Farwah Jafri | June 18 2021
Let’s be honest: bookkeeping isn’t fun, but it’s a crucial function that ensures your business continuously generates profits. While technology and the cloud have definitely made things simpler, bookkeeping still remains an insurmountable challenge for many business owners.
The problem is that many people, in the rush to get their business off the ground, relegate their bookkeeping to the very bottom of their to-do list and do not come back to it until the finances become disastrous due to common bookkeeping mistakes. This is no less critical and needs regular management and overseeing.
You must remember that while your creative spirit may have helped launch your business, it will always be the financial side that will sustain it and keep it going in the long run. But all things considered, if you start off on the right foot, then managing your books will not be the biggest challenge and you will be able to avoid committing these common bookkeeping mistakes.
This is the most common error. Business owners continuously delay their bookkeeping responsibilities and fall so further behind that they lose all time to catch up. As is the common saying, the more you avoid your problems, the bigger and more complicated they will become later on.
So, it’s always better to face them headfirst and get them out of the way as bookkeeping is one of the activities that you will be able to keep under control if you do it regularly.
Another common bookkeeping mistake CEOs make is to not track their sales invoices using an accounting software. There are several methods for tracking sales invoices, but not all of them are equal in terms of their practicality and proficiency.
While it is true that tracking invoices on Microsoft Excel is much more efficient than tracking them on paper, there are a number of accounting software programs available that can help you monitor sales invoices. Xero, a cloud-based bookkeeping tool, for example, makes it simple to manage invoices and combine them into your bookkeeping. You can also set up automatic alerts and receive payments online through Xero.
A common bookkeeping mistake committed by small business owners is that they try to write off major capital purchases as a current expense. The difference between both is that while current expense is a business’s day-to-day operating expenditure, capital purchases provide long-term profit to a business that goes beyond a year. Capital purchases are also depreciated over a large period of time, while expenses are recorded as they occur.
Forgetting to keep receipts is another very common bookkeeping mistake. During audits, the IRS usually asks a company to present the following two documents from their expenses: receipts and credit card statements. And not having proper records of both of these documents leads the auditors to take stern action against an organization.
Although it does not imply that you keep every single receipt from now on, but you need to keep important business expense receipts saved for up to seven years at least. A physical copy is acceptable, but we recommend storing a digital counterpart on your system as well, to make finding and presenting them to auditors all the more convenient.
Often business owners commit a bookkeeping mistake of using the first banking card that is readily available to them while making a purchase. While it may seem innocuous at first, it is a very common error committed that makes differentiating between business and personal expenses extremely difficult later on.
To avoid going through this hassle, make sure to always keep your business and personal banking transactions separate. The simplest way to do this is to have a different card for all your business expenses.
If you keep your business and personal spending apart, your bank statements will show completely accurate records of your expenses and save you from losing out on valuable tax savings!
Another common bookkeeping mistake businesses make is not having proper, organized paperwork. Despite the financial healthf your business, as a business owner, you need to remain up to date about your received revenues and incurred expenses. A well-documented paperwork is the only thing that can help you stay informed in this regard. Doing so can be pretty simple if you schedule time for it and it will only end up making things easier for you in the future.
Organize your paperwork, make regular backups, and invest in a waterproof and fireproof storage solution that can only be accessed by you or your accountants and can be locked per necessity.
Bank reconciliation is the process of verifying that the balances listed in your books are accurate. It also allows you to track the financial health of your business much more clearly. Many business owners find the process of reconciliation to be somewhat tedious and time-consuming and therefore, miss out on reconciling their accounts.
This oversight leads to owners committing mistakes like over-drafting their accounts and being unable to account for all of the money in their bank. Monthly bank reconciliation is recommended, and software programs like Quickbooks greatly help to ease the process.
One of the most common bookkeeping mistakes that occur in businesses is when an employee is allowed to use the business records for reimbursing, purchasing, or paying a bonus. Because when they are permitted to carry out such activities, they often miss out on doing the most important thing, informing the bookkeeper.
If you have an in-house bookkeeper, you must keep them informed of any and all activities related to your accounts. Failure to do so leads to all sorts of mishaps, and complications at the time of book reconciliation or tax filing.
When expenses are correctly classified in the ledger, it helps every accountant get a good understanding of the financial health of the business. However, when things like these are incorrectly classified, the financial picture becomes anything but accurate.
Incorrect categorization of revenue or entering info in the wrong categories entirely are two of the biggest reasons that create financial confusion. If you don’t fix these problems until much later, resolving them will become all the more costly and time-consuming for you.
If you have a skilled bookkeeper working for you, they should be able to detect incorrect categorization easily and fix them before they become a problem. Avoiding these kinds of headaches is worth the cost of hiring a professional who you can rely on day-in, day-out to carry out accurate bookkeeping for your business.
Probably the biggest and most common bookkeeping mistake CEOs make is misconceiving that they can manage their bookkeeping by themselves. You have to know a capable bookkeeper does more than just record and update your financial ledger with receipts. They also assist the company owner in handling daily transactions by carrying out bank reconciliations, managing payables and receivables, processing payroll, and preparing monthly and quarterly reports.
At Monily, we’ve seen a lot of small business owners make these common bookkeeping mistakes. With our dedicated assistance, advice, and expertise, you will be able to run reports, and evaluate the performance of your business accurately and with utmost convenience. We’ll manage your bookkeeping so you can concentrate on what’s important to you: developing your business and increasing your revenue. Set up a meeting today with one of our professional certified public accountants to see how our bookkeeping services can best assist you.
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.