learn more about getting your business organized, schedule a call with Koda Bookkeeping. We can help keep your finances in order so you can focus on driving your business toward higher profits!
7. Not Recording Sales Appropriately
Another common mistake businesses make is not recording sales correctly. This can lead to a number of problems, such as:
– Inaccurate financial statements
– Difficulty preparing tax returns
– Trouble understanding where your business stands financially
8. Not Budgeting or Forecasting Properly
Regardless of whether you are running a business or managing your personal finances, proper budgeting and forecasting are essential to achieving your financial goals. Without a clear understanding of your income and business expenses, it can be very easy to overspend and find yourself in debt. Additionally, failing to budget for future costs can leave you unprepared when unexpected expenses arise. By taking the time to plan ahead, you can ensure that you are on track to achieve your financial goals.
9. Not Maintaining Records Causes Bookkeeping Mistakes
Maintaining records of receipts, bills, and invoices is another important task for businesses. This helps to ensure that you have a paper trail for all transactions, which can help with bookkeeping, tax preparation, and understanding your financial situation. You should have a process in place so in case of an audit you can glide through with ease. There are many ways to track receipts and invoices, including using software or apps.
10. Wasting More Time Than You Need to Spend
According to a survey of small business owners, the average business owner spends 7 hours per week on bookkeeping tasks. That’s nearly a full work day! With all of the other demands of running a business, it’s no wonder that many small business owners feel like they’re wasting their time on bookkeeping.
11. Not Keeping Track of Expenses
Not keeping track of expenses is a major financial mistake. Not only can it lead to inflated profits, but it can also create cash flow issues and increase the risk of an audit. To avoid these problems, it is essential to keep timely and careful track of all expenses. This includes everything from the costs of goods and services to employee salaries and travel expenses. By promptly capturing all expenses accurately, businesses can ensure that their profits are precise and can easily make quick changes if needed. Coding expenses that belong in your personal bank account as an income and expense category in the business financial statements will negatively SKU your business performance.
12. Not Reconciling Accounts Regularly
Not reconciling your accounts leaves you effectively running your business blind or off of intuition. You want to make informed data-based decisions, and if you do not have up-to-date financials, you do not have a clear picture of your company’s health. Therefore, reconciliation is essential to ensure that your business is running smoothly and you, the owner, are making intelligent well-informed decisions. Make sure that your bank statements are properly reconciled every month so you don’t find major bookkeeping mistakes in the future.
13. Not Hiring a CPA
Many small business owners choose to forgo hiring a certified public accountant (CPA), opting instead to handle their own financial affairs. While this may save on short-term costs, it can ultimately lead to significant problems down the road. Without the help of a CPA, business owners may miss important tax deadlines, take inappropriate deductions, or make errors that could trigger an audit. In addition, CPAs can offer valuable insights into financial trends and help to identify potential problem areas. As a result, failing to hire a CPA can be a costly mistake that could jeopardize the future of your business.
14. Throwing Away Receipts
One way to ensure accurate bookkeeping is to save all receipts. Whether it’s a receipt for office supplies or a client lunch, each provides valuable information that can be used come tax time. As a small business owner, it’s best to get into the habit of always tucking them away. With a little organization, saving receipts doesn’t have to be a hassle. Set up a system that works for you, and bookkeeping will be one less thing you have to worry about.
15. Not Seeking Professional Bookkeeping Help
Many businesses try to do their own bookkeeping, but this can often lead to more problems than it solves. If you’re not sure how to handle your finances or you’re having trouble staying organized, hire an experienced bookkeeper. Pick a small business bookkeeper that matches your goals and values! If you have any questions about small business bookkeeping & accounting, schedule a call with Koda Bookkeeping. We are here to help you build and maintain the financial health your business needs and keep you from making these common bookkeeping mistakes. Your success is our success!
Final Thoughts on Bookkeeping Mistakes
Making any of these common bookkeeping mistakes can have serious consequences for your business. From missed tax deadlines to inaccurate financial data, the ramifications can be costly and damaging. To avoid these problems, it is essential to carefully track expenses, reconcile accounts regularly, and hire a virtual bookkeeper. By taking these simple precautions, you can help ensure that your business remains healthy and prosperous.