Many small business owners opt to manage their bookkeeping for various reasons, ranging from cost savings to simply enjoying the task. While this approach can be practical and works for some business owners, it certainly has its pitfalls. There are several common bookkeeping mistakes to look out for, which can lead to significant problems for your business. Recognizing and avoiding these errors is crucial for maintaining your company’s financial health.
Don’t Make These Bookkeeping Mistakes
At Cents and Balance, there’s nothing we dislike more than hearing about small business owners making bookkeeping mistakes that could have been avoided. Here are ten of the most common bookkeeping mistakes and some actionable tips to help keep you from making them, too.
1. Ignoring Bookkeeping or Delaying It
Procrastinating on bookkeeping (or ignoring it altogether) can lead to a backlog of financial information, making it challenging to catch up.
Tip: Utilize bookkeeping tools to stay organized and/or consider delegating this task to a professional to ensure timely maintenance.
2. Not Reconciling Accounts
Failing to reconcile your accounts accurately and consistently can lead to balance sheet inaccuracies, cash flow issues, and even allegations of fraud. By staying on top of your books, you can often avoid discrepancies and potential issues before they become a bigger problem.
Tip: Dedicate time each month to account reconciliation. If the task feels too overwhelming, you may want to consider hiring a professional bookkeeper.
3. Not Maintaining Proper Records and Receipts
Avoiding detailed record-keeping can negatively impact your financial reporting and tax obligations— never mind the nightmare it can create when it comes time to do your annual taxes.
Tip: Implement a reliable system that works for you to track all business-related transactions and receipts, or hire a professional to assist you.
4. Misunderstanding Business Expenses
Many owners are unaware of the expenses that qualify as business costs, potentially missing out on beneficial tax deductions. They may also incorrectly categorize something as a business expense, leading to issues with the IRS during an audit.
Tip: Educate yourself about what constitutes a business expense and diligently track these expenditures to maximize profitability and minimize tax liability.
5. Not Claiming Valid Tax Deductions
Overlooking deductible expenses means you may be missing out on potential savings.
Tip: Regularly review your expenses and consult with a tax professional to ensure you maximize your deductions.
6. Overlooking Reimbursable Expenses
Failing to track reimbursable expenses can lead to financial losses for the business. You can’t claim expenses if you aren’t properly tracking them.
Tip: Establish clear policies for yourself as the business owner and your employees regarding reimbursable expenses and meticulously record these expenditures.
7. Not Hiring a Professional When Necessary
Hesitating to invest in professional accounting services can ultimately lead to multiple errors and inefficiencies. You may also spend too much time doing your bookkeeping when you could focus on other aspects of your business where your expertise lies.
Tip: It’s important to recognize when tasks exceed your expertise and to seek professional assistance to safeguard your business’s financial health.
8. Incorrect Classification of Employees
For small business owners, the line between an independent contractor and an employee can become blurry; however, very different rules apply depending on their status. Misclassifying workers can have serious consequences, leading to legal issues and complications with the IRS.
Tip: Take the time to research and understand the distinctions between independent contractors and employees so you can classify each worker accurately.
9. Not Maintaining Backup Records
The absence of backup records can pose significant risks, especially during audits or legal proceedings. Digital and paper records are both acceptable, but it is the business owner’s responsibility to provide proof of all documents.
Tip: Regularly back your digital records and maintain a secure and organized system for your paper files.
10. Relying on Unverified Sources for Advice
Don’t believe everything you see or hear on the internet! Seeking business advice from unreliable sources, especially platforms like TikTok, can lead to misinformed decisions and difficult-to-correct errors.
Tip: Source your business guidance from reputable resources and experienced professionals, especially in the initial stages of your business.
Take a Proactive Approach to Bookkeeping
While DIY bookkeeping can be a cost-effective option for small business owners, there is much room for error. A proactive approach safeguards your business against financial discrepancies and sets a strong foundation for sustained growth and success.
When in doubt, choosing to work with a professional will often provide peace of mind and ensure your business’s financial health is always in good hands. Contact our team today for all your bookkeeping needs.
By Katherine White
