Many small business owners just starting out tend to take on many tasks they didn't foresee taking on, like bookkeeping. While it’s perfectly fine to be your own bookkeeper when your business is just getting off the ground, you want to ensure the job is done correctly, so your books reflect your true financial situation.
As mundane as it may appear, bookkeeping is actually your biggest secret weapon when it comes to business management and growth. Being a small-business owner, you’ll find yourself consulting your financial records while planning for the future, making significant decisions, and of course, preparing your taxes.
Errors in accounting happen to everyone. But, you should try to avoid them whenever possible. Here are some common mistakes made by novice bookkeepers and tips on how to avoid them.
1. Not properly dividing business and personal expenses
When your business is just starting off, you might find yourself using your personal bank account or credit card for the occasional business purchase. Or you may make a personal purchase with business funds.
This makes for messy bookkeeping because all these transactions must be sorted out later on. You also risk losing track of business expenses, which could cause you to miss out on beneficial tax write-offs.
You can steer clear of this situation by opening a dedicated business bank account early on. Your books will be much more organized and easier to maintain. Trust me, you will thank yourself later.
2. Improper or poor record keeping
Improper or poor receipt and record keeping is common for businesses. It is easy to lose receipts or forget about those small expenses that seem insignificant.
Maintaining accurate records on a monthly basis and with a proper filing system can save you time and money on your income taxes.
It can also provide the necessary documentation in the event that you are audited by the IRS. In case of a potential audit, accurate records of income and expenses could end ups saving you thousands of tax dollars.
We recommend Hubdoc for all your recording keeping needs!
3. Not reconciling your books
Reconciliation is the process of lining your books up with your bank statement. It consists of matching your bank transactions to those in your books, as well as accounting for any differences between the two records.
The goal is to keep your books up to date so you understand your financial situation at that moment. It’s generally good practice to reconcile on a monthly basis. The longer you go between reconciliations, the more out of touch you can become with your business’s finances and the harder it can be to find and correct errors.
4. Improperly categorizing expenses
Correct expense classification is not only crucial when it comes to tax time. Without a good system, the net profit numbers you look at regularly will be off the mark – giving you an inaccurate picture of the health of your business.
Many times, business owners don’t find out about expense mistakes until they are getting affordable tax prep services and it is pointed out to them. There are several ways that you can prevent these problems from becoming a bigger issue in the future. These ways include; re-evaluating your expense categories regularly, always double check your work, and consult a professional when needed.
5. Doing it yourself for too long
As a small business owner, you might feel like you need to do it all. Keeping the ship afloat on your own is an honorable notion. But, it’s OK to take some of the stress out of tasks that don’t generate revenue. As your company becomes bigger and more complex, so does the bookkeeping.
Managing your books is time consuming and doesn’t produce cash. You need an effective way to handle accounting so you can get back to running your business without facilitating accounting errors. Hiring a bookkeeper will likely pay off in the long run, since you’ll save time and avoid costly errors.
Now that you have read through the 5 most common bookkeeping mistakes, take a look at your business and determine whether any of these apply to you. Now is the time to make some easy changes to turn that mundane task of bookkeeping into your secret weapon for business management and success!