When you’re running your own business, even small bookkeeping mistakes can end up being a huge pain. What are the most common pitfalls? And how can you avoid them? We asked our friends at Xero.
Good bookkeeping is vital to all businesses. “The books” tell the story of where a company is and where it’s heading. As a small-business owner, you’ll find yourself consulting your financial records while planning for the future, making significant decisions, and of course, preparing your taxes.
However, the books are only useful when they’re well maintained. Most companies work with a bookkeeper, but if you own a bootstrapped business, the duty might land with you.
It’s perfectly fine to be your own bookkeeper when your business is just getting off the ground. But you need to do the job correctly, so your books reflect your true financial situation. Otherwise, your decisions will be based on bad information. Here are some common mistakes made by novice bookkeepers and tips on how to avoid them.
1. Combining business and personal expenses
When your business is just starting off, you might find yourself using your personal bank account or credit card for the occasional business purchase. Or you may make a personal purchase with business funds.
This makes for messy bookkeeping because all these transactions must be sorted out later on. You also risk losing track of business expenses, which could cause you to miss out on beneficial tax write-offs.
You can steer clear of this situation by opening a dedicated business bank account early on. Your books will be much more organized and easier to maintain.
2. Not reconciling on a regular basis
Reconciliation is the process of lining your books up with your bank statement. It consists of matching your bank transactions to those in your books, as well as accounting for any differences between the two records.
The goal is to keep your books up to date so you understand your financial situation at that moment. It’s generally good practice to reconcile on a monthly basis. The longer you go between reconciliations, the more out of touch you can become with your business’s finances.
3. Completing your own tax return
It’s great to practice responsible spending when your business is young. However, choosing not to hire a tax professional is one of those rare instances when thriftiness actually costs you more than you save.
Business taxes are complicated and not to be taken lightly. If you choose to complete your own return, you could fail to include valuable deductions or make a mistake that draws the attention of the IRS.
Hiring a tax professional is almost always a good business decision. They can ensure you meet your tax requirements, in the most beneficial way for your business.
4. Throwing away receipts
Most of us toss out receipts after buying everyday items. This is fine for most personal purchases, but holding onto receipts from business expenses is a must.
When completing your taxes, your accountant will easily be able to include all your expenses for that year using your receipts. And if the IRS decides to question your return, you’ll have all the necessary documentation to prove that your expense write-offs are accurate.
Receipts also make your bookkeeping duties easier. If you’re making lots of purchases, you can use your receipts to make sure you categorize your expenses correctly.
5. Doing it yourself for too long
If your goal is to grow your business, then you’ll need to hand off the bookkeeping responsibilities sooner rather than later.
As your company becomes bigger and more complex, so does the bookkeeping. But as the business owner, your time is best spent on the business itself — not in the back office. Hiring a bookkeeper will likely pay off in the long run, since you’ll save time and avoid costly errors.
Rookie bookkeeping mistakes are common but easily avoidable, even if you’re not quite ready to hire a professional. Cloud bookkeeping software like Xero can help automate much of the process so you can spend more time and effort making your business a success.