Small business owners often have fewer resources at their disposal, which means the owner ends up wearing many different hats. Keeping an eye on growth, profits and sustainability are full-time responsibilities. Yet many small business owners find themselves handling the back-office tasks as well. Without accounting knowledge or skills, bookkeeping mistakes can significantly impair your business. Although no business can avoid the dreaded task of bookkeeping, it is possible to avoid these common bookkeeping mistakes.
1. Inadequate Record-Keeping
Financial records need to be up to date and accurate so you can monitor cash flow, track expenses for favorable tax outcomes, and make informed financial decisions. Neglecting to track expenses, even the small ones, is like throwing money out the window.
2. Neglecting to Track Reimbursable Expenses
Reimbursable expenses are the ones that you make on behalf of your client(s), and you can charge them back to the client. However, most business owners fail to record them as expenses in their bookkeeping system, thus losing the opportunity to collect the amount from the client. Not only do you lose money, but you can also miss out on tax deductions.
- Create a regular process for tracking your business expenses, large and small, as you make them. The longer you go without tracking them, the greater the likelihood that the expenses will be forgotten or overlooked.
- Use technology to make tracking easier. Most online accounting programs have accompanying apps to track expenses, plus there are many standalone expense-tracking apps available.
- Keep copies of the documents that support the transactions in your accounting system (digital and/or paper files) – receipts, invoices, cancelled checks, etc. Most online and digital accounting programs provide you with the ability to take a picture and store it with its appropriate register entry.
Professional bookkeeping services like those provided by CRI Payroll Services can implement the robust systems and processes to make sure that no transaction goes unnoticed.
3. Mixing Personal and Business Finances
Entrepreneurs often commingle personal and business finances, creating a confusing and misleading financial landscape. This practice not only makes it difficult to understand the true financial health of the business but also complicates tax filing. Misidentifying a personal expense as a business expense and then deducting it could lead to IRS fines, penalties and worse. Alternatively, misidentifying a business expense as a personal expense means you don’t take all the deductions to which you’re entitled, and therefore you’ll pay more tax than you should.
- Set up and maintain separate banking accounts and credit cards for personal and business use.
- Use tools that make it easy to identify business and personal expenses when reviewing and reconciling expenses — including when both types of expenses are on a single purchase receipt.
A dedicated bookkeeping service can help establish clear boundaries between personal and business finances, simplifying financial management.
4. Misclassifying Expenses
Incorrectly categorizing expenses can distort financial reports, leading to inaccurate budgeting and forecasting. Mistakes can include misclassifying capital assets as expenses, misreporting startup costs, assigning an expense to the wrong account number and/or incorrect business entity, or data entry errors.
- Regularly review entries for misclassifications
- Check for differences between your budget and actual expenses.
- Set deadlines for data entry and reconciliations so that errors are found quickly and can be corrected.
- Train your staff (or yourself, if you are maintaining your own books) to understand your accounts and descriptions.
Our bookkeeping professionals have the expertise to accurately classify expenses, providing a clear picture of where your money is going and facilitating better financial planning.
5. Overlooking Petty Cash Transactions
Small expenses can add up quickly, and neglecting to track petty cash transactions can result in financial discrepancies. Or worse, not paying attention to petty cash may leave it vulnerable to fraud, theft or abuse. To ensure accountability, every business that uses petty cash should have a dedicated person who can manage it and approve purchases.
- Get a petty cash box.
- Log every amount taken from the petty cash box and notate where the cash is used.
- Keep the accompanying receipt for the expense to maintain clear documentation for deductions at tax time.
A professional bookkeeping service can implement systems to monitor even the smallest expenses, preventing leaks in your financial boat.
6. Failing to Properly Classify Employees
You may need different types of workers for your business – as employees, independent contractors, consultants, freelancers, part-time, temporary, seasonal, etc. It can be confusing to determine the appropriate worker classification and to account for them correctly in your bookkeeping system. However, misclassifying workers can result in serious fines and penalties that can significantly hurt your business.
- Get advice from payroll compliance experts to clarify employee versus independent contractor classifications.
- Ensure that both employees and contractors complete and sign the government-required forms. Keep these forms in your files.
- Record payroll information and contractor invoices as people are paid.
CRI Payroll Services has more than 55 years of experience navigating the ever-changing payroll compliance regulations.
7. Ignoring Bank Reconciliations
Neglecting regular bank reconciliations is a recipe for disaster. Discrepancies between bank statements and financial records can lead to misinformed business decisions and, in extreme cases, financial crises. Reconciling allows you to identify the amount of money available and to discover any errors made by the bank or in your books.
- Consistently reconcile your bank accounts monthly
Reconciling can be complicated. Professional bookkeepers, like those at CRI, excel at reconciling accounts, ensuring that your records align with your actual financial position.
8. Failing to Review Financial Statements
Ignoring the financial reports from your bookkeeping system exposes your business to numerous risks. The numbers on the financial reports tell the story of your business’s health and performance – they are a comprehensive snapshot of its financial well-being. Without knowledge of your company’s true financial position, you can embark on misguided strategies, investments or resource allocations. Financial statements help you better understand your business’s bottom lines and make smarter business decisions.
- Examine your profit and loss statement, balance sheet and cash flow statement every month.
- Ask your bookkeeping firm to explain what has been recorded, provide insights into your business’s profitability or identify areas for financial improvement.
9. Trying to do it yourself
Most small business owners hate doing their own books yet insist on doing it themselves. Bookkeeping is time-consuming and prevents you from focusing on other important business concerns. If you don’t have accounting knowledge or skills, the results can significantly cripple your business. Competent, professional bookkeepers have the required skills to do the job quickly and efficiently, and they have the necessary expertise to locate subtle errors that might otherwise be missed. As professionals, they’ll also be aware of the tax changes that could affect your day-to-day financial practices. In the long run, having a second set of eyes on your financial records is extremely beneficial and will save you time and money.
- Work with a professional bookkeeping service and protect your business.
In the fast-paced world of small business, the significance of accurate and comprehensive bookkeeping cannot be overstated. By avoiding common bookkeeping mistakes and enlisting the support of professional bookkeeping services from CRI Payroll Services, small business owners can set the stage for financial success. Don’t let avoidable errors hinder your business growth – invest in professional bookkeeping and pave the way for a financially sound and prosperous future.
CRI Payroll Services is ready to assist you and your company if you are looking for an expert in bookkeeping. We offer comprehensive bookkeeping services for start-ups, small and medium-sized businesses, including coding transactions, account reconciliation, financial statements, advising, and more. Whether you need a quick bookkeeping refresher, ongoing consulting, or weekly support, we can help you maintain accurate financial records to ensure your business runs smoothly and efficiently.
Contact CRI Payroll Services to learn more.
For CRI Payroll Services, your growth is our success. Serving clients nationwide.