At first glimpse, bookkeeping might look like a straightforward task. But many small businesses make mistakes that can be costly. While it may not be the most glamorous job, maintaining accurate financials is crucial to small business success.
Generally, owners often make bookkeeping mistakes in their business's early stages, primarily due to the lack of knowledge and experience. While this does not look like a huge problem at first, being aware of the mistakes can relieve you from unnecessary stress and potential penalties.
Even if you don't have the time or money to become a qualified accountant, you can still avoid some common mistakes that can impact your business in the long run. Here are top pitfalls to avoid:
1. Trashing Receipts for Tiny Amount
While small charges might not look significant, they add up pretty quickly! The IRS does not require any receipt worth less than $75, making business owners neglect them, and they often end up in a dustbin. However, they can be essential as backup documentation to get the claim of any deductions.
These receipts can significantly help in budgeting, claiming deductions, tracking the cash flow, and even in the case of an audit.
A simple solution can be to arrange them in a folder and keep them away in a designated drawer. Also, there are mobile applications that help in taking pictures of such receipts and organize them accordingly.
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2. Handling Bookkeeping Yourself
As an owner of a small business, it is natural to oversee every aspect of your business yourself, especially bookkeeping. However, a few business owners are financial experts, and thinking that technology will compensate for the lack of expertise is a colossal blunder.
Hiring a competent professional bookkeeper can save you a lot of trouble. Not only do they have the skills and expertise to look out for errors, but they can also get the work done quickly and efficiently. Moreover, keeping a close eye on your financial track can be highly fruitful and save you a lot of money in the long run.
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3. Not Keeping Personal and Business Finances Separate
With many small business owners managing their books by themselves, they often mix personal and business finances. And it can get pretty messy. Mixing these finances not only puts you in the dark as to how your business is performing, but it also might blur the actual operating cost for the company. This can significantly impact your business growth.
An easy solution to this is to keep different accounts for your business and personal expenses. This is considered as one of the most important bookkeeping tips as it can help you keep track of your finances efficiently.
4. Failing to Track Reimbursement Expenses
Tracking your reimbursement expenses is the same as saving your smaller receipts. Neglecting to keep a check on reimbursement expenses can result in losing a considerable sum of money. For starters, you can lose tax deductions. Making a habit of tracking your reimbursement expenses as soon as you collect them is a great way to avoid this mistake. Additionally, there are several expense tracking apps available that can help you.
5. Not Backing up Files
While cloud storage has become essential storage for keeping records, not keeping hard records might be a liability. When it comes to auditing, an office without proper documentation of hard records can be a significant liability. Taxing authorities such as the IRS likes to see paper documents, so keeping an appropriate backup in the form of hard copies is a must.
It is recommended to record at least the last seven years to stay on the safe side in a technical issue.
6. Not Classifying Employers Properly
Each business consists of full-time employees, half-time employees, consultants, and even freelancers. Thus, it becomes a difficult job to determine who is a staff member and who is not.
Incorrectly classifying your employees can lead to misfiling of taxes, and in some cases, tax penalties and lawsuits. A much better approach is to work together with your bookkeeper and work out the details. This will ensure that your business is compliant with the law.
7. Not Communicating With Bookkeeper
Hiring a professional bookkeeper can save you from a lot of trouble. However, many business owners don't communicate with their bookkeepers effectively. Communicating with your bookkeeper can keep you both on the same page and help minimize errors. Bonuses being unregistered or supply not entered in the books are common mistakes due to lack of communication in a business.
8. Not Reconciling Your Books
Another important reason you need to hire an experienced bookkeeper. Reconciliation of your books with bank statements is extremely important to keep your financial health in check. Not only should it be done correctly, but regularly.
How does it help? By reconciling your books, you can pinpoint bank errors. While the process can be complicated, professional bookkeepers can quickly identify how much money you possess currently and any mistakes at the bank's end.
9. Not Reviewing Books
While hiring a bookkeeper is a smart move, it isn't necessarily a good idea to give them access to delegate financial information without keeping a check.
Many small business owners heavily rely on their bookkeepers and do not review the books themselves. This can be a huge mistake and can cost you a hefty sum of money if your bookkeeper scams you.
10. Failing to Report Taxes Accurately
The IRS is very strict towards errors or misrepresentations of sales and payroll taxes owed by a business. The IRS's computer programs continuously check tax returns, and in case of discrepancies, you can expect a hefty fine.
Individuals who fail to pay taxes correctly face a penalty of 0.5%, which is added to the unpaid balance plus the month's interest. Even late payroll payments cost taxpayers a penalty. For 1 to 5 days late payment, a 2 percent penalty is applicable on unpaid tax. While for 6 to 15 days, a total of 5% penalty is charged.
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11. Not Being Up To Date
For small businesses, the first few years are crucial. Even if your business is flourishing, if you don't keep your books up to date, you will incur errors, which will cost a lot.
Moreover, due to the spike in the e-commerce market over the decade, sales tax has become complicated. Many small businesses don't keep up with the recent changes and face heft penalties as consequences. So keeping your books up to date and following the recent sales tax collection changes is equally important.
No business can escape the task of maintaining their books. And even the most competent business owners can make bookkeeping mistakes. Identifying the errors, acting on them, and not repeating them is what puts your business on the path to success. Remember always to seek out information, keep up to date with recent changes, and be prepared not to miss any warning signs.