Accurate bookkeeping is an essential component of running a small business successfully. The truth is, many business owners make mistakes — and that's OK. Nearly every aspiring entrepreneur and even thriving business owner have made some bookkeeping mistakes in their lifetime. Luckily, fixing and remedying these errors is easy if you catch them early or know what to avoid.
We will break down some small business bookkeeping slip-ups we see all too often and give some helpful tips for fixing them on how to do small business bookkeeping.
Don't Make Guesses
When you start a small business, especially for green entrepreneurs, we see many guessing their way through bookkeeping, hoping everything just "works out." Unfortunately, this can only make the problem worse down the road, causing you to fix months or even years' worth of errors in a single go.
Some common examples of guesswork include:
- Failing to take tax deductions into consideration
- Incorrectly categorizing expenses
- Late filing deadlines due to incomplete books
If any of these sound all too familiar, don't worry. We'll go into greater detail later in the article about how to correct guesswork.
Misclassifying Employees
Many small businesses are a mod podge of in-house employees, freelancers, consultants, and contractors — and it can be tricky to classify every employee correctly. However, it's important to get this right. Failing to do so can not only make your bookkeeping a mess but also have somewhat severe repercussions. You may be subject to either tax penalties or even lawsuits. So, take your time and classify each employee correctly so that you don't have to worry about issues down the line.
Failing to Separate Business and Personal Expenses
If you want to avoid turning your books and taxes into an unmanageable mess, you want to avoid mixing business and personal expenses. While it may seem like a "one-off" to cover a business lunch or expense with your personal credit card, it can quickly snowball into a much bigger issue if it continues.
Plus, you take away legal safeguards if your business is ever audited or deals with a lawsuit. It's one of the many IRS red flags you'll want to avoid. Try to make a habit of separating business and personal expenses and spending. Here are some tips to remember, whether it's having a business savings account or having business cash flow on deck.
- Have a dedicated business credit card
- Handle your business finances in its own bank account
- Keep some capital in your business checking account for lunches and quick business-related spending
Sometimes, mixing business and personal expenses happens by accident. For example, you may use the wrong card at the grocery store or mistakenly hand your business credit card to the drive-through. We recommend putting a sticker or some sort of identifier on your business card to avoid these accidents. These accidents can be remedied by simply reimbursing your business account for the purchase or completing an "Owner's Draw." However, being proactive is better than wasting an afternoon fixing mistakes.
Tossing Out Receipts
If you want to back up deductions from your tax return in the case of an audit or avoid fines — you'll want to hold onto business-related receipts. There are plenty of ways to manage receipts, so you don't need to have a filing cabinet filled with paper.
You can take pictures of your receipts with your phone and store them in a designated folder. You can also take advantage of digital receipts emailed to you after purchase. You can also use your business accounting software to upload receipts, help organize expenses in the case of an audit, or provide more spending transparency.
A general rule of thumb is to keep receipts for at least seven years. Audits can be a scary process, but organizing details of expenses can help make the audit a less frightening experience.
Failing to Understand & Read Financial Statements
If you want sound bookkeeping, you'll need to understand and pay attention to financial statements. These are a direct reflection of your business performance and overall health. So, be sure to read them on a regular basis and learn to recognize opportunities for growth and revenue — along with potential red flags that could foreshadow company problems.
Here are five ways financial statements can help you today.
- Maintain control of cash flow
- Apply for bank loans
- View financial trends
- Show business performance to investors
- Spot optimal tax deductions
A deep understanding of your financial statements can help your business grow. If you want to qualify for a startup loan or obtain debt financing, these statements will give you the insights to make the right decisions.
Transfers as Income: A Big No-No
You may run into this bookkeeping issue if your business receives capital through multiple accounts or platforms. If you use apps such as PayPal, Cash App, Venmo, TransferWise, or other services — you will eventually transfer that cash into your business bank account. However, some accounting software may record these transfers as income unless you make the right adjustments.
These need to be accounted for as transfers instead of income, as it can cause unwanted mix-ups for your bookkeeping that may leave you pulling your hair out.
A Few More Suggestions On Small Business Bookkeeping
There are plenty of ways business owners can blunder in their bookkeeping, but we want to leave things on a more positive note and offer some tips for avoiding mistakes. Whether you're just starting a business or a seasoned business owner — there are plenty of ways you can better manage bookkeeping for long-term success.
- Hire an experienced CPA
- Find a skilled bookkeeper
- Stay on top of your business financials
- Use a well-rounded business accounting software
- Get to know tax guidelines, deadlines, and opportunities
- Collect sales tax correctly
Bookkeeping is all about understanding the various components of your business financials. However, it's important to know about your company's various financial standings to gain the most out of your business growth opportunities. We've covered some of these in greater detail, so check out How to Calculate Your OCF and some helpful Insights on Profit & Loss Statements.
Take control of your business bookkeeping today. A proactive approach to bookkeeping is the best way to avoid these mistakes and set yourself up for success.
