10 Small Business Bookkeeping Mistakes to Avoid
Maybe you’re just starting out, or maybe you’ve had a trusted bookkeeper leave you. Either way, if you’re taking a do-it-yourself approach to your bookkeeping, you’ll want to avoid the top 10 mistakes small business owners make with their bookkeeping.
1. Using price as the main factor when choosing a bookkeeper
There are no licensure requirements for bookkeeping, so anyone can call themselves a bookkeeper. But proper bookkeeping takes both computer skills and accounting knowledge. So be wary of bookkeepers quoting low rates. That low-rate bookkeeper may have invoiced in QuickBooks for a previous job, but chances are they don’t understand the underlying accounting.
In the end, your business comes down to numbers. Those numbers need to be right for your CPA to file your taxes and, more importantly, for you to have the information you need to make critical management decisions. So don’t skimp on price when hiring a bookkeeper
2. Mixing personal and business in your bank accounts
Do you have a separate business bank account and credit card? If not, stop what you’re doing and go set them up right now. There are plenty of banks that will set up additional business checking accounts for free if you already bank with them personally.
Separating business and personal makes bookkeeping a whole lot easier. It will save you money on accounting services and help if you get audited. If you don’t separate business and personal, you might forget to include business expenses on your tax return – costing you money in lost deductions.
3. Not setting up strong internal controls
You might hire a trusted friend or family member to manage your accounting. No matter how much you trust your employees, always set up internal controls to prevent theft.
The most important internal control is very simple: The person making payments and deposits should not be the same person recording those transactions. If these duties are split among two employees, it’s best if they don’t work together. Better yet, outsource the bookkeeping and the two employees don’t even have to know each other.
4. Doing your taxes yourself
It might be tempting to save on costly tax preparation fees, but those fees are high for a reason. The tax code is complex and changing, and it takes an experienced professional to do business taxes properly. Software does a decent job, but those tax “interviews” are designed to work for millions of people and can’t possibly address every situation.
Do taxes yourself and you could miss out on valuable deductions or credits. Or you might claim one you’re not eligible for, raising a red flag with the IRS and leading to an audit, penalties, and interest.
5. Not doing your monthly reconciliation
If you don’t regularly reconcile your books, there’s no way to know if the financial statements are accurate. All bank accounts, fixed assets, and loans should be reconciled on a monthly basis to ensure all business activity has been captured and recorded. Don’t reconcile, and you could end up overstating or understating important items such as revenue, cost of goods sold, and net income.
6. Thinking that cash flow and profit are the same thing
Profit is a simple concept: Total Income – Total Expenses = Profit. Cash flow is the amount of money moving in or out of your bank accounts. Due to the time between invoices/bills and the corresponding payment, profit and cash flow will usually differ. Thinking that positive cash flow equals profit can get you in trouble, since you might not keep the cash on hand necessary to pay all your bills.
Here’s an example: Let’s say you make gizmos. You have one customer. In April you make 50 gizmos at a cost of $50. You sell the gizmos for $200, but the customer doesn’t pay you until May. April is a profitable month because your costs were less than your projected income. But your cash flow in April is negative because you haven’t received payment from the customer yet.
7. Incorrectly reporting payroll taxes
In 2013 the IRS assessed approximately $4.5 billion in penalties for payroll tax errors. As the business owner, you are responsible for timely filing and payment of federal payroll taxes, as well as state and sometimes even local payroll taxes. Even if you’re incorporated, the government can come after your personal assets in this regard. To minimize this risk, outsource your payroll.
8. Expensing large purchases right away
It seems intuitive – everything you purchase for your business is an expense, right? Not quite. If you purchase something that will last longer than one year, like a new computer, you should capitalize that purchase. What that means is you’ll treat that computer as an asset, record it on your balance sheet, and then depreciate the cost over time. This may be beneficial for high-growth startups as they will be able to record an expense in later (hopefully more profitable) years.
9. Losing petty cash records (or never keeping them to begin with)
Having a petty cash account is inherently risky and subject to abuse. If you handle cash, make sure to carefully track the money in and out, and reconcile the expenses with the cash disbursements from time to time.
Expenses incurred in the petty cash fund should also be recorded in the books to ensure you’re capturing all business expenses. If you miss a deduction in one year, it’s gone. You can’t hold on to it for next year!
10. Paying your staff as contractors when they should be employees
The IRS uses 3 factors to determine if someone is an employee or contractor. There’s no hard-line test for it, so employers have to use their best judgment.
If the IRS determines that you’ve improperly classified employees as contractors, you’re on the hook for all unpaid payroll taxes – the employee’s share as well as the employer’s, plus interest and penalties.
If the employee vs. contractor status isn’t clear, it’s best to play it safe and put that worker on your payroll as an employee.
This guest post brought to you by Blake Oliver CEO of Cloudsourced Accounting,
Blake has 10 years of experience as a bookkeeper and accountant managing accounting systems for a variety of small businesses and non-profits. He earned his bachelor’s degree from Northwestern University’s Bienen School of Music, majoring in cello performance. Always good with computers and numbers, Blake picked up bookkeeping after graduation to support his music habit. Blake believes firmly that the future of accounting is in the cloud, and loves leveraging technology to cost-effectively free up the time of busy entrepreneurs.