The Most Common Mistakes When It Comes To Bookkeeping
When starting a new business, a lot of entrepreneurs choose to do their own bookkeeping, at least in the beginning. Although this is usually done as a money saving measure, it is always a good idea to familiarise yourself with as many aspects of the business as possible. If you choose to take on a bookkeeper further down the line, you will have a much better understanding of the skillsets they should have, as well as an improved ability to spot any discrepancies or mistakes they may make.
While doing your own bookkeeping can have its advantages, it can also be a complex and time-consuming task. Unfortunately, making even a small mistake when it comes to money can have enormous logistical and legal ramifications, and can put your business at serious risk. To help avoid this, we’re going to look at some of the most common mistakes people make when it comes to bookkeeping.
Using Your Business Account For Your Personal Expenses
The cardinal sin of bookkeeping is using your business account for personal expenses. From a purely practical point of view, this just creates more work for yourself later on. Any personal expenses that are charged to your business account need to be recorded as an owner’s draw rather than an expense, or simply reimbursed to the business account. While it is not the end of the world if you accidentally use your business card rather than your personal card, it will take more time to balance your books if you do it regularly, and will skew any analytics you may perform. Furthermore, if you ever get audited, mixing your personal and business expenses is not a good look.
From your own perspective as a business owner, the only thing worse than muddied records is no record at all. Absolutely every expense, no matter how small, should be recorded. It may seem as though including receipts for small amounts is creating more work than it is worth, but these small amounts add up over time. Omitting them will not only lead to a situation where your expenses appear lower than they truly are, which will impact your analytics and decision-making, but will also make it seem as though some of your cash has simply vanished. Once again, this could reflect badly on you in an audit, as it may appear that you or another staff member is slowly siphoning money from the business. Everything, right down to the amount of money in your petty-cash, should be recorded.
Bookkeeping may be a legal requirement in order for you to ensure you are paying the right amount of tax, making the appropriate deductions, and so on, but there’s no need to view bookkeeping as nothing more than a necessary evil. When done right, bookkeeping can be one of the most powerful assets in your business arsenal. A comprehensive and properly categorised ledger allows you to identify both positive and negative trends, and make well-informed decisions as to how you should handle your business moving forward. A large part of this is about ensuring that your expenses are properly categorised.
To use a simple example, classifying legal fees as wages rather than professional services will cause your wage expenses to appear artificially inflated, which upon review could make it appear as though you are overstaffed, when you are not. By clearly and properly categorising your expenses, you will paint a clearer picture of the true state of your business for yourself, and ultimately make better decisions.
Failure to Reconcile
Let’s face it: regulations and expectations surrounding business finance are, and always will be, complicated. Even a good bookkeeper with a well-maintained ledger will occasionally make mistakes. That is why, as unappealing as it may be, it is important to reconcile your records with your bank account. Doing this regularly, such as on a monthly basis, can help you identify any inconsistencies, and address them before they repeat or become a major problem.
Not Creating Backups
The point of bookkeeping is to keep a record of all transactions in one place, which can serve as the go-to reference point for any financial queries. But this often leads to a mentality that there is one book or file that is the be-all and end-all of your records, while the rest of the documentation is stored somewhere else, or simply discarded. The risk here is that if that book or file goes missing without a backup, it can wreak havoc on your business. In this day and age, there is no excuse for not having several backups.
There are lots of free services such as DropBox and Google Drive where business owners can safely store files for free, eliminating the risk of losing files if your computer is stolen or breaks down. You should also take the time to photograph the pages in your physical ledger, and email them to yourself, as well as printing off another hard copy and storing it off-site.
Overlooking Deductions & Incentives
One of the biggest disadvantages of doing your own bookkeeping is that you will not be as well-informed on all the money saving possibilities as a professional bookkeeper. This inevitably leads to a situation where people are not taking advantage of all the deductions, tax credits, schemes, incentives, and reimbursements for which they are eligible. These are often more than just small savings here and there, and they certainly add up over time, which not only costs the business money, but the owner as well.
Confusing Transfers with Revenue
This mistake applies particularly to people who use bookkeeping software, as most of these products will see any cash that lands in your account as income. The software then automatically classifies these as such, and since they usually provide the user with analytics, things can get distorted quite quickly. Usually you can easily reclassify these and nip this issue in the bud, but if you’re not aware of the issue, it can cause problems further down the line.
Bookkeeping is not an easy or enjoyable process, but it is a extremely important one. All of the mistakes listed above can easily be made by intelligent, well-meaning individuals who are simply overwhelmed by all the different aspects of the tasks. Familiarising yourself with the bookkeeping process is a good idea, and can be very helpful in the early days of a new business, but once you find your footing, engaging the services of a professional bookkeeper is an investment that is definitely worth considering.