It’s true: bookkeeping isn’t the most glamorous part of running a small business. But believe it or not, accurate bookkeeping isn’t just about keeping the tax man happy—it’s a crucial part of the success and long-term sustainability of any company.
Proper financial management ensures that your business stays compliant with tax laws, keeps a healthy cash flow, and lets you make smart business decisions.
However, many small business owners have a hard time with bookkeeping, which leads to financial consequences ranging from minor to catastrophic. In this article, we’ll explore 7 of the common bookkeeping mistakes many business owners make and the actionable steps to avoid them.
Mistake #1: Not Keeping Receipts and Records
The first part of accurate bookkeeping is keeping comprehensive financial records and receipts. Seriously, “just believe me” doesn’t count when it comes to keeping track of expenses and revenue!
Why Keeping Records Is Important
Many small business owners neglect to keep track of all necessary receipts, making it difficult to verify expenses, monitor spending, and provide evidence for possible audits.
No receipt is too small or unimportant, either, as they can affect your business’s bottom line. For example, forgotten receipts for business lunches that could be written off as tax-deductible business expenses are savings opportunities missed.
Records and receipts are important when it comes to taxes, too, as in the case of an audit, the relevant authority will require documentation for any business expenses you’ve claimed. If you’re unable to provide such records, penalties and taxes can be applied.
Beyond taxes, complete records allow you to monitor your business finances and manage your budget effectively. It’s difficult to make smart decisions for your business’s financial health if you aren’t aware of where you’re money is going.
What Type of Documents to Keep
As for what type of records to keep, make sure to include receipts for all business-related purchases, vendor and contractor invoices, and bank statements. Loans, asset purchases, and payroll expenses should be included as well if applicable.
Tips for Keeping Records
To keep track and easily store these documents, consider using a digital receipt scanning app. This allows you to file receipts electronically under the correct income and expense category, saving time and reducing the risk of records getting lost or destroyed.
Don’t forget to keep a backup, too. Having both physical and digital copies is crucial, as well as a procedure for regularly updating and backing them up.
Mistake #2: Mixing Personal and Business Finances
Personal expenses and business expenses go together like oil and water—in other words, not at all. It’s a common mistake made by small businesses, and it can lead to confusion, inaccurate record keeping, and even legal ramifications.
The Problem With Combining Personal and Business Finances
When the two types of finances are combined, the process of tracking business performance, preparing taxes, and making the right business decisions becomes difficult.
Significant problems can arise too in the form of tax penalties. For example, paying for personal expenses through a business account and accidentally claiming them as reimbursable expenses can lead to fines in the case of an audit. If the auditor notices a pattern of this behavior, the consequences can be even more severe.
How to Avoid Mixed Finances
In order to best keep personal and business finances separate, maintain separate bank accounts and credit cards for your small business. This keeps tracking and categorizing expenses properly simple, and ensures your business records reflect the true business activities it conducts.
Furthermore, pay yourself a true salary rather than simply taking random amounts of money from your business accounts. That way, clear financial boundaries are maintained, and you can have a consistent personal income that also contributes to a steady business cash flow.
Mistake #3: Not Reconciling Accounts Regularly
Account reconciliation is the act of comparing the financial records of your business with the bank statements they ostensibly reflect and ensuring they match. This step is essential in maintaining accurate financial records, and yet is regularly overlooked by many business owners.
Why Reconciling Accounts Matters
Firstly, failing to reconcile accounts can have severe consequences. Errors like double or missed payments, incorrect totals, and others can alter your financial statements.
Furthermore, discrepancies can be the result of fraudulent activities (whether by employees or external sources), and detecting them late can mean significant financial losses for your business.
How to Effectively Reconcile Accounts
Reconciling accounts can be done in a few straightforward steps. Gather all bank statements and internal records for the period you wish to reconcile, and compare each transaction between the two sources.
If there are any errors or discrepancies, attempt to identify their causes. These causes could be transactions awaiting processing by the bank, data entry errors, or unauthorized activity. Once you’ve identified the discrepancy, alter your records to match the bank statement.
Mistake #4: Failing to Track Small Transactions
As we mentioned before, no expense or income is too small to keep track of. Although they may seem insignificant, they can add up over time and impact your financial statements.
Why Even Small Transactions Matter
Small transactions matter because they contribute to the overall accuracy of your records. Everything from office supplies, coffee for the lunch room, or parking costs for the business vehicle add up, and making a habit of overlooking them can lead to underestimated expenses and unbalanced budgets.
Some examples of commonly overlooked transactions include minor travel costs, gifts for clients, and small equipment or supplies purchases. If you don’t track them, there’s no way to keep accurate financial data and therefore maintain a complete understanding of your business’s overall financial health.
