If you’re like most small business owners, your goal is to make as much money as possible and keep your cash flow steady. Bookkeeping mistakes can hinder that and cost you a lot of money that will lead to cash flow problems, which are one of the top reasons for business failure, according to the Small Business Development Center at the University of Georgia.
Keep your business afloat and your bank account full by avoiding the following common bookkeeping mistakes.
Chances are you went into business for the excitement of creating products and services for eager customers. That may put bookkeeping at the bottom of your list in terms of enjoyable activities, but underestimating the value and importance of bookkeeping can quickly derail your company.
Bookkeeping may not bring cash into your business, but it does ensure that your money is well managed and the cash keeps flowing. Without a proper set of books, you also can’t apply for funding, if needed. Good bookkeeping ensures that you always know how well or not so well your company is doing.
To ensure your books are accurate, it’s important to properly differentiate expenses from income and then record them in the correct categories. If your information is entered incorrectly, your financial reports will be inaccurate. This can cause a snowball effect of decisions made using erroneous information.
By not categorizing income and expenses correctly, you may also miss out on money-saving tax deductions. Here are some general categories to include: travel, dining and entertainment, reference materials, dues and subscriptions, office supplies, equipment expenses, and rent and utilities.
Not keeping track of all your company’s expenses harms your business in many ways. Failing to track and record deductible expenses results in you paying more taxes than you should.
Additionally, if you don’t have a good record of how much you’re spending on your business, all your financial reports are inaccurate. You also risk a serious cash flow problem in the future because not tracking and recording all your expenses makes your company appear more profitable than it really is.
Ensure that you keep track of even the smallest of purchases. A few dollars here and there may not seem like a lot. Add those amounts up over the course of months or a year, though, and you’ll have a substantial amount of money.
If you are audited, it’s important to be able to back up your claimed deductions with receipts — even small ones. If you don’t want to store a lot of paper, there are apps that capture a photo of the receipt for you. Then each receipt can be allocated to the proper category. Just make sure you have a backup of the digital receipts if you’re going to throw away the paper receipts.
Large purchases such as a copy machine or other equipment should be written off as major expenses. That means that such expenses will be categorized as assets. When you buy an asset, the item can be depreciated over its lifetime on your tax return. That saves you money each year. The yearly savings add up to much more than if you took a one-time deduction.
A petty cash fund consists of a small amount of cash that can be used for nominal expenses in lieu of paying with a check or credit card. The petty cash amount you keep on hand may vary. What shouldn’t vary is how you handle the funds in terms of disbursement and record keeping.
Every petty cash disbursement should include clear documentation, including how much money a person took out and when. Those using the petty cash must return with a receipt that shows what the cash was spent on.
It’s often a good idea to have one person in charge of managing the petty cash. Like all your accounts, the petty cash should also be reconciled monthly. For security, consider getting a locking cash box.
To avoid expensive tax penalties, it’s important to know the difference between employees and independent contractors. There are rules to consider when determining how to classify those working for your business.
According to the Internal Revenue Service (IRS), an independent contractor has full control over his or her schedule and generally works in a separate office or location. You as the employer are not able to control how, when, or where the work is done — only that it’s done. Those who work as independent contractors must pay their own self-employment tax.
An employee, on the other hand, must follow your rules in terms of where, when, and how to work. The IRS stipulates that even if you give employees freedom of action, if you control the details of how their work is performed, they are employees. The taxes employees and employers must pay are different from those of independent contractors.
When you have employees, you must pay payroll taxes each payday. On the other hand, when you have independent contractors, you must send them Form 1099-NEC, if you paid them $600 or more during the year.
Mistakes are made during bookkeeping. That means that it’s important to do what is known as reconciling. This refers to checking the entries you made in your bookkeeping system against your bank and credit card statements.
Make sure to check that everything has been entered correctly in your books. If there are mistakes, this will affect the accuracy of your financial reports and may end up costing you tax savings. Reconciling should be done monthly with all your accounts.
Bookkeeping is a labor-intensive task. For that reason, it’s best to stay on top of your company accounts by working on the books on a regular basis. The further behind you get, the more difficult it is to ensure that any costly errors are caught in time and you remember everything that needs to be entered. It also becomes more difficult to reconcile the longer you wait. If your bookkeeping is lagging, you’re also at a disadvantage because you won’t have important financial documents at your fingertips.
If you sell physical products, you’re generally required to collect sales tax. When you sell online, this can be complicated. It’s important to understand your responsibilities regarding sales tax collection and payments. Non-compliance in this area can lead to stiff tax penalties. It’s also vital to ensure that you pay your sales tax in a timely manner, as there are fines for not doing so.
For your financial reports to inform you of how your business is performing, it’s necessary to understand what each report encompasses and represents. Familiarize yourself with the various accounting reports, such as profit and loss (P&L) statements, cash flow reports, and accounts receivable aging reports.
If you have someone enter your finances into a bookkeeping system, it’s important to go through their work and spot check for accuracy and omissions. It’s also vital that you review your financial statements on a regular basis.
While it might be tempting to keep your eye on growing your business and neglect your finances, keep in mind that your accounting reports are a barometer of how your company is performing. Without checking those reports on a regular basis, you’re flying blind.
While it’s advisable to work on a computerized accounting system to enter your bookkeeping data and manage it, you still need a reliable backup in case something should go wrong and your data is lost or becomes inaccessible.
Some business owners choose to keep paper backup records, while others use a separate digital system or cloud backup. Whatever method you choose, just make sure that you have more than one option for accessing and downloading your financial records. Losing your financial data could spell disaster for your business.
Make sure to keep financial records for at least seven years, as that’s how far back the IRS may go to do an audit of your company’s books. Losing your data, such as receipts, is not a valid excuse for the IRS. For example, if you can’t produce receipts for expenses shown on your tax return, they can invalidate the deductions. That means you’ll be responsible for paying more taxes than you would have otherwise.
Just about every small business owner makes bookkeeping mistakes at some point. If you’ve made errors, correcting the problems as soon as possible will generally minimize damage to your business. For a free trial to Swyft Books, which offers small business bookkeeping assistance, including instructions and guidance, click here.