11 Common Small Business Bookkeeping Mistakes (And How To Avoid Them)
Knowing how to avoid these 11 common small business bookkeeping mistakes will save you time and money and keep your business successful. RELATED: What Is Bookkeeping — Explained In this article:
- How Important Is Bookkeeping to a Business?
- Bookkeeping Mistakes That Small Business Owners Make
- Not Hiring an Experienced Bookkeeper and Professional Accountant
- Improper Record-Keeping of Financial Transactions
- Inaccurate Categorizing of Income and Expenses
- Inappropriate Petty Cash Management
- Neglecting Sales Tax
- Failure to Properly Classify Employees
- Neglecting to Review Financial Statements
- Improper Tracking of Reimbursable Expenses
- Failure to Reconcile Bank Statements and Accounts
- Poor Internal and External Communication
- Not Securing Data Backups
What to Avoid in Small Business Bookkeeping
How Important Is Bookkeeping to a Business?Bookkeeping may seem like a mundane and tedious task compared to the overall appeal of owning and managing a small business. Yet, it’s a necessary practice you need to do right to keep your business afloat and successful. To manage your business well, make sure to avoid the 11 most common bookkeeping mistakes.
Bookkeeping Mistakes That Small Business Owners Make
1. Not Hiring an Experienced Bookkeeper and Professional AccountantMany business owners, regardless of the size of their business, don’t get bookkeeping and accounting help from professionals. Instead, they do all the work themselves or get someone inexperienced to do the job. There’s a danger of messing up your financial records or missing tax deadlines when someone inexperienced handles bookkeeping and accounting. Despite this, there are business owners who don’t see hiring bookkeepers and accountants as an investment but rather as a waste of money. It also speaks volumes about how they value their time. Without the help of an experienced bookkeeper and a professional accountant, managing your finances can become tedious and time-consuming. Time is money, and business owners can free up their time to focus on growing their business if they know how to delegate tasks appropriately. The most practical solution is to hire an experienced bookkeeper and a professional accountant. Bookkeepers will prepare your books and financial statements, while accountants will guide you through taxes and financial decisions. Hiring trustworthy professionals to do the work for you ensures the following:
- Proper recording of your financial transactions
- Proper handling of your finances
- Compliance to financial and legal regulations
2. Improper Record-Keeping of Financial TransactionsA common small business bookkeeping mistake is improper receipt and record-keeping. Keeping track of your financial transactions accurately and saving your receipts will prepare you for tax filing and potential IRS auditing. One of the small business bookkeeping tips you can apply is saving your receipts in electronic format so you can easily retrieve them from your database. It’s the bookkeeper’s job to record all financial transactions and organize receipts accurately. Maintaining up-to-date records can save you from overpaying and penalties later on.
3. Inaccurate Categorizing of Income and ExpensesIf you delegate your bookkeeping to someone who doesn’t know formal bookkeeping practices, they can commit this mistake. For instance, a common error is categorizing transfers as income when these are non-business transactions that don’t affect your profit and loss. It’s important to accurately differentiate income from expenses and record them correctly to ensure you see the right amount of profit. When you apply the right tax treatment for each income and expense category, you can also save money from taxes.
4. Inappropriate Petty Cash ManagementPetty cash is the cash on hand you keep for your business. The amount may vary, but it often covers regular and unexpected expenses. The problem is, some business owners aren’t able to track their petty cash and where they spend it. That’s why you need to set up a system that’ll track your petty cash fund and disbursements. Some of the practical things you can do are:
- Get a petty cash box
- Log every amount you take from your petty cash fund and where you use it for
- Collect receipts for all your disbursements
Disbursement Definition: This refers to the payment of money from a particular fund (e.g., a petty cash fund).