Bookkeeping mistakes you should avoid
Small and medium enterprises show a lot of zest for expanding the business, but more often, they fail to grasp the underlying requirements. One such thing is bookkeeping, which, if not dealt with, will put your business process in jeopardy.
Many business owners are of the opinion that accounting is a fairly simple process and don’t spare the adequate attention that it deserves. But, poor accounting and bookkeeping practices can adversely affect the financial health of any organisation. In many cases, recurring bookkeeping mistakes can lead your business towards insolvency.
Being overly dependent on an accounting software
Many bookkeeping errors emerge from oversights that could be easily detected and rectified through a manual audit. Now, it isn’t uncommon for small businesses to completely bypass them because they’re too dependent on their accounting software.
Small businesses are required to carry out proper financial audits to look for bookkeeping mistakes in their spreadsheets, or for errors that the software failed to catch. The sooner you realise that not all mistakes will be rectified by any accounting software, the higher your chances of maintaining an error-free bookkeeping record.
Cannot Accurately Track Petty Cash
Many businesses do not keep a proper account of petty cash, due to their relatively small amounts. However, petty cash can add up to a significant sum over time. A simple accounting system should be in place to log the amount of funds initially placed into the petty cash reserve, and each employee who needs petty cash should submit a petty cash slip every time they require funds. The sum of these slips should balance with the original amount of money deposited in the petty cash reserve fund, prior to replenishing it.
It’s good practice for small businesses to keep petty cash on hand to cover minor expenses related to the business. But just because the amounts are small doesn’t mean they don’t need to be accounted for properly. A bookkeeper can set up a simple yet rigorous system for managing your petty cash to ensure small losses ‘here and there’ don’t add up to a lot at the end of the financial year.
Cannot Accurately Track Cash Flow Versus Profit
At times, businesses are unable to distinguish between cash flow and profit properly. This can frequently occur when expenses and outstanding payments due are not accurately accounted for. For example, there may be positive cash flow, but there may actually be a business loss due to outstanding expenses that are unpaid. Similarly, negative cash flow may be of a temporary nature, due to outstanding payments due from customers, and the business may actually be profitable.
Combining personal and business finances
This is one of the most common bookkeeping mistakes we see people make yet it’s one of the easiest to avoid.
Business and personal expenses must be recorded separately at all times, irrespective of the size of the organisation. One of the first things that small business owners should do is to open a business account and keep all of their business income in it.
The next thing to do is to work with an accountant to develop an earnings management strategy defining how cash is separated from the business to maintain personal expenses. Your earnings management strategy will be guided by aspects such as how much of your profits need to be invested back into the organisation, the time of payments for big business expenditures, your seasonal cash flow requirements, and your long-term personal financial plan.
The problem with mixing up your personal and business finances are two-fold; on the one hand, you could be missing out on tax deductions, on the other hand, if you declare personal receipts as business expenses, you could potentially incur costly fines. Outsourcing a professional bookkeeper for a few hours each month will save you from headaches in the long run.
In order to accurately track your business finances, you must separate all of your personal and business transactions, regardless of the size of your business. Separate business and personal financial accounts should be maintained, and you should avoid depositing any funds from the business into your personal accounts. You should also implement a strategy for withdrawing funds from your business account to disseminate profits to investors and to provide funds for your personal expenses.
No matter how big or small your business, and regardless of turnover or profit, your business and personal finances must be kept separate at all times. One of the first things a new business owner needs to do is open a separate business banking account and deposit all business income into that account.
Failing to Keep Relevant Receipts
Holding onto receipts for business expenses is crucial. Misplacing these can either cause problems when you complete your tax return, or you won’t be able to claim back any expenses. Nobody wants that.
It might seem silly to store all your receipts for things such as stationery you bought.
Failing to track the invoices
Invoicing is an integral part of cash-flow management and takes precedence for every bookkeeper. However, most business owners find it challenging to get payments on time.
It requires creating effective invoices which consist of payment links and are sent as soon as the project is delivered to the client. The bookkeepers usually follow up with the clients to remind them to make the payment on time.
They inform them clearly about the late fee clause in case of a delay without sounding overbearing. The business owner does not take all these pains and ends up getting late payments which disturb the flow of capital into the business.
Incorrect classification of data
It can become a problem if the books being prepared by the entrepreneurs to have too many similar categories. Entrepreneurs may not be able to differentiate between them and end up making the same entry twice under different categories.
It can change the final amount and give you the wrong figure. It can put the whole business in a chaotic situation since all the significant decisions are based on the available finances in the company. With an inaccurate figure on hand, the budget and the investments can get disrupted.
For instance, purchasing stationery should come under immediate expenses, and a long-term purchase like a photocopier should be categorised as an asset with depreciating value.
Also, an incorrect amount added to the accounts can cause an understatement of accounts payable where the owner believes to have more capital than what is actually available. It can create financial trouble for the venture.
There are several different categories of workers: full-time, part-time, and temporary employees, as well as independent contractors, such as freelancers and consultants. Classifying your workers in the wrong categories can be extremely costly as these categories determine who is eligible for employee benefits. A fully qualified bookkeeper can help identify the correct categories and ensure your records are accurate and in line with your taxation requirements.
Not Chasing Late Payments
Staying on top of your accounts receivable isn’t fun. It can be stressful when you’re relying on the money to come in, and it’s not in your account. After all, you’re a business. You provide a service or product, and you expect to get paid.
Make sure to establish payment terms so your customers are aware when to pay and your request for payment doesn’t seem out of the blue. Keeping up with your books will help you streamline your invoicing so that you can get paid in a timely fashion and you can then pay your bills the same way. Simple.
