The Top 10 Bookkeeping Errors that Are Costing Your Business Money
Small business owners often make bookkeeping mistakes in their early years of operation, primarily due to a lack of knowledge regarding proper accounting procedures. While you may not have the time, money, or desire to become a certified accountant, it is still possible to avoid a few key pitfalls that can have an impact on your company’s bottom line.
The following are 10 of the most common bookkeeping mistakes made by small business owners.
1. Trying to Do It All Yourself
You are only given 24-hours each day, and as a small business owner it is important to make sure you are filling them with only the most important tasks. While money management is certainly an important task, it’s not important you be the one to do it. In fact, if you don’t have a fairly strong background in accounting and business tax law, it’s probably advisable you don’t handle your own bookkeeping. Delegating this task to a professional will help you double check for errors and free you up to work on your business, not in your business.
2. Always Going the Cheapest Route
While pinching pennies can certainly save your business money, there is a point where frugality can cost you money. In many cases, the adage “you get what you pay for” rings true. Spend a little extra to get a quality accountant rather than the cheapest bookkeeper available. In addition, do your research before spending money on other business services and items that have a useful life of more than a few months. When purchasing items like office furniture, equipment, or software, a good rule of thumb to follow is to select a moderately priced item and purchase it when it’s on sale.
3. Failing to Negotiate Vendor Terms
Many small business owners frequently purchase items for their business from the same vendor, month after month. If this is your practice, it’s a great idea to contact your vendor and build a relationship with them. Even if your purchases are relatively small, don’t be afraid to call and ask questions. Often, you can negotiate reduced pricing or longer payment terms, allowing you to keep more cash flow working for your business.
4. Failing to Keep Track of Receipts for Minor Purchases
Even the most meticulous business owners occasionally forget to save a receipt related to a business purchase. While it might not seem like a big deal if a meal ticket is missing here or there, those small purchases can add up to big money. Likewise, you don’t want to have to answer to Uncle Sam if you have claimed expenses and don’t have the proof to back up every penny.
5. Writing Off Major Purchases as Immediate Expenses
If you visit your local office supply store and pick up $250 worth of printer paper and other items that have to be replenished frequently, it’s perfectly acceptable to log the purchase under “office supplies” and write it off. If, however, you happen to pick up a new $250 printer, the purchase needs to be logged differently. It’s not the amount that matters, it’s the useful life of the items you purchased. A printer will definitely be used longer than a few months, so add it on the books as an asset and depreciate it over the estimated useful life of the item.
6. Taking “Charitable” Tax Deductions
For a personal tax return, individuals are allowed to write off donations given to charitable organizations. Businesses, however, are not afforded the same deduction. Because businesses are often given recognition, advertising space, or some other concession in return for their donations, they are not truly considered “charity.” If you make this bookkeeping mistake, Uncle Sam will probably make sure you don’t do it twice.
7. Failing to Keep Hard Copies of Records
In a world of Cloud computing and Internet banking, many small business owners feel safe relying on the Internet to keep their records. While the idea of “going paperless” might sound like an eco-friendly, no-fuss option, think twice before you go this route. Many banks only give access to online records for a few months, so business owners come up short if they wait until tax time to print off and reconcile bank statements.
8. Failing to Accurately Report Sales and Payroll Taxes
As previously mentioned, the IRS has little tolerance for error. If you misrepresent the amount of sales or payroll tax owed by your company, you can expect hefty fines. It’s best to leave this one to the professionals, and double- or triple-check your returns before dropping them in the mail.
9. Giving Employees Too Much Access with Too Little Supervision
While it is a good idea to delegate your bookkeeping to an experienced professional, it isn’t necessarily a good idea to give them open access to business records without a system of checks and balances in place. Many small business owners assign responsibility of the company books to a close family member or friend with accounting experience, only to find out several years later they had been ripped off. Had they reviewed canceled checks or petty cash ledgers once a month, the issue would have been caught with minimal damage done.
10. Not Keeping Things Current
The initial years of a new business are extremely overwhelming, but failing to keep your books current will only make the situation worse. If your books are suffering because business is booming, that’s a sure sign you need to bring on an extra hand. Costly errors will be caught more quickly, and your business operations will be more efficient in general.
These costly bookkeeping mistakes can happen to anyone, and at least one of them will probably happen to you at some point in your business. Seek out information, prepare accordingly, and be on the lookout for warning signs. Your bottom line will thank you.