At the outset, many small business owners lack knowledge about basic accounting concepts and procedures, which can lead to bookkeeping mistakes during the early years of an operation (and, potentially big problems down the road).
So what are the 10 most common bookkeeping mistakes small business owners make?
1. Blindly Following a DIY Approach
It’s not rocket science after all, right? Many small business owners make the mistake of thinking they can handle all the bookkeeping aspects of the business. And that may be a good strategy in the very early stages of a start-up when operations are a bit more simple and bootstrapping is the name of the game. But as the organization grows, business owners often miss the point at which the DIY approach isn’t working until it’s too late and big mistakes show up. These mistakes can affect the financials used to make strategic decisions, which can ultimately put a dent in the bottom line. Garbage in, garbage out.
And that’s not to mention the hazards of accidentally misreporting financial information on tax returns.
Finally, it can end up being far more expensive to pay a professional to come in and untangle these mistakes than it is to hire one at the outset.
2. Price Shopping for a Bookkeeper
No, bookkeeping isn’t brain surgery. But just as you wouldn’t perform your own brain surgery or choose a brain surgeon solely based on price, you shouldn’t choose your accountant or bookkeeper using only price as a benchmark.
Because the adage is true: You get what you pay for. Some bookkeepers are just better, more experienced and more qualified than others. And those bookkeepers don’t generally come with rock-bottom prices.
Focusing exclusively on price isn’t the same as getting the most value for your dollar when it comes to engaging the services of an accounting professional. In fact, in many cases, pinching pennies in this area of operations can ultimately cost the business money.
3. Misreporting Payroll Taxes
Woe to the business owner who either purposely or accidentally misfiles payroll tax information. The IRS has little tolerance for error.
While it may be tempting to skip the administrative fees and run payroll yourself, it’s an excellent investment of resources to use a payroll tax specialist instead. Tax laws are constantly in flux, and the rules and regulations can be complex. It’s far better to pay a professional than to pay huge fines and interest in the event your information is misrepresented on returns.
4. Failure to Keep Complete and Accurate Records
If you don’t have good data (and documentation to back it up) you’ll likely end up paying for it in the long run.
For example, lost receipts can mean expenses don’t get booked properly—or at all!—which can mean a higher tax liability. Plus, incomplete records mean your books are likely also incomplete, so strategic financial decisions get made on faulty information, costing your business in cash and opportunities.
5. Not Backing Up Data
This seems like a no-brainer, and yet many small business owners make this mistake. If you haven’t backed up your data and accounting systems, you’ll be in a world of hurt in the event of a catastrophic failure.
And it’s a good idea to maintain redundant systems. For example, if you’re using a cloud-based accounting program and keep digital copies of things like receipts and invoices there, consider keeping secondary copies on your hard drive or external backup drive.
6. Failing to Capitalize Equipment
Many business owners make the mistake of expensing an entire piece of equipment during the year in which it was purchased. But watch out, because tax law stipulates that in some cases, you must book the purchase to your balance sheet as a capital asset and write off depreciation over its useful life.
7. Mistaking Advertising for Charitable Donations
Many small businesses choose to support nonprofit organizations by donating dollars for things like signage, sponsor recognition or logo placement in a program. While it’s important to be a good corporate citizen, don’t make the mistake of thinking these dollars count as charitable donations from a tax perspective.
Again, if you’re uncertain how to book a transaction of this nature, it’s far better to consult with a tax professional now than to have to provide an explanation to Uncle Sam later.
8. Failing to Negotiate Terms
Particularly for vendors from which you buy goods and services on a regular basis, it’s a good idea to create personal relationships with them. Then you’re better able to negotiate more advantageous terms, which can save money and improve cash flow over the long haul.
9. Failing to Review the Books
If attempting a DIY solution can be hazardous at one end of the spectrum, a total lack of involvement can be hugely problematic on the other. There’s a difference between delegating bookkeeping duties to a professional and completely handing over the reigns to them.
As a business owner, it’s incredibly important that you review the books on a regular basis and work closely with your bookkeeper to go over financial and managerial reports so you have a solid grasp on how well or poorly your business is doing.
10. Failing to Keep Current
If a set of books isn’t kept up to date, important data like cash balances can be over- or understated, which can mean overdraft fees, angry vendors and finance charges.
It pays to reconcile bank, credit card and liability accounts each month so your financial reports are accurate. And failing to keep your books current can mean a mad scramble to get up to date come tax time, which can produce not only headaches but lots of errors made in haste.
Adding It All Up
Most business owners don’t go into business with an in-depth knowledge of generally accepted accounting and bookkeeping principles, and so keeping the books can be a challenging task.
And even if an owner has some background in bookkeeping, it’s very often a much better use of their time to pay a professional to keep the books for them. When a DIY solution no longer makes sense, it’s time to ask for help.
Steiner Business Solutions helps small business owners save time and avoid costly mistakes by offering convenient and affordable bookkeeping services. Our certified bookkeeping experts keep accurate records so business owners have the right information to make the best, most strategic business decisions. We’d love to talk!