Managing a small business is a juggling act. You’re handling marketing, sales, customer service, and everything in between. It’s no surprise that bookkeeping often gets pushed to the back burner, but neglecting it can lead to some serious problems down the road.
From missed tax deductions to cash flow issues, seemingly bookkeeping errors can oversize your business’s financial health. Here are five small but common bookkeeping mistakes small businesses make and how to avoid them.
1. Not Reviewing Your Reports Until Tax Season
Bookkeeping isn’t just for tax prep. The deliverables from the monthly bookkeeping process, namely the Profit and Loss Statement and the Balance Sheet, are valuable tools for running your business. One of the strongest arguments for monthly bookkeeping is real-time access—something annual P&L prep simply can’t offer.
Your annual P&L will ultimately look the same whether you prepare one month at a time or spend a week in January doing all twelve months at once. However, breaking the task into monthly increments makes it easier, since you’ll have digital records on hand and the details of each transaction will still be fresh in your mind.
Most importantly, by reviewing reports monthly, you can spot worrying trends and identify unprofitable revenue streams or customers. If you notice expenses increasing, you can also take action to maintain your desired gross profit percentage before too much time has passed.
Just knowing you have cash in your bank account is not enough information to run a business. If you need help understanding your P&L, schedule a monthly check-in call with your accountant.
2. Not Reconciling Accounts At All
Account reconciliation is the process of comparing your bank register in QuickBooks Online with your bank statements to ensure they match. This process should also apply to other Balance Sheet accounts, such as credit cards, car loans, lines of credit, and mortgages.
It’s essential for spotting missing transactions, bank fees, fraud, and one of the few ways to catch duplicate deposits. Overlooking duplicated deposits directly means you pay more in taxes.
Many small business owners skip reconciliations because the process is tedious or unfamiliar, but it’s a necessary chore. Clearing the bank feed screen in QuickBooks or categorizing all your transactions is not the same as reconciling. If you’re not completing the QuickBooks workflow called Reconciliation, you’re missing an essential final step and the last line of defense against overpaying Uncle Sam.
3. Mixing Personal and Business Finances
This is the most common mistake. When starting out, it might seem harmless to pay for a business lunch with your personal debit card or use a business credit card to buy groceries. However, this creates a confusing mess and is a leading cause of delayed bookkeeping and last-minute tax extensions.
It also becomes challenging to ensure you are tracking all business expenses. This results in unnecessary time spent manually recording transactions, potentially missing out on tax deductions, and making another overpayment to Uncle Sam.
You should have one bank account (and credit card, if desired) for your personal finances, plus another for each separate business you run.
4. Ignoring Your Accounts Receivable
Accounts receivable (A/R) refers to the money owed to your business by customers. If you’re not diligent about invoicing and following up on late payments, you’re essentially letting your cash flow dry up. Many business owners are so focused on sales that they forget to collect the money they’ve already earned.
When closing your books, you’ll catch discrepancies like payments you thought you processed but that your customer’s bank declined. You’ll realize billable expenses were accumulating uninvoiced and find auto-emailed invoices that bounced back, never making it to the customer.
You’ll find little mistakes here and there that can add up to big dollars. Aged accounts receivable can lead to uncollectibles and increased interest payments as owners are forced to draw on lines of credit.
These foundational bookkeeping best practices can help ensure your records reflect reality:
- Create a consistent process for invoicing.
- Maintain a checklist of all your customers, including who to bill for what.
- Send invoices promptly following service delivery.
- If you’re not using accounting software, ensure your invoices are professional by including the date, a unique invoice number, and the payment terms.
- Follow up on past-due invoices with a friendly reminder.
- Most importantly, clearly show how clients can pay you. Include your address for checks or a link to accept electronic payments.
5. Categorizing Expenses Incorrectly
When entering expenses, it’s easy to lump things into generic categories. However, categories like office supplies, job supplies, miscellaneous, and other business expenses can quickly balloon into large, meaningless amounts.
Proper categorization is essential for accurate financial reporting and expense tracking. When multiple types of costs live in the same account, your reporting becomes less valuable.
While you have wide latitude when naming expense accounts, some special rules still apply. Loan and credit card payments, as well as purchases of meals, entertainment, and assets, need to be treated in specific ways. To simplify error correction later, always tag transactions with vendor names and assign them to consistent categories.
Why Hiring a Professional Bookkeeper is a Smart Choice
While it might seem like a way to save money, handling complex bookkeeping tasks without proper knowledge can lead to bigger problems. What you save in an accountant’s fee, you could lose in interest, missed deductions, and, ultimately, overpaid taxes.
A professional bookkeeper’s expertise can save you time, money, and stress in just a few hours a month. Whether you’re just starting or scaling up, small business bookkeeping tips like working with a pro can make all the difference.
Bookkeepers can assist with the following:
- Set up your accounting system
- Categorize your transactions
- Send out your invoices
- Reconcile your books monthly
- Review your reports with you
- Ensure you are ready for tax season
Takeaway
Good bookkeeping isn’t just about paying bills and tracking income—it’s about understanding the financial health of your business. By avoiding these common bookkeeping mistakes, you can set a strong foundation for sustainable growth and make tax season much less stressful.
Contact Szweda Consulting, LLC today to explore our bookkeeping solutions.
Szweda Consulting, LLC has presented this material for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. It is not to be considered an exhaustive resource on the topic presented. Contact us individually or consult your tax, legal, or accounting advisor before engaging in any transaction. This article was generated using the assistance of an Al program. A human has reviewed, revised, supplemented, and rewritten parts of this content.