Not devoting enough time to the bookkeeping process
Proper accounting is one of the determinants of the success of your small business. It’s crucial to ensure that every financial transaction is properly recorded and categorised in your accounts, whether it’s a small payment or a hefty transaction from customers and clients.
Irrespective of how small your organisation is, taking the bookkeeping process seriously provides you with an accurate insight into your company’s prosperity. It allows you to learn exactly how well (or poorly) you’ve performed within a particular span.
Not keeping a record of small purchases
Even the most accomplished business owners sometimes forget to keep track of their business transactions. While it may not sound like a huge issue if a meal ticket is missing, these small purchases can mount up if ignored continuously. Also, you wouldn’t want the government breathing down your neck to check if you have claimed expenses, and don’t have any evidence to justify them.
If you go to your local stationery store and pick up $250 worth of printer paper and other important resources that need to be restocked frequently, it’s absolutely essential to record the purchase under “office supplies” and then write it off.
Being aware of the small transactions ultimately makes it easier to deal with the bigger ones. This way, you’ll find it easier to maintain your books as your organisation grows in size and the number of transactions increases.
If, however, you purchase a new printer, this needs to be recorded differently. You need to understand that it’s not about the purchase itself, but the usefulness of the items you purchase. A printer will obviously be utilised for a long time, so you can include it in the books as an asset and depreciate it over the estimated useful life of the machine.
Not knowing the distinction between cash flow and profits
A small business can have a positive cash flow within a short span and yet be unprofitable. Again, it can experience a negative short-term cash flow but still emerge as profitable in the long haul. The first situation is common among small businesses as they often need to pay the suppliers before they receive payment from their consumers.
To get a clear picture of your organisation’s true financial standing at all times, you need to liaise with an accountant so that he/she can prepare the financial statements regularly”. These comprise a balance sheet, profit and loss statement, and income statement, which should be presented at least quarterly.
Not preparing a budget
Most bookkeepers are experts in devising a financial plan for your business which helps in forecasting the budget and creating strategies for investments and cost-saving in Melbourne. It is a roadmap of how the business should utilise money without going overboard.
A budget helps in making progress made from the past year and investing wisely in resources and assets that pay off in the long-run. However, entrepreneurs avoid this step and end up spending far more than what is permissible and work without any financial goals. Thus the budget should not be ignored.
Not reconciling your books
Reconciling your books with your bank statement each month is one of the most fundamental aspects of bookkeeping. It simply means comparing the numbers on your books with your bank statement each month to ensure there are no discrepancies. If there are, they need to be dealt with right away.
A professional bookkeeper not only knows exactly what they’re looking for, they know how to deal with inconsistencies and can call the bank on your behalf if necessary. Leaving this to a qualified professional will ensure it’s done properly and you’ll avoid major financial problems later on.
Erroneous Monthly Balance Sheet Reconciliation
Each month the balance sheet of your business must be reconciled so that you have an accurate assessment of the financial status of your business, including its income, expenses, and inventory. This is one of the most fundamental accounting tasks, and it is sometimes overlooked or not performed properly. It is important to perform this task accurately to avoid, and correct, any accounting errors that occur, so that they will not accumulate and lead to larger financial problems.
Treating Assets or Liabilities as Expenses
You MUST know the difference between a balance sheet item and Profit & Loss item (remember, your bookkeeper can help you with this by explaining the Profit & Loss – what it means, what it’s telling you about your business).
Using the wrong accounting method
There are two main accounting methods, cash accounting and accrual accounting. Cash accounting records the money for a sale or service when the money is received, whereas accrual accounting records revenue and expenses when they’re incurred. It’s important to know which method is right for the type and size of your business, and how and when to change this over. A qualified bookkeeper has all the necessary skills and experience to help you with this.
Using the DIY Method of Bookkeeping
Many small business owners feel proud of wearing multiple hats, which also involves maintaining books and accounts. However, this part of the business should be handled by a specialist.
Bookkeeping and accounting can get really technical and complex. The money invested on a professional bookkeeper or an accountant, or even on a part-time or contract basis will be beneficial in terms of the time it will save and all the mistakes that will be averted.
Using Manual Accounting Systems
It’s no longer practical to input manual accounts records using a spreadsheet like Excel. Spreadsheets don’t provide a safeguard against incorrect data entry and other bookkeeping mistakes.
Businesses and those who are self-employed should opt to make the transition to an accounts system which is designed to catch simple errors which could cause major problems later on. Plus, nobody really has the time to sit down in front of a spreadsheet to crunch numbers when it can be done so much easier.
Lack of communication with your bookkeeper
Your bookkeeper should always know what’s going on in your business. Your small business must maintain complete information of its transactions, and it’s even more crucial that this information is thoroughly communicated with the bookkeeper.
Apparently, small mistakes like buying products or services, particularly those with monthly recurring expenses, and not informing this to your bookkeeper can cause serious issues down the line.
Other than maintaining clear communication with your bookkeeper, maintaining a paper record of all the transactions (big or small), make it easier to keep tabs on all of your income and expenditure.
It can be very tempting to try to cut costs and do the DIY method of bookkeeping. However, without the expertise offered by a professional, things can often get messy. Not knowing when to seek the assistance of an expert can lead to business failure.
A professional bookkeeper’s know-how and experience can help to keep your finances in line, maintain a healthy and steady long-term strategy, and keep your business on track.
Accurate and professional bookkeeping services are essential for the successful operation of any business. In addition, professional bookkeeping services can assist a business owner in successful business operation by providing them with data on revenue sources and expenses associated with their business. This service is also imperative for complying with all taxing authorities and maintaining your business records. We have outlined several bookkeeping errors that small business owners should be aware of in order to avert financial calamity.