Avoid these bookkeeping mistakes as a small business owner
6 min read
February 07, 2022 • Block Advisors
Your financial records represent the very core of your business, and if they’re not maintained thoroughly and daily, your small business can feel the effects. Need proof? Here are a few real-life examples:
+ Are your vendors or contractors not getting paid? Your credit and business standing could be in jeopardy…
+ Are your invoices not going out? Your cash flow could suffer…
+ Are your payroll taxes not getting paid with precision? You could face an IRS audit or penalties…
Unfortunately, there are many common bookkeeping mistakes that can happen in a small business. On the bright side, they can often be avoided or mitigated. Read on as we walk through some bookkeeping best practices and red flags.
Common bookkeeping mistakes
Do any of these common mistakes sound familiar? Learn more about how to spot them, then avoid them here:
- When you don’t keep your receipts.
The IRS doesn’t require you to keep most receipts under $75, but should you? Yes, small business owners should maintain the proper records as backup documentation for tax deductions.
- Failing to properly classify employees.
Sometimes it’s difficult to determine who is on staff and who is not. But, if you fail to properly classify those working for you as employees versus contractors, you could face significant consequences, including tax penalties and even legal action.
- Not doing your bookkeeping in a timely manner.
If you don’t keep up with your payables and receivables in a timely fashion, it creates messy books. Plus, it causes undue stress when you are under a time crunch to get it done, which can cause bookkeeping mistakes.
- Forgetting to reconcile your books.
Reconciling (comparing) your books with bank statements is a fundamental step that should be done consistently to confirm that what you’ve spent matches your records. When you reconcile your books, it’s easier to spot errors before they become major problems. Moreover, doing this bookkeeping task can help you determine the amount of money your business has on hand at any given time.
- Improper cash management.
If your small business operates using petty cash, you should make sure there’s a dedicated person to managing and tracking it to avoid theft and abuse. From a bookkeeping compliance perspective, you should always make sure your receipts and remaining cash line up. Failure to do so could result in tax issues down the line.
- Recording transactions improperly.
Improper recording of transactions can have a ripple effect, causing problems all the way down the line. An example is when you miscategorized something on your books, you may not be able to get them to balance. This also trickles down to income tax time because your records won’t accurately reflect items that may be deductible.
Luckily, help is just a step away. Whether you’re looking for small business or self-employed bookkeeping, we have bookkeeping services to meet your needs. Block Advisors associates can help store contact and employee records, help you keep track of account activity, create multiple types of transactions, generate reports, and automate what you may have been doing on paper. Our pros can drastically reduce data entry and make it more accurate and organized so that you can find financial details in seconds.
- Failing to create a reimbursable expense guideline.
If you have employees, a common bookkeeping mistake is not creating reimbursable expense rules for your team. This document should serve as a guide to gauge what your employees can and can’t write off as a business expense.
- Neglecting to create critical financial reports.
No matter what bookkeeping method you use now, you probably have a way to keep track of your income and expenses, what you owe and what you’re owed. Small business bookkeeping solutions – both in person and through technology – can generate a wide variety of accurate customizable reports in seconds to get a clear financial picture of your business.
Advanced bookkeeping reports like an income statement (also known as a profit & loss statement) can help you analyze and track your small business’ finances. If you aren’t generating these statements, you likely won’t know your business’ margins, which means you may incur expenses you can’t afford. Or you could withdraw too much money from your business because you aren’t aware of your cash flow and balances. Last, you can’t reasonably determine which ones should be cut or mitigated. These documents are critical for understanding and demonstrating your business’s health.
- Failing to understand cash vs. accrual methods.
Not understanding cash method vs. accrual method can affect your businesses’ bookkeeping. Accrual accounting’s goal is to match revenue and expenses. Cash basis accounting recognizes revenues as soon as cash is actually received minus when expenses are paid.
- Not accounting for sales tax.
If your small business sells goods or services subject to sales tax, you should properly record and separate sales tax at each point of sales. Not doing this results in inflated sales figures, and incorrect sales tax return filings.
- Not having backup systems.
Backup bookkeeping systems is the process of backing up your computer if it crashes so you don’t lose your data.
How to fix bad bookkeeping and form good habits
If you’re just starting a small business, you can avoid business finance problems from the start with the proper bookkeeping strategies.
Even small businesses in existence for years can adopt new, compliant bookkeeping practices midstream.
If you’re wondering how to fix bad bookkeeping and adopt better habits, first spot the trouble areas using the red flags above, then hire specialized bookkeepers at Block Advisors to move forward in compliance with the right bookkeeping strategies.
Whether you’re pressed for time or you don’t have the desire to dive deep into bookkeeping, you can always rely on our bookkeeping services to get your bookkeeping in order. With just a few inputs, we’ll help you get set up to help make bookkeeping a breeze.
Bookkeeping best practices
When paying attention to bookkeeping best practices, it helps:
- Forecast your business’ needs and evaluates performance
- Track financial information at any given time for external sources like investors, customers, lenders, and even the IRS
- Make timely payments to contractors, vendors, creditors, and more
- Give a view of how your business is performing year over year
- Stay tax complaint
That’s where Block Advisors can help. We can help you avoid bookkeeping mistakes, so you can make better business decisions based on credible interpretation of your finances. With bookkeeping tasks off your plate, so you can get back to the business you love.
Get bookkeeping help from Block Advisors
See how Block Advisors can help with your bookkeeping needs and answer your bookkeeping questions.