So I am behind in my posts but you know how it is when things are busy! Especially since you are likely a small business owner yourself. Today’s article is directed at new business owners but the information is a good reminder for all business owners.

Why Bookkeeping is Important

I mentor bookkeeping at London’s Small Business Centre and this is one of the most crucial things I teach. Bookkeeping is the back bone of your business. Yes, you are an expert at your craft and you are excited to just get started. But without proper record keeping, more than 50% of new businesses will fail. I recommend reaching out to a bookkeeper for a consultation before you even get the ball rolling. This will ensure that you are off to a great start.

But, I want to give you an idea of the most common mistakes made by (not just new) business owners and how to avoid them.

1. Mixing personal and business finances.

This is a big no-no. Although a good bookkeeper can accurately record these transactions, it takes time and is tedious for you and the bookkeeper. Tedious work for the bookkeeper means higher bookkeeping bills for you! Further, it makes deciphering financial statements more difficult than they need be.

How to avoid it: quite simply, keep a dedicated business account and credit card account and use them strictly for business purposes.

2. Leaving the bookkeeping until tax time.

There’s a few reason’s for this. Number one, your bookkeeper doesn’t want all their clients handing in a year’s worth of bookkeeping at tax time! The chance that it will get completed on time is slim. Number two, how will you remember what that expense was for 11 months ago? This can lead to inaccurate financial reporting. Lastly, if you don’t keep tabs on your finances throughout the year, how will you be able to make sound business decisions? You don’t want to wait until year end to find out your business is losing money.

How to avoid it: arrange with your bookkeeper to have your bookkeeping completed at least quarterly. They may recommend monthly depending on the size of your business and the volume of work.

3. Not keeping supporting documents.

This is all too common. Supporting documents and receipts are an absolute must to support you in an audit. If you do not have supporting documents for those expenses, the expense could be disallowed. And no, your credit card or bank statement is not sufficient evidence for expenses.

How to avoid it: I suggest that business owners keep folders for each type of expense or use and accordion folder. If volume is limited, you can also keep documents by month.

4. Ignoring bank reconciliations.

If you don’t regularly compare your bank statements to your financial records, mistakes can go on for months, creating havoc for your financial statements. You just can’t afford to have the wrong information in the books.

How to avoid it: Always review your bank statements to ensure you understand what all the expenses are. A bookkeeper should be reconciling your books in the accounting software for you. If they are not, see here for red flags with regards to your bookkeeping.

5. Misclassifying expenses.

This one might be self explanatory. Entering expenses into the wrong categories can cause distortions in your financial statements, and ultimately, your tax returns.

How to avoid it: be sure your bookkeeper sets up a Chart of Accounts that best suits your business and is consistent when categorizing similar expenses.

6. Not monitoring your cash flow.

 

Cash is king. Not keeping tabs on it will cost you later when your bills come due.

How to avoid it: Invoice your customers as soon as the work is complete. Keeping the cash coming in will help when cash has to go out. Send reminders regularly.

7. Not reviewing and understanding your financial reports.

One of the topics I cover with business owners is how to read basic financial statements. This is imperative to your success. You should be looking for mistakes or discrepancies.

How to avoid it: review and understand your profit & loss and balance sheet reports every month or quarter. Some business owners also review their cash flow to be sure they are on track. This will help you find red flags, trends and plan for the future.

8. Failing to retain help for your bookkeeping.

Many business owners feel that hiring a qualified bookkeeper at the start of their business is too expensive. Well, I can tell you this: not doing so can be even more expensive! When we onboard new clients who have tried to do the bookkeeping themselves, we usually start from scratch because more than likely, there is a problem with the set up of the books or the data entry. Bookkeeping requires tremendous attention to detail and a solid understanding of accounting principles.

How to avoid it: see opening paragraph about why you should outsource your bookkeeping right from the get go.

9. Hiring an unqualified bookkeeper.

Unfortunately, unlike accountants, bookkeeping is not a regulated industry and therefore anyone can call themselves a bookkeeper, regardless of training. I have seen and cleaned up many a disastrous set of books only to result in enormous bookkeeping bills for the client. It’s just not worth it. Let me be clear: not all trained bookkeepers are great and, similarly, there are many good bookkeepers who do not have formal training. Just do your homework.

How to avoid it: see referrals for a bookkeeper and interview them to be sure they are knowledgeable and that it will be a good fit.

10. Confusing cash flow and profit.

This is super important. They are not the same. I frequently have to explain to people why, when they seem to be making money according to the books, there is no cash in the bank. And vice versa.

How to avoid it: see point 7. Read those reports. Understand them. Like I always say, money in the bank doesn’t mean profit and profit doesn’t mean money in the bank.

A Final Note

Being confident about your financial decisions is imperative for your business success. Accurate and on time bookkeeping is not an option for this to happen. Thankfully, it’s never too late to get things up to date and correct. There is no need to incur late fees and penalties for remittances and taxes; your business just can’t afford them. Keeping current will keep you organized, aware and confident in running your business. And you will be able to sleep at night!