When you start your own business, you're eager to learn everything there is to know about becoming a success. This often means doing your own marketing, selling, and finances.
Then as your business grows, you'll eventually outsource the tasks to specialists.
But this doesn't mean you shouldn't learn the best practices to ensure they're doing their jobs adequately.
This is especially true when it comes to your bookkeeping. Whether you're doing it yourself or overseeing a department that does it for you -- there are mistakes you must avoid.
Let's take a look at 10 of the most common mistakes we see made in bookkeeping (and what to do about them).
1. Not separating business and personal finances
This is a rookie mistake, especially for smaller companies. When you first start out, you may not have a business account.
So you'll end up using your personal account to collect revenue and pay for business expenses. The problem is, this will make it harder to determine which costs are for business and which are for pleasure.
This is important to know during tax season when it comes time to make deductions to lower what you owe.
To avoid this problem, we strongly recommend having a separate business account for all company transactions. And make sure you only use it for business purposes.
2. Not using accounting software
It's difficult to keep up with all the money coming into and out of your company. As you continue to grow, the transactions will only increase.
If you're still using paper bookkeeping to keep track of it all, then you're at a higher risk of human error. Plus, a lot of time is wasted doing tasks you can automate.
For example, invoicing.
With tools like invoicely, you can set up recurring bills that are automatically sent to customers. You can also see all of the pending and paid invoices in your platform.
This cuts out the need to track down payments and eliminates the need to update your paper books. So consider finding software tools that can cut down man hours and boost productivity.
3. Hiring just any bookkeeper for your company
There's never a one-size-fits-all bookkeeper. You have to ensure they one you hire caters to your particular industry.
For example, it wouldn't make sense to hire a CPA with tax experience to manage your investment accounts.
Make sure you're looking for and hiring candidates that have experience relevant to your business.
4. Not thinking ahead
Companies with the best financial stability are forward thinkers. They're always planning ahead to maintain their competitive edge.
Yet, there are some businesses that do the exact opposite. Like waiting until the last minute to do their bookkeeping.
Trying to scramble at the end of each quarter (or worse, each year) to do their books, is asking for trouble. As you'd imagine, this creates a hectic situation that can lead to a ton of errors.
You'll have to go through all of your bank statements to insert the data manually, which is already time-consuming. Wait too long and you have yourself a soul-sucking ordeal.
Avoid this by making it a habit to manage your books each month.
5. Not backing up your books
It's difficult to back up your financial books when you're doing things the old fashioned way -- pen and paper. If you're not already using software, then it's a good idea to consider doing so.
This will make it easier to back up all of your data in the cloud. Doing this will ensure you always have access to your financial details.
This can come in handy when you're traveling and need to access these files via your mobile device.
The last thing you need is to have all of your books ruined by a flood, fire, or vandalism. By uploading your data to the cloud, you never have to worry about physical storage and security.
6. Not differentiating between employees and contractors
While it's a good practice to treat your contractors like they're a part of the in-house team, you don't want to ignore the fact they're not.
What we mean is that you should classify your contractors separately so they're not counted as employees. When it comes time to do your taxes, you'll be able to deduct the expenses you pay to each contractor.
However, if you're classifying them as employees, then you miss out on this opportunity. Plus, you run the risk of paying higher taxes.
So file independent contractors accordingly.
7. Not going over your financial statements
There's a lot you can learn about your business just by reviewing your monthly and annual financial statements. These offer a window into how well your company's doing financially.
Is it growing? Is it stagnant? Or worse, is it in decline?
You won't know until you look at the reports. Again, if you're using a tool like invoicely, then it's easier to see the trends in your cash flow (or lack thereof).
Plus, if you have a set budget for each quarter, then these statements will tell you whether you're exceeding it.
Not going over your financial statements puts you in the dark, which means you're operating blindly -- not smart.
Be sure to regularly check your financial statements to ensure the sustainability and growth of your company.
8. Not keeping receipts for business purchases
Sure, you use your business credit card for all of your company expenses. But sometimes, these transactions are vague on your monthly statements.
This will make it tough to prove to the IRS that the deductions you claim are valid. So another way to back up your tax return is to keep all of your receipts.
No, this doesn't mean you have to keep a drawer filled with paper receipts. There's a more practical way of storing them -- digitally.
There are apps and tools you can use for recording your receipts. You just take a photo or scan of the receipt and it stores in the cloud.
This allows you to access your receipts from any internet-connected device. Plus, you can print them out if needed.
It's good to write on the receipt what the expense was for. For example, a business lunch or office supplies.
9. Not hiring a professional bookkeeper
There's a lot you can do on yourself as a business owner. But this doesn't mean that you should.
You need all the hours possible to be productive in growing your business. You can't do this if you're constantly staring down at your statements and books.
So allow a pro to do it for you instead.
It's good to work with a CPA because they can help you save money on your taxes. Plus, they stay up-to-date with the latest business tax laws.
That's definitely not something you can commit to as a business owner. Just make sure to hire someone with experience, industry knowledge, and a license.
In the event you're audited, you want them present to represent you (an added bonus!).
10. Recording transfers as income
Own multiple bank accounts? Then you likely transfer money from one account to the next every now and then.
When you do this, it's essential to mark these transfers as transfers. Otherwise, at first glance, it'll look like income.
This can obviously inflate your revenue, which will also increase the taxes you owe.
If you're using a platform like PayPal to transfer funds from a bank, then you can look up these transactions and deduct them from your revenue in the books.
Also, if you're using accounting software, then you'll need to update the "income" to "transfer."
11. Not paying attention to sales tax
There's no excuse -- if you're not paying your sales taxes, then the IRS will audit and fine you. It's best to become acquainted with sales tax obligations.
If you don't have the time to learn this, then you should get a CPA ASAP to help you figure things out. This will ensure you file your sales tax on time and are properly collecting sales tax from customers.
There are plenty of resources online you can use to learn all of this as well.
Improve Your Companies Bookkeeping
Staying on top of your business finances should always be top of mind. But it's hard when you have a business to run.
Thankfully, there are tools available to make managing your finances easier. Then if things get hectic, you can always work with a CPA.
Have your own secrets to successfully managing business bookkeeping? Then share them with us in the comments!