Recent statistics reveal that cash flow problems cause 82% of small businesses to fail. It is not easy opening a small business. There are many considerations, and bookkeeping is a top priority.
A brilliant quote from Benjamin Franklin is this: “If you fail to plan, you plan to fail.” This could not be more true!
You must keep a keen eye on your finances to keep your small business running smoothly. Mistakes in bookkeeping can prove detrimental.
Here are the seven most common mistakes that small business owners fall victim to and how to avoid them.
1. Poor Record Keeping
You risk landing in hot water if you are not tracking business finances, including saving receipts and keeping proper records. Small expenses are easy to forget, and you may not track them. You may lose receipts.
Accurate monthly records and a sound filing system save your business time and money. That is why bookkeeping software is critical to your business’s success. An IRS audit could cost you big, but with an organized small business bookkeeping system, you won’t have to worry because you have the records you need to give them.
Your Time Is Valuable
Eventually, you must pull all your bookkeeping details for various reasons. This could be for reporting cash flow, profitability, tax returns, etc. You need a system where you can pull your financial data quickly and effectively.
Without such a system, you waste valuable time. You could spend this time on items that will make more money, like beefing up your sales and marketing. While hiring a bookkeeping service may seem like an expense, in reality, freeing up your time helps give you the time you need to build your business.
2. Not Having a Backup
Technology simplifies many time-consuming tasks for a small business. With some help from AI, applications, and databases, small businesses can reduce issues from arising. Paperwork can be damaged and lost. It can take up too much space and be challenging to organize.
Data, on the other hand, is safer. However, it can also be lost. That is why it is critical to back up data, mitigating the chances of losing reports on your business income and expenses.
3. Not Reconciling Your Bank Account
Tracking business finances is easier when you have a business bank account. It is essential to have separate bank accounts. Personal purchases should come from your personal bank account, and business transactions come from the business bank account.
Every month, reconcile your bank statements. If there are issues or errors, you want to find this quickly to create a remedy for them. The longer you wait, you risk not being able to fix it.
4. Not Managing Petty Cash
Small businesses will keep a little petty cash for when they need it. While it may be a small amount, petty cash still needs tracking. You need a system that tells you how much petty cash you have.
When you need to use it, you need a system that tracks what you use it for.
A good start is keeping receipts for petty cash purchases and getting a petty cash lock box. You can purchase a lock box from a local office supply store. Software for bookkeeping will also have a method to help you track this.
5. Logging Incorrect Category Expenses
While software for bookkeeping is critical to stay organized, it also helps to hire a bookkeeping service. Unless you are a finance expert, you may not understand how to categorize an expense. This can lead to enormous problems.
To correctly measure the profitability of your small business, you need accurate business income and expense tracking. Further, you can reap the reward of significant tax savings when you know how to treat business income and expenses for tax purposes.
6. Classifying Employees Incorrectly
Many small businesses hire employees and independent contractors to help them. If you misfile their classification, this can become a nightmare at tax time. Set up your employees and independent contractors correctly in your payroll system from the beginning.
Also, there are laws on the types of paperwork you must collect from an employee or an independent contractor. You want to follow the law and collect the correct documentation. As an employer, you must keep a record of this documentation.
7. Non-Tracking of Reimbursable Expenses
As a small business owner, you may need to pay for a few business expenses from your personal funds. If you want to track this immediately, software for bookkeeping can help. It can be easily forgotten if you allow too much time to pass.
If you forget to track your reimbursable expenses, your small business can lose significant money. That is because you can lose tax deductions. The easiest way to avoid this common fumble is by creating a policy.
Software for bookkeeping is a vital part of your policy. Use it to track and record your reimbursable expenses often.
Don’t Make These Mistakes in Bookkeeping
Avoiding these mistakes in bookkeeping is much easier than you think. If you are not an expert in accounting, that is okay. Hiring a bookkeeping service is an essential investment for the success of your small business.
Professional accounting and tax services are within reach. Propel CFO can help you. They are a full-service accounting firm, providing small business owners like you with professional services that mitigate risk, save money, and run more efficiently.
Focus on what’s important. Focus on running your business! Contact Propel CFO for a free consultation.