Do you have a small business? If so, it’s time to start thinking about bookkeeping. Even if you are keeping track of your books on paper or in an accounting software package, some mistakes can happen that will cost you money and hassle down the line. This blog post will go over seven common mistakes small businesses often make when they keep their books, so be sure not to do these things.
1. The Benefits of Having a Single Bank Account
One bookkeeping mistake that small businesses make has multiple bank accounts. This can be confusing when it comes to reconciling the books because you’ll be dealing with two different sets of transactions, which will lead to double entries and other mistakes. It also makes processing your payroll easier if all the income for your business goes into one account and simplified tax returns at year-end.
2. Inadequate Record-Keeping
Keeping inadequate records can lead to large amounts of time and money finding missing information when you need it most. In 2017, the IRS received over 92 million pieces of mail from taxpayers looking for help in locating old tax documents – a number has been increasing drastically since 2011 when only 69 million such letters were sent.
3. Expenses are incorrectly classified
Proper bookkeeping requires that all expenses are correctly classified. Expenses need to be matched with the appropriate income source. When this is not done correctly, it can lead to inaccurate financial reports and hinder your ability to make sound business decisions based on data. For example, suppose office supplies were misclassified as a marketing expense instead of an operating expense.
In that case, you’ll have trouble determining whether or not marketing initiatives had any effect on driving revenue for your company. This mistake could ultimately mislead management into taking incorrect actions to boost sales. They may end up spending more money without seeing any return on their investment due to poor analysis of available information.
4. Data backups aren’t kept up to date
A recent survey found that 50 percent of small business owners store their data on an external hard drive. However, 36 percent only backup the information once every week or more than once a week, which leaves them at risk of losing all of their records in case of theft or fire. Additionally, 19 percent of respondents do not back anything up at all.
Have you ever accidentally deleted some critical emails? You will be surprised to know how many people lose precious memories by deleting photos and videos from their smartphones without backing them up right away. In this digital age, when we have so much stored online waiting to be accessed with just one click, why take such risks? So what should you do instead? It is always advisable to keep both physical as well.
5. Petty Cash Management That Isn’t Tracked
Not Having Proper Controls in Place: If your business doesn’t have proper controls, it is easy for employees to take advantage of their access to company accounts or sensitive information. Most small businesses have petty cash to handle minor expenses, but this could become a problem if it isn’t managed correctly. Since no receipts are being kept for these payments, you won’t backtrack the money and will have trouble determining any excess funds.
You need measures that monitor employee activity so that you don’t lose track of just how much they’re spending, what they’re purchasing with the company’s credit card, etc., which leads us to our next point.
6. Hiring an inexperienced bookkeeper is a big mistake
Another common bookkeeping mistake is hiring an inexperienced person to do the job. Hiring somebody who has never worked in your industry or does not understand how your business works will only result in poor quality work and mistakes that need to be corrected later on.
You should look for a professional accountant with experience working for small businesses like yours before you hire them, always insist on references from past customers they have already worked with successfully; that should give you a good idea of the quality of bookkeeping services they provide.
7. Not Interacting with the Bookkeeper regularly
One of the biggest mistakes that small businesses make is not staying proactive with their bookkeeping. Not only should you be reviewing your reports regularly, but you should also be making sure to interact with your accountant or bookkeeper as much as possible so they can ask if there are any questions regarding anything in particular.
Just like how Wit’s recommended hiring an attorney before getting into legal trouble, hiring someone who will look over all of the financial statements and records regularly (often this person may even act more like another staff member than just an outside party) is vital for companies looking to avoid costly accounting errors.
The Bottom Line
Bookkeeping is a technical process that requires lots of attention to detail. You can do many things wrong if you’re not careful – and the consequences will be felt down the road when it comes time for tax season or, even worse, an audit. The last thing any business owner wants is to deal with taxes at less than optimal times.