Running a small business is not easy. With access to limited resources, you have to be extra careful, as you cannot afford to make too many mistakes. Chances are that you tackle almost every process on your own, including bookkeeping. While this works alright for some very small businesses, for most small business owners, it is easy to miss things. Let’s look at the value of bookkeeping and then five common bookkeeping mistakes you must avoid..

The Importance of Quality Bookkeeping For Business Owners

Now, you must be wondering, “Do small businesses need to worry about bookkeeping?” The truth is that every type of business, from SMEs to Fortune 500 companies, requires a close eye on bookkeeping. As errors can prove harmful, it is often necessary that you hire a bookkeeper to achieve success. Here are a few of the many benefits of a quality bookkeeper. 

Budget: A major reason why businesses need professional bookkeepers is they help keep income and expenses organized. This information helps you plan strategies and manage both your business expenses and personal expenses.

Tax Planning: When the year ends, you might struggle to file your tax return, either on time or with accuracy, due to a lack of access to or enough understanding of your business records, financial statements, bank transactions, and business deductions. Bookkeepers help manage tax time so that you file your return before the deadline and do so accurately.

Organization: Your lenders, investors, customers, employees, and the IRS have an interest in your financial records. Bookkeeping helps keep financial information organized so that you can provide it to the relevant party if the need arises and so that all your financial records are close at hand to inform you during important decisions.

Analysis and Decision Making: As we just mentioned above, bookkeeping provides financial statements and all the necessary information needed to make business decisions. You can use the information to analyze strengths and weaknesses, track short-term and long-term consumer trends, see how your investments are performing, spot problem areas early, and uncover opportunities for expansion and new development. 

Expense Tracking: In order to find out how much profit you are making and if you are even breaking even, you need to keep track of your expenses. Expense tracking also gives you a clear view of all your expenditures, enabling you to see which expenses are yielding fruit and which ones are simply a burden. You can use this information to streamline your spending and find deductions during tax season. This is only possible through good bookkeeping.

Improved Cash Flow: A more in-depth understanding of every aspect of your cash flow is a must for every business, allowing you to see clearly the overall health of your business and the patterns that led to its current state. 

IRS Audit: If there is an IRS audit, you must have updated financial records. Otherwise, you could be subject to penalties. Not to mention getting yourself on the IRS’s radar, which keeps them “interested” in returning for more audits later on. 

Now let’s look at those 5 important bookkeeping mistakes that must be avoided. 

1. Poor Organization

One of the most common bookkeeping mistakes reported is poor organization. Without a well-organized system, both for physical as well as updated software for records, copies, financial reports, invoices, receipts, and all other important info, you risk inaccurate or late tax filing, missed savings from deductions, inaccurate data during meetings and a sense that you never quite have the information you need at hand to make strong business decisions. 

It’s important to implement a proper filing system for your physical files, where everything is always exactly where you need it. Be sure to print regular reports from your accounting software programs and backup computer files in the cloud and on external hard drives to keep things secure. You can also take pictures of receipts and invoices so you’ll always have electronic copies if fire, flooding, or theft takes place. 

2. Improper Record Keeping

Another common bookkeeping mistake, this problem has the potential to mess up your whole system and put you at risk for audits and penalties. It is absolutely imperative that you record expenses right away, that you keep track of mileage and travel costs, business equipment, outsourced work, employment expenses, and all other expenses in a detailed manner.

If you keep ledgers and notebooks, save receipts and invoices, and take time each day to record and file everything without fail. While using accounting software will greatly streamline your bookkeeping, you must still enter all information consistently and look over your reports to ensure accuracy. Don’t procrastinate. And if your bookkeeper has concerns, meet with them right away to reconcile all financial data. 

3. Failing to Reconcile Bank Accounts

The next bookkeeping mistake that should be avoided is not reconciling your bank accounts. For starters, you must create separate bank accounts for business activities and personal expenses. Otherwise, expenditures will get mixed up, payroll will become a hassle, taxes and possible deductions will be convoluted, and you may risk an audit. Ensure that each bank statement is reconciled each month, or better yet, on a weekly or daily basis, to identify potential issues early on and take action immediately. 

4. Not Using Accounting Software

As we live in a world where technology in some form is necessary for just about everyone, especially those running a business. It’s unwise to overlook accounting software. While there are still some of us who seem to excel at using books and ledgers, utilizing a good accounting software program allows for an extra level of accuracy, accountability, and analysis. 

5. Forgetting Sales Tax

A common error in bookkeeping is forgetting sales tax. You must account for it and report it to stay on the right side of the law. Failure to report and collect sales tax would result in your business facing fines and penalties. Make sure to calculate it properly, set it up within your registers, accounting software and other financial records, so that you have accurate reports and tax payments. 

Conclusion

These, of course, are only a few of the many bookkeeping mistakes common to business owners. While they are easy to make, the resulting consequences are often hard to undo. Avoid the stress, audits, worries, and confusion of poor bookkeeping practices. If you keep your own books, get some training and guidance from an experienced bookkeeper. And if you feel you’d rather not take a chance, reach out to a professional with considerable experience. 

Sound Accounts has been helping individuals, and businesses organize their books for years. We provide complete support or exactly the level of service you need for continued success. Contact us today to get started. 

For quick answers to bookkeeping questions, check out our frequently asked questions below.

FAQ

Why is good bookkeeping so important for me as a business owner?

Timely and accurate bookkeeping keeps you organized, prepares you for tax season, helps you spot money-saving deductions, gives you an in-depth understanding of your cash flow and each area of your business, so that you can see what is working , what isn’t and why this is so. Bookkeeping equips you with the knowledge you need to lead better and make stronger business decisions. 

What are some common mistakes in bookkeeping?

Poor organization, filing taxes late, not accounting for sales tax, failing to reconcile your bank accounts, not taking advantage of helpful software and other technologies, not recording expenses and many others.

What are some of the consequences of poor bookkeeping?

Poor bookkeeping practices lead to IRS penalties, audits, lost financial data, outdated information leading to unfocused business decisions, poor relations with business partners and employees, underperforming departments and investments, and even legal trouble.