Nobody is perfect. As a business owner, I’m sure you know this all too well. You’ve made some mistakes in the past and I’m sure you’ll make some more in the future.
But with that said, some mistakes can be avoided.
In my experience, I see so many companies making accounting errors that negatively impact the business and operations. You could be making these mistakes without even realizing it.
That’s what inspired me to write this guide. I’ve identified the most common bookkeeping mistakes that I see on a regular basis. Use this article as a reference for recognizing any faults with your financial reporting.
You’ll also learn how to correct these mistakes and avoid them moving forward.
1. Not Using Professional Help
Not every small business owner is an expert accountant. Yet I see so many entrepreneurs try to handle all their accounting and bookkeeping efforts on their own.
The time you’re spending managing your finances should be spent on growing your business. Leave your finances to the professionals.
Plus, if you’re incorrectly reporting your finances, it just digs you into a deeper hole.
For those of you who don’t want to hire a new employee, you can always outsource your bookkeeping services. This is a great way to get professional help without incurring added expenses.
2. Mixing Personal Expenses with Business Expenses
This is arguably the most common mistake that I see when I’m consulting with new business owners.
You need to get in the habit of separating your business accounts from your personal accounts. This is also one of the generally accepted accounting principles (GAAP), which is known as the economic entity assumption.
It may not seem like a big deal when you’re first starting out, but as your business continues to grow, this can turn into a huge problem. That’s why you need to learn how to set up internal bookkeeping controls that are scalable.
Don’t cross the line. Declaring a personal expense as a business expense is a major no-no. You could find yourself in some tax trouble if you make this mistake.
3. Mismanaging Capital
One of the top reasons why startups fail is because they run out of cash. According to a recent study, 29% of startups cited cash problems as the reason why they went out of business. This ranked second on the list of 20 reasons.
In order to avoid this mistake, you need to understand how to manage your cash flow and forecast the amount of cash you’ll have in the future.
This is especially important for those of you who are buying items that depreciate quickly. It’s much better to keep your cash on hand as opposed to being forced into a loan that you’ll need to pay lots of interest on over time.
It will be much easier for you to analyze and manage your capital if your financial reports are accurate and organized. That’s another reason why a professional needs to handle your books.
4. Incorrectly Declaring Revenue
Declaring revenue as soon as a sale is made does not accurately portray your profits. If you declare it too soon then you can overlook the expenses related to that sale.
You need to know the full picture, including the expenses.
That’s why revenue must be recognized on a cash basis, accrual basis, or based on the percentage of completion.
Otherwise, you can’t really determine your actual profits. Not understanding your true profits can be extremely dangerous for businesses.
5. Improper Financial Analysis
Budget management is a crucial component of success, especially as your business grows.
Properly keeping track of your financials is only one aspect of bookkeeping. You also need to understand how to read and analyze those reports that have been generated by your bookkeeper.
An interim CFO can be the solution for this problem.
A bookkeeper will be able to prepare everything properly for you. But it’s not really their job to make predictions and provide you with a financial analysis. On the other hand, an experienced CFO can help you with both long-term and short-term financial decisions and forecasts.
6. Misinterpreting Payments to Owners
This mistake mostly applies to sole proprietors or businesses that operate as a single member LLC.
Payments made to yourself are not considered wage expenses so they will not show up on a profit and loss statement. If they are incorrectly booked on the profit and loss statement, they lower the company’s profits, which ultimately falsifies the income that you need to pay taxes on.
Instead, these payments need to be made to an “owner’s draw” equity account. That’s the proper way to avoid this error.
S-corps will still report the wages paid to owners as an expense based on their salary. So, if your business is set up as an S Corp, you don’t need to worry about this.
7. Not Keeping Receipts
Always, always, always save your receipts. You can eventually use these for business deductions when it comes time to file your taxes.
It doesn’t matter if it’s $5, or $5,000—save the receipt!
All too often I see businesses fail to do this. They think that it’s just a couple of dollars and it doesn’t matter. But those smaller receipts add up throughout the year.
The best way for you to avoid this mistake is by using innovative technology to streamline your bookkeeping process. Take advantage of mobile apps that let you upload photos of your receipts to stay organized. That way you won’t have to keep track of everything by hand.
8. Misreporting Transfers
If you’re using cloud-based accounting software, you need to make sure that transfers between accounts are being reported properly.
At times, bank feeds post to the wrong accounts. These are just two computers talking to each other, so you can’t expect everything to go according to plan if you’re not monitoring the transactions.
For example, let’s say you get paid via PayPal and then transfer that balance into your checking account. The software may report this transaction as income because it looks like a deposit. It’s your responsibility to make sure that it’s not being reported twice, or it will cause major problems with your bottom line.
9. Not Doing Monthly Reconciliations
You need to go through each line of transactions in your books to make sure they match your bank statements.
If something isn’t matching up, you need to find the problem.
Doing reconciliations on a monthly basis is the best way to find errors quickly. It’s more reasonable to go through a month’s worth of transactions, as opposed to a year. So, do this on a regular basis.
All these mistakes can be avoided if you have a professional providing you with assistance. Otherwise, small errors can turn into big problems for you.
Consider hiring an interim CFO or taking advantage of outsourced bookkeeping services.
Then you’ll be able to spend more time focusing on your business growth, rather than trying to fix problems in your accounting department.