Are you digging a money pit with these bookkeeping mistakes? Cut these habits out of your system, and say hello to a healthy cash flow.
1. Falling Behind on Entries
Sure, putting out daily fires in your business is an urgent must. However, neglecting to keep your finances up to date in the books only leads to chaos in the long run. Without the right numbers, you’ll be crippling your financial reports, which becomes even worse when you are unable to pinpoint where things went wrong. Financial statements need to stay current so you can properly reconcile your accounts and always make sound business decisions.
2. Poor Record Keeping
Yes, you definitely have to save receipts less than $75. You need all the proof you can get to support your financial reports and tax documentation for your claims. Set up a filing system that works for your business so you can keep an eye on each transaction – big or small.
Also, make sure not to mix business with pleasure. Separating bank accounts for business and personal activities is vital to proper monthly reconciliation. Minimize bookkeeping mistakes and identify potential issues before the IRS steps in. Don’t let big brother be the end of your business dreams.
3. Improper Categorization of Income and Expenses
General bookkeeping guidelines for standard categorization should be a good start. It would also be helpful to know the different tax treatments for each entry in order to bag some savings. Oversimplifying or overcomplicating these categories can affect the accuracy of reports, and ultimately, the measurement of profitability. Make sure to get this right.
4. Improper Categorization of Employees Versus Contractors
Know the difference between employees versus independent contractors, W2 versus 1099. Understandably, there would seem to be grey areas for some people, but you would still need to clearly define which of the two categories they properly belong to. You don’t want to end up misfiling or overpaying taxes.
5. No Paper Trail Fallback
Computers can crash. External data can get corrupted. For whatever reason, these handy pieces of technology can malfunction or even go missing. Backing up files should go beyond copy-pasting everything to a separate hard drive or uploading on the cloud. Don’t wait to face this predicament, and always keep a paper trail of documents available to avoid audit issues.
6. Poor Communication
In order to create financial statements that reflect your operational needs, your bookkeeper needs to be in the loop with the on-goings of your business. Don’t leave him or her hanging when you make changes that can affect the numbers and then throw around blame for your oversight when issues pop up. Keep a healthy level of communication going, and have strong internal controls where you can supervise monthly bookkeeping updates.
7. DIY Bookkeeping
Admit it. Bookkeeping jargon might not exactly be your cup of tea. You might’ve thought you were saving money by doing it yourself, but bookkeeping without any professional certification only digs a deeper money pit for your business.
Without proper knowledge and experience, you’ll be facing a labyrinth of documents, not knowing which numbers to keep or even look at, how to record them properly, what they mean for your business, how to avoid every potential issue, how to save on taxes legally, and how all this information can help you level up your profits.
Stop wasting time on a tedious task if it belongs outside the realm of your expertise. Instead, invest on the benefits of hiring a professional bookkeeper, and maximize the possibilities for profitability.
More bookkeeping mistakes that didn’t make it to our main list, but can still cause some number kerfuffle:
8. Accidentally recording transactions on a prior period
9. Failure to record 100% of loss contracts in the period
10. Inaccurate application of overhead to jobs