Achieving long-term business success requires accurate, timely financial reports. Unfortunately, many small business owners make serious bookkeeping mistakes that threaten their company’s finances.
Misclassification of expenses or revenue, incorrect banking reconciliations and other problems can all lead to financial instability and possibly bankruptcy. Avoid these common bookkeeping mistakes to keep your company’s finances in tip-top shape.
1. Not Reconciling Accounts Regularly
Reconciling your books with bank statements is one of the most important parts of bookkeeping. It ensures that your business has accurate financial records and helps identify errors such as missing or mismatched transactions. By reconciling your bank account with your accounting system, you can verify that all deposits, withdrawals, fees, transfers and payments are recorded and accounted for. This helps prevent overdraft charges and other penalties. It also helps keep your records up to date and allows you to discover any unauthorized activity that could be occurring.
It is recommended that you reconcile your accounts at least monthly, though some businesses prefer to do it on a daily basis for cash flow purposes. If you fail to regularly reconcile your accounts, you could miss expenses and other crucial details about the state of your finances. This could hurt your company’s reputation and damage your relationships with customers, vendors, and other stakeholders.
Aside from the fact that it could negatively impact your business’s finances, failure to reconcile your accounts can lead to costly mistakes, including inaccurate invoices and credit card payments. Keeping up with your accounting can help you make better decisions that will support business growth and sustainability.
Many small business owners struggle to hire full-time staff and end up tackling all the bookkeeping tasks themselves. This often leads to a lot of time spent on mundane, repetitive tasks and neglecting more complex or urgent needs such as tax compliance or strategic analysis. However, this isn’t the best way to go about it. There are several ways to avoid making common Denver Bookkeeping mistakes that can have a disastrous effect on your business, such as implementing organizational systems, establishing data entry controls, reconciling bank accounts regularly, tracking expenses diligently, setting reminders for key deadlines, maintaining comprehensive documentation, effectively managing petty cash, prioritizing backup and security, staying informed about tax regulations, and conducting thorough financial analysis.
Whether you’re handling the bookkeeping on your own, working with a bookkeeper or accountant, or even using software programs to simplify the process, it’s essential that you take a proactive approach to avoid these big bookkeeping mistakes and keep your company on track.
2. Not Maintaining a Petty Cash Policy
The idea of a petty cash fund is to provide a way for your employees to make small, frequent purchases that are too costly or impractical to pay for using a check or credit card. A petty cash policy can be useful for things like coffee (yes, even single-serve cups), office snacks, office supplies, office gifts, and so on.
One of the biggest bookkeeping mistakes a business can make is not establishing clear petty cash policies and procedures for its team members. This can be a huge problem because it leaves the door open for mismanagement, theft, and fraud. It’s important to set rules that dictate how much money can be spent, who can authorize a purchase, and how to register each transaction in the petty cash log. This also includes laying out a clear process for reimbursements and making sure that each purchase has a receipt to validate the amount spent.
If you don’t have a petty cash policy in place, your employees may spend company funds on things like ice cream or a new desk chair without recording it. This can lead to serious problems when the company runs out of cash and must pay bills with personal checks or credit cards. It can also create a perception that the company is not fiscally responsible and discourage employee trust in the organization.
It’s critical to establish a petty cash policy that makes it easy for your employees to keep track of their reimbursable expenses. For example, you can create a document that clearly states that any expense above $20 requires department supervisor approval, while larger purchases of equipment or furniture require executive-level authorization. You can also establish a schedule of meetings and audits to review the petty cash log, confirm that documentation is complete and accurate, and ensure compliance with any applicable legal or regulatory requirements. A good record-keeping system will also help you quickly produce a variety of accurate financial reports in order to develop a clear picture of your business’s health and performance.
3. Not Maintaining a Custodian or Receipts
Bookkeeping mistakes can cost small business owners thousands, and even jeopardize their company’s financial stability. These errors are typically due to not reconciling accounts or correctly categorizing expenses. Fortunately, these blunders are easy to correct when they’re caught. By recognizing common mistakes, you can keep your books accurate and ensure that your financial records reflect the true state of your business’s finances.
Mixing personal and business expenses is a common mistake that can cause serious problems at tax time. This is because it’s often difficult to determine what expenses are truly related to the company’s operations. In addition, it can lead to inaccurate budgets and forecasts that can cause poor business decisions.
Another common mistake is failing to save receipts for purchases or failing to keep a clear record of reimbursable expenses. This could cause serious problems if the IRS audits the company and finds that you cannot provide complete documentation of your deductible expenses. If you don’t have the proper paperwork, you might face penalties or see your deductions disallowed.
Finally, a big bookkeeping mistake is not keeping a paper backup of your financial records. This can be a huge problem if you experience an IT failure, or in the event of a natural disaster such as a flood or fire. Having a hard copy of your records can save you from costly data loss and protect you against identity theft.
Getting your bookkeeping in order is critical for the success of any small business. Inaccurate or incomplete financial records can lead to cash shortages, missed tax deductions, and unmanageable debt. Small businesses should adopt best practices such as separating personal and business expenses, using accounting software, and regular account reconciliation to reduce the risk of costly errors. By avoiding these bookkeeping mistakes, you can make better financial decisions for your business and improve its long-term financial health.
4. Not Keeping a Paper Backup
Bookkeeping may not be the most exciting aspect of running a business, but it’s crucial for success. And even the smallest mistakes can have big consequences. The good news is, most of these mistakes are easy to avoid. But first, you have to know what they are.
One of the most common bookkeeping mistakes is not backing up your financial records. In the event of a computer system crash or other disaster, your bookkeeping will be lost. It’s important to back up your records regularly and keep a physical copy in a secure location (e.g., a locked filing cabinet). It also helps to have multiple copies of your backup in case one is damaged or stolen.
Another major bookkeeping mistake is not reconciling the books on a regular basis. This can result in inaccurate revenue and expense figures, which can have a domino effect on other business decisions. It’s important to do your books monthly at the very least, and weekly or daily if you need to be more accurate.
Keeping up with your books takes time, but it’s essential for the success of your small business. Many entrepreneurs and small business owners find themselves overwhelmed with other responsibilities and let the books fall behind. This can lead to serious problems, including tax deduction errors and misclassified expenses.
Some business owners feel that keeping track of minor expenditures like office supplies and occasional lunches isn’t worth the effort. However, failing to record these minor transactions can add up over time and skew your company’s financial data. It’s best to set up an accounting system that makes it simple and easy for your employees to consistently log reimbursable expenses.
Lastly, it’s important to separate your personal and business bank accounts. This will prevent you from mixing up your personal spending with the official business expenses and will make it easier to comply with auditing requirements. It’s a good idea to maintain a chart of accounts that lists all the financial accounts your company uses and their reference numbers. This will help you stay organized and identify the source of every transaction.
