Common Bookkeeping Mistakes Made by Small Businesses
Updated: Mar 26, 2021
So you’ve got your own business. Congratulations! Many people dream of financial independence and now you’ve made that happen. Maybe it was a long time in planning, or maybe it was being in the right place at the right time. Either way, here you are.
But did you know that owning a business was going to be more about paperwork and finances than about actually selling your service or product? Did you know how many government agencies you were going to have to deal with? Did you figure you would just be able to work at your product Monday through Friday and all that other “stuff” would be dealt with at the end of the month? Now you may find your weekends taken up with the less fun parts of the business: finances. Afterall, you went into business at least partly to make money, if not for some greater good.
Don’t worry. Small businesses everywhere face the same concerns, so you’re not alone. I am here to let you know some of the most common mistakes made by business owners and how to avoid them.
Mixing personal and business finances
The biggest mistake when someone is just starting out is to not separate the business from personal finances. As part of setting up your company, you need to open a distinct bank account and even a credit card for purchases in your company’s name. There are many reasons for this but the biggest one is that it allows you to see exactly how your company is doing, financially. If you end up mixing in payments for the grocery shopping and dog walker, those add up and take away from the profitability of that widget you are making and selling. In addition, if any legal actions arise against your company, including personal expenses included in the bank account opens the door for action against your personal finances. And vice versa.
Ignoring petty cash receipts
Petty cash is something that many small (and larger) businesses use. It’s taking a few dollars from the cash drawer to run to the store and buy paper towels for the bathroom. It’s using $20 to buy the staff a pizza lunch to reward their hard work. Or reimbursing your driver for filling up the company delivery van’s gas tank with their own money while on the road. All of these items are small, often less than $75, but over time they add up. And not accounting for these little things can make a big impact later on. This is why it is important to keep all receipts and make sure your petty cash balance is reconciled on a frequent basis.
Thinking cash = profit
A very common misconception among small business owners is thinking that as long as there is money in the bank, they are doing okay. To an extent, that is fine to think but long term that is not the way to go. For example, you may have started with $5,000 and after a year you still have $5,000. Is that a good sign? In addition, you have a $10,000 loan to pay. If that lender wants its money, is $5,000 in cash going to be able to pay it? If you didn’t spend the loan or make any additional money from sales, you should have $15,000 in cash at this point. So what happened? This is where understanding your financial statements comes into play. A profit is not the bank balance. A profit is how much the business has increased in value through operations (sales, paying bills, etc). Investors look at how much cash you have, in addition to how much cash you owe to others and how much you are bringing in from your customers. That is the bigger picture and much more than just what’s in the bank to use.
Not filing tax returns timely
Remember those government agencies I mentioned? Yes, they want their share of your profits too. That means filing sales, payroll, and income taxes on a regular basis. No one is going to be knocking on your door telling you to do it so you need to understand your state’s deadlines. The tax system in the US is based on voluntary compliance. That doesn’t mean you get to choose whether to pay or not, but since your business operations are your own, it means it’s up to you to tell the government what you owe based on tax rules. And if they find out you didn’t follow the right rules for your business, then they will take even more in fines and penalties. So it really helps to know what those rules are to minimize the risk to your company.
DIY because you have QBO
QuickBooks Online (QBO) is a great and powerful tool for small business bookkeeping. And with great power comes great responsibility. Accountants and bookkeepers train for hours, days and months to understand all the features and abilities of this software. So unless you also have an accounting degree, chances are that fully understanding the power of QBO is not something you want to take the time to do. Just putting in the data will get at least part of the job done, but you are missing out on all it can do for you. I may have inherited my father’s power tools and I know I need to be safe to use them, but that doesn’t make me a master carpenter.
This is just a short list of common mistakes small business owners can make. You can Google “bookkeeping mistakes made by small businesses” and come up with millions of top 10 lists and examples. For me, they all boil down to the same thing: don’t go it alone. It’s a lot to handle. Enlist the help of a professional bookkeeper and/or accountant to guide you through the process. A good professional will not only help you, they will teach you so that you understand what is going on and prevent any pitfalls from getting in your way to running a great business.
Contact me today to help guide you through the finances of your business, and keep you OnTime.