Compared to large entities, small business owners have fewer resources available at their disposal. This often means that the manager ends up wearing more than one hat and has to address issues at the back office as well.
One of these tasks is 'bookkeeping.'
At first glance, bookkeeping may seem like a simple enough matter - especially if you are familiar with the top bookkeeping practices. Managing the accounts yourself is also a good money-saving tactic on the surface.
But here is the tragic truth: there is a lot of potential for mistakes. And many small business owners are prone to making bookkeeping mistakes that can cost them their success.
To avoid the headaches that come with bookkeeping mismanagement, it's essential to be aware of the pitfalls that can cripple your business. What are they?
Let's find out in the guide below!
1. Disregarding Small Purchases
A business has all kinds of different expenses. And keeping a record of every transaction is critical. However, many small business owners fail to address small purchases and don't record them on the books.
But, do you know that small purchases like new stationery or file cabinets can add up to a significant amount? This is why you mustn't treat small business expenses as personal expenses. Instead, keep a record of them and mark them in your books on the same day. It will save you many headaches later on.
2. Neglecting to Track Reimbursable Expenses
Reimbursable expenses are the ones that you make on behalf of your client. Since they can be charged back to the client, most business owners fail to mark them in their expense diary.
However, just like other expenses, this one should be traced back to the record books. Failure to do so can result in lost money. It will also make you lose on tax deductions.
So rather than ignoring these expenses, make a habit of tracking them as you accrue them. This will ensure you have a proper trail in the event of an audit, and you can follow the financial health of your business effectively.
3. Failing to Classify Employees
Nowadays, businesses have lots of different types of employees working on various projects. You can even have independent contractors and freelancers working for you. Misclassifying them as staff members can put you in legal trouble and even result in tax penalties.
Don't neglect this! And ensure that you take help from a professional bookkeeper who educates you on the difference between each type of employee.
4. Not Reconciling
Reconciling the accounts books according to the recent bank statement is a fundamental task. You should ensure it is carried out every month to recognize your financial health. And it is important that you do it properly and consistently.
With regular reconciliation, you will be able to identify how much money you have on hand at any given time. It will also allow you to discover any errors made by the bank before they become major obstacles in your financial plan.
5. Not Having Proper Backup
The cloud infrastructure has made it easy for business owners to go paperless and access their business from any part of the world. The data is available 24/7, and there's no need to keep a hard copy of every aspect of your business.
However, there are a few problems you can run into if you decide to go completely paperless. For starters, technical glitches occur frequently, and you may end up losing all your records if the event occurs. In some scenarios, tax authorities also prefer to see a paper audit of all your transactions.
While using an app may seem like an easy route, keeping a paper backup of at least 7 years is necessary.
6. Mishandling Sales Tax
With the rise in eCommerce, sales tax has become a complex issue for many small business owners. Initially, the only mistake was failing to deduct sales tax from the total sales amount. This would result in a huge surprise at tax time. However, with the recent changes in the rules of digital goods sales, tax collection has become even more complicated.
A professional bookkeeper will be educated about the changes in terms of sales tax, and will be able to guide you better. However, if you are planning to handle the situation yourself, make sure to learn the ropes and then handle the sales tax regime to ensure compliance.
7. Mixing Personal and Business Accounts
Many business managers make the mistake of not differentiating accounts for their personal and business expenditures. However, mixing up the owner's money with business money is the worst endeavour for any business.
When the two accounts are mixed together, it will become difficult to conciliate them with tax deductions and bank statements. The business owner will also end up spending business money in a personal emergency. Ultimately, the merger would create trouble for the business's financial structure at some point.
8. Cash Flow Problems
Multiple factors can affect cash-flow problems. For example, too many receivables, loans, inaccurate sales goals, and ignoring financial statements. The person handling the bookkeeping should be able to identify these problems and work on the solutions.
Of course, if an unqualified person handles the accounts, they may overlook the issues and even opportunities. However, having sufficient cash flow is necessary for small business owners and their success. And the lack of it can lead to a company's doom in no time.
9. Stalling Bookkeeping
Bookkeeping is not a glamorous part of any business venture. In fact, it can be a boring task that many individuals try to avoid. However, it is essential that it is done regularly and without delay. It will help keep your business records straight and prepare you for any pitfalls that might come in your financial statements.
10. Attempting Yourself
Bookkeeping is a full-time job. If the owner of the business commits to it, then they may fail to undertake other important business decisions. And if they lack accounting skills, the results may be crippling for your small business.
Competent and professional bookkeepers boast the required skills needed to complete the bookkeeping job quickly and efficiently. They also have the expertise to point out acute errors that you may fail to recognize. Plus, they are professionals in the field. They will be more updated about the trends in the financial avenue and the changes occurring in the tax programs.
Additionally, they will give you a second pair of eyes to overlook your business finances and save you considerable time to concentrate on growing your business.
Small businesses need to be extra cautious when it comes to bookkeeping. This is because many companies end up losing money while making these small mistakes. And many of these can be avoided by hiring a professional to commit to bookkeeping regularly.
Hiring a professional may seem like an extra expense. Still, a fulfilled account will end up being to your advantage in the long run. Good luck!
Article by Carole Anne
Carole Anne is the bubbly head honcho of Key Admin. She started the company in May 2012 and has successfully grown it into a thriving bookkeeping business. She is one busy, determined woman. Carol is a BAS Agent Member of the Institute of Certified Bookkeepers, a Certified Xero Advisor, Advanced QuickBooks Online Advisor, and has an Advanced Diploma in Business and Finance.