Managing a small business in the current tough economic conditions is a challenging job. Many small business entities fail due to financial problems and liquidity crunch.
While economic conditions play a big part, several other internal problems are also at play. Numerous issues stem from improper accounting practices at small businesses.
You may not realize, but bookkeeping is one of the essential functions of a business. The books of accounts tell the story of the business’s financial health and what to expect in the time to come. If you have your books in order, your business will likely succeed in achieving its intended goals.
However, if you are not following the best practices for bookkeeping, your business will likely have losses. Small companies make some typical bookkeeping mistakes that lead to losses and, eventually, closures.
If you are running a small business, you must avoid the bookkeeping mistakes listed below:
10 Bookkeeping Mistakes Small Businesses Must Avoid
1. Bookkeeping Yourself
Unless you’re a professional accountant, it is not a good idea to keep your books. There are many fine accounting details that bookkeepers are at home with, and you may miss them. Since you’re occupied with other responsibilities, you may find it hard to keep the books on time.
Maintaining the books also takes away a lot of the time from other business decisions and your participation in the day-to-day operations. It’s best to have a professional bookkeeper take care of your accounts.
2. Poor Communication
Communication is crucial for the success of any endeavor. Communication between a business owner and the bookkeeper is imperative for the business to succeed in the long run.
A bookkeeper is in the know of most events taking place in the business. Clear and timely communication from the bookkeeper can help you as a business owner improve your financial model. They can even offer advice on the operational side of things.
However, if you do not communicate well, confusion may arise, damaging the company’s financial health. It can also affect the operational side with lower liquidity.
3. Not Recording Every Transaction
Businesses incur all kinds of expenses. Some of these expenses may appear petty and insignificant. If you’re buying a 10-pack of ball pens or getting lunch for some employees, the bill is only a few dollars.
However, that’s money spent out of the business finances. If you do not record these transactions, you may end up losing track of expenses worth hundreds, even thousands of dollars a year.
If these expenses are not accounted for, you may end up paying significantly more tax than you should. It’s a big pitfall that a small business must avoid at all costs.
4. Using a Single Bank Account
When many small businesses start, the owner pays the vendors and suppliers through their personal bank accounts. This arrangement can work for a couple of individual orders, but not for a properly running business.
You must maintain a separate bank account for personal, and business uses. Failing to do so will either lead you to spend money out of your pocket for business, or you may be spending business funds for personal expenses.
Either way, a single account is a terrible idea. You must have separate accounts and debit and credit cards to avoid mingling your personal and business finances.
5. Shunning Technology
Technology has both its upsides and downsides. When it comes to keeping books of accounts, technology can be very friendly to you. There are numerous software and applications that you can use to keep track of all your transactions with ease.
These apps also help you bill the clients and remind them of overdue payments. With the inclusion of smart features, you can also see a prediction about your business’s future trajectory and act accordingly.
6. Forgetting About Taxes
Most small businesses have to pay some taxes on their income. You must keep track of your likely income tax and maintain a reserve to pay them. In the absence of such a reserve, you may have to take out several thousand dollars from your accounts at the end of the tax year.
A sudden need to take funds out can cause a liquidity crunch even though your organization may run smoothly and have a healthy profit. If you have to pay less than expected taxes for whatever reason, you can utilize those funds elsewhere or keep them for the following year’s taxes.
7. Misclassification of Expenditures
Expenditures have their particular classifications in bookkeeping. Not all expenses are the same and cannot be put under a single head. Some businesses make the mistake of misclassifying their expenses.
A pizza party from the office to celebrate a new project is an ordinary expense, but buying expensive specialized tool kits for the same project may be treated differently. These tools may be used for years to come, even after the project.
Many of such assets are depreciated over the years and recorded in the books. Proper treatment of all search transactions can save you a significant amount of tax money over the years.
8. Failure to Record Sales Tax
Sales tax is applicable just about everywhere. The percentage you pay will vary based on where you are located. However, you must account for the sales tax and ensure that you record and collect it properly.
The tax has to be passed on to the local tax authorities as per their requirements. Some businesses collect the sales tax but do not record it correctly. You will find it hard to make the calculations when the tax year ends. This problem can lead to financial as well as legal trouble at the hands of the tax department.
9. Misclassifying employees
Small businesses may employ several people. Some of them may be full-time employees while others may be part-time. Yet, some will work as consultants with the company. The tax classification of all of them is different.
They must be appropriately classified and reported in your tax papers accordingly. Mistakes in this regard can lead to financial penalties and sanctions from the tax authorities. Some companies do this on purpose for tax benefits, which is highly unethical.
10. Delaying Reconciliation of Accounts
Reconciliation of bank accounts is an essential process for any business. It should be done periodically, and any issues should be corrected, investigated, and corrected immediately.
However, if you leave the reconciliation process for too long and do it only when you start feeling guilty about it, you will end up with a big mess. It isn’t straightforward to reconcile accounts after a long break. This delay can lead to headaches at the end of the fiscal year.
Bookkeeping is one of the most crucial functions in a business. People make several of the mistakes above to damage their outstanding running companies. A professional must undertake the bookkeeping duties, ensuring everything is in order and the business runs smoothly.
Other smaller issues can also lead to larger and significant ill effects and must be avoided at all costs. When you ensure that your bookkeeping is adequately done, it benefits your business finances and its overall operations.
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Carole Anne is the bubbly head honcho of Key Admin. She’s a BAS Agent Member of the Institute of Certified Bookkeepers, a Certified Xero Advisor, Advanced QuickBooks Online Advisor, and has an Advanced Diploma in Business and Finance.