As any small business owner will tell you, running a small business is no small feat. Between juggling sales, customer service, marketing, and whatever else, you can feel like a chicken with your head cut off more often than not. The last thing on your mind at the end of a busy day is catching up on your small business bookkeeping or running updated financial statements.
However, neglecting these crucial tasks can lead to financial chaos and even jeopardize your business’s future. Let’s dive into some common mistakes small business owners make when it comes to their bookkeeping and accounting—and how to avoid them.
1. Mixing Personal and Business Finances
One of the biggest (and most common) mistakes small business owners make is mixing personal and business finances. It’s tempting to use your personal bank account for business expenses, especially in the early stages before you’ve set up new business bank and credit card accounts.
This causes a few issues: first and foremost, it makes it REALLY hard to get an accurate view of how the business is doing. If your personal expenses are mixed in with the business expenses you won’t know if you’re bleeding cash or making money, which means you won’t know if changes need to be made. This also means you won’t be able to get ready for tax time (without a lot of extra time and expense). Lastly, if you set up an LLC or a corporation for the business, you could jeopardize the extra legal protection if a judge views you as intermingling your personal and business lives (ie, they could “pierce the corporate veil”).
What to do: open a separate bank account for your business as soon as possible, and then run ALL of the business income and expenses through that account. Keep your personal expenses in your personal account.
2. Neglecting Regular Bookkeeping
While I try to coach (ie, nag) my small business clients to stay on top of their bookkeeping, inevitably a few of them come to me during tax season and admit they haven’t exactly done a great job at keeping things up to date.
Consistent bookkeeping might not be the most glamorous task, but it’s essential to running a successful business. Many business owners procrastinate on recording transactions, thinking they’ll catch up later. This often results in missed receipts, forgotten expenses, and inaccurate financial statements.
What to do: set aside a regular time each week to update your books. This will save you from headaches down the road. If you really can’t find the time, it’s time to outsource (see #7 below)
3. Not Keeping Track of Receipts
In the past, small business owners had filing cabinets full of old receipts and expense reports. Thankfully, those days are long gone and its easier than ever to keep a good record of major expenses.
If you’re ever audited, the IRS will ask for proof that expenses are for legitimate business purposes. This isn’t as hard as it sounds. Most of the time that you purchase something online (ie, Amazon) they already keep a record of it for you, or you immediately receive an email confirmation.
What to do: Invest in a good receipt management system—whether it’s a dedicated app or a simple filing system. Consider putting a folder on your desktop and dropping PDFs in it for major purchases. Keeping digital copies can also save space and make organization easier.
4. Failing to Reconcile Accounts
Reconciling your bank statements with your bookkeeping records ensures everything matches up and helps catch any errors or suspicious activities early. Skipping this step can lead to discrepancies and potential financial issues.
What to do: make it a habit to compare your month-end cash balance from your records to the month-end balance on the actual bank statement. If you use small business bookkeeping software like QuickBooks they’ll help you automate this process.
5. Ignoring Cash Flow Management
You might have heard the phrase “Cash is King.” It’s a popular adage because it’s true. Cash flow is the lifeblood of any business.
Ignoring it can lead to severe problems, even if your business is profitable on paper. Track your cash flow diligently to ensure you have enough funds to cover expenses and plan for future growth. Early on for new businesses it’s likely you’ll have some months in the red (especially if your business is seasonal or sporadic in nature). What we want to avoid is running into a cash crunch where you’re unable to pay your bills.
What to do: If you use software like QuickBooks, you can run a Cash Flow Report to see where all your money is going. If you’re doing your books manually (on a spreadsheet) look at your beginning and ending cash balance each month track it. If you have big expenses coming up in the next month or two, make sure you have enough set aside.
6. Not Understanding Tax Obligations
Taxes can be complicated, and many small business owners make the mistake of not fully understanding their tax obligations. One of the reasons to keep your bookkeeping up to date is to have an accurate estimate of what your taxable profit for the year is going to be. You’l need to keep that number in mind, because if your business is profitable you could have a big bill due in April. (Reminder! You’ll likely pay BOTH income and self-employment taxes.)
What to do: If you’re a small business owner, congratulations – you’ve officially graduated from TurboTax. Find a local tax professional to help you come up with estimates on what your taxes owed will be. More on that in the next point.
7. Overlooking Professional Help
Many small business owners hesitate to hire professional help due to cost concerns. However, a good accountant can save you money in the long run by providing valuable financial insights, ensuring tax compliance, and helping you make strategic decisions.
How do you know when it’s time to outsource your bookkeeping to a pro? If any of these apply to you, contact us to take over your books
- Your business has grown and either you’re too busy or there are too many transactions for you to stay on top it. Most small businesses can handle their books when they have fewer than 25-50 transactions a month. Once you approach 100 you can feel like you’re drowning.
- You open a second location / division / product line / etc and want to keep track of profit and loss by multiple segments (ie, revenue and expense by Location A vs Location B). This is usually outside the scope of what DIYers can handle.
- You need more advanced financial reporting. Most QuickBooks users are familiar with running a Balance Sheet and Profit and Loss report, but haven’t quite dipped their toes into the muddy waters of A/R Aging and Vendor Spend details.
- The business becomes profitable enough to warrant converting to an S-Corp. Since we’ll need to run payroll based on your projected profit, you want to make sure your books are well managed so those projections are accurate (ie “garbage in, garbage out”
What to do: find a local CPA firm to help. Or contact us today for a free consult.