How to Track and Categorize Small Expenses
Bookkeeping software can prove useful in easily keeping record of all transactions ranging from large to small. Implement a system to consistently input and categorize every expense to ensure that nothing is missed.
Additionally, setting a threshold for petty cash expenses and tracking them diligently can help in maintaining accurate records, as can regularly reviewing your expense reports to identify any overlooked small transactions.
Mistake #5: Not Backing Up Financial Data
Nowadays, losing your financial data doesn’t just happen from fire or natural disaster—it happens from digital system failures, cyberattacks, and accidental file deletion, too. Not backing up financial data puts your business at risk, and it’s a mistake all too many business owners make.
Why Backups are Essential
Losing your financial records can have serious consequences. Permanent loss of financial data can disrupt business operations, leading to delays in decision-making.
In case of a system failure or other form of data loss, the ability to restore your financial data from a backup can prevent extended downtime and maintain continuity—as opposed to the slow and costly process of recovering without backups.
Tips for Backing Up Financial Data
Cloud-based bookkeeping software with a scheduled automatic backup can provide an easy way to ensure your data is safe and secure. Furthermore, keeping your backup data on an external hard drive or server (ideally in a separate location) gives you an extra layer of security.
To prevent cyber threats, implement data security measures like password hygiene, encryption, and user authorization protocols to ensure only those who should have access are able to view and edit your financial records.
Mistake #6: Procrastinating on Bookkeeping Tasks
Procrastinating on bookkeeping tasks can create a backlog of unrecorded transactions and missed deadlines, resulting in penalties and increased stress. Bookkeeping might not be anyone’s favorite activity, but doing it regularly is essential to your overall business’s financial health.
Why Regular Bookkeeping Is Crucial
Falling behind on bookkeeping is a common mistake, and it can have serious consequences ranging from missed tax deadlines, fines, penalties, and other unnecessary costs to your business.
Additionally, catching up on a giant backlog of bookkeeping work can be overwhelming and negatively affect morale for those tasked with its completion.
Tips for Avoiding Procrastination
Procrastination is natural, but that doesn’t mean it can’t be avoided. To stay organized, set aside time each week or month for bookkeeping tasks. Having a regular schedule helps to manage workload, and implementing a formal procedure for you or your employees ensures no critical tasks are missed.
Use reminders and alerts, and break down your business bookkeeping into manageable pieces. That way, the processs becomes less daunting and is more likely to be completed. Rewards for completing tasks on time can be effective, too.
In the case that you find bookkeeping overwhelming, consider outsourcing it to professional bookkeepers to in order to free up your time and reduce stress.
Mistake #7: Trying to Do Everything Yourself
Finally, many small business owners make the mistake of trying to perform all bookkeping tasks themselves. Stretching oneself too thin is a common problem, but can be avoided with the right approach.
Why Doing It All Yourself Is Harmful To Your Business
While it may seem cost-effective initially, handling all bookkeeping tasks oneself prevents you from focusing on core business activities—like delivering value to customers, for example.
Handling bookkeeping tasks without professional help can be anywhere from difficult to impossible, depending on the nature of your business. The likelihood of errors increases when you’re wearing too many hats, potentially leading to inaccurate financial records.
Strategic planning, business growth, and other essential parts of your business can suffer when you’re pre-occupied with bookkeeping, too. Although you may not realize it, you may also lack the expertise needed to handle complex financial transactions and regulatory compliance matters that may come along, leading to increased risk of mistakes.
Why Outsourcing Your Bookkeeping Is Beneficial
Outsourcing bookkeeping tasks can provide several benefits. Professional bookkeeping services ensure that your records are compliant, accurate, and less likely to incur penalties.
Outsourcing saves time, too, allowing you to focus on growing your business, building revenue, and providing service to customers. Moreover, professional bookkeepers can equip you with valuable financial advice, allowing you to make informed decisions that can optimize and streamline your operations and financial management.
Consider Precise Ledger for your comprehensive bookkeping needs. Our experienced team ensures you’ll have accurate, up-to-date financial records without the hassle of handling it yourself.
Conclusion
By implementing the tips in this article, you can improve your bookkeeping practices and avoid costly errors. Avoiding these common mistakes lets you maintain healthy cash flow, stay compliant, and make well-informed business decisions.
However, managing bookkeeping tasks on your own can be time-consuming and stressful. Precise Ledger’s bookkeeping services offer a convenient, affordable solution. Our experienced professionals will handle all your bookkeeping needs, ensuring accurate, up-to-date financial records and helping you avoid costly mistakes.
With plans starting at just $140 per month, you can have peace of mind knowing your books are in good hands. Contact us today to learn more about how we can help you streamline your bookkeeping and focus on growing your business.
