7 Bookkeeping Mistakes Your Small Business Is MakingSeemingly small errors and oversights could be costing your business thousands.
Bookkeeping is one of those tasks small business owners tend to put off or ignore until it becomes so onerous it’s almost impossible to accomplish. But falling behind can lead to missed payments, inaccurate forecasts and trouble come tax season.
NCR Silver talked to Courtney Barbee, co-owner of The Bookkeeper, a firm in Raleigh, North Carolina, about common errors she sees when working with small businesses and startups. If you’re making any of these seven mistakes, it’s time to clean up your act, and probably, your books.
You’re not keeping up
According to Barbee, where businesses fall behind the most is in accounts receivable.
“If you don’t record your deposits accurately and in a timely manner, it’s hard to keep up with who owes you,” she said. “We’ve identified six figures in receivables that clients didn’t know existed.”
On the flip side, you might have unpaid bills and taxes collecting penalties without knowing it.
“If you’re doing monthly bank reconciliation and there’s a huge difference between what your books say you have in cash and what the bank says, that’s a red flag,” Barbee said.
Barbee recommends setting a strict bookkeeping schedule if you do your own bookkeeping (a good function to outsource, by the way, among others — it could even save you money on your tax preparer). Once or twice a week, make an appointment on your calendar to record spending and payments, and once a month, reconcile your bank statements against your expenses.
You’re mixing your business and personal finances
According to Barbee, one of the problems she sees most often is using just one account for both business and personal expenses. Many owners then try to write off personal expenses as business deductions — sometimes mistakenly, oftentimes on purpose.
“This is so dangerous because single-member LLCs are the most frequently audited companies, so you have to really be careful to have things recorded and justified,” Barbee said.
Keeping separate accounts is the best way to properly record your business expenses and prevent mistakes.
You’re entering investments and loans incorrectly
Many small business owners don’t know how to properly record money in their books. In particular, Barbee said she sees problems with how people enter money that has been invested in their business.
For example, if you’re investing your own money into your business and recording the amount as “paid-in capital,” you’ll incur a higher tax bill than if you recorded it (properly) as a “loan from owner.” “This can affect your bill by tens of thousands of dollars,” Barbee said.
Additionally, small business owners sometimes include accounts on the wrong financial reports. Some common mix ups: profit and loss accounts on the balance sheet, liabilities on the profit and loss statement, and expenses on the balance sheet.
You’re missing deductions
According to Barbee, many small business owners don’t realize they can take a tax deduction for continuing education that they’re getting for the benefit of their business. This includes any formal degrees, certifications and classes. These can be included as business expenses.
Business owners who use home offices may miss out on home office deductions. Additionally, many owners forget to deduct matched funds they contribute to employees’ 401 (k) plans, Barbee said.
You’re recording your employees incorrectly
This is more an accounting error than a bookkeeping error, but it’s an important one. The IRS has cracked down on how employees are classified, Barbee noted. Compliance with the Fair Labor Standards Act (FLSA), which establishes minimum wage and overtime pay eligibility, is critical.
In family businesses, there’s a tendency to mark spouses, siblings and others who work for a family member as independent contractors when they’re really full-time employees to avoid some taxes. This happens with non-family members, too.
When it doubt, Barbee said, talk to an expert to avoid problems.
You’re not double-checking
At small businesses, it’s common to have an all-purpose administrator oversee accounting. But too many owners don’t have oversight practices in place to make sure the person isn’t charging business accounts for personal expenses, embezzling money or committing other types of fraud, said Barbee. Be sure to review your books yourself if someone else in your company is managing them.
“Checks and balances help protect everyone,” Barbee said. “So if something goes missing by accident, you can prove it was an honest mistake.”
You collect receipts but don’t enter your expenses
Some small business owners collect pieces of paper and receipts for expenses and invoices — then let them sit around without recording them. “We have people bring us garbage bags full of receipts,” Barbee said.
The worst thing you can do is let receipts pile up. When you finally go to enter your expenses in your ledgers, you have to try to remember, weeks or months later, why you bought something or why a charge was business-related.
“Entering expenses and putting notes in your accounting software can be more important than hanging onto faded scraps of receipt paper,” Barbee said. With electronic banking and credit card statements, you may not even needs those scraps.