Unrecorded business transactions, poorly-organized books, and poor bookkeeping are the main obstacles to business failure. A well-organized financial record will help you get on the right path to success and build your business. Bookkeeping should not be a distraction that keeps you from doing things needed to grow your business.
Avoiding the nine pitfalls below will help You can safely arrive at your destination: A profitable, growing business.
1. Ignoring your bookkeeping
It’s up to you. You could end up with disastrous results if you don’t keep your books in order. Tax problems could lead to financial ruin for your company. The IRS could place a lien on the business of your choice, fine you, or assess a penalty.
The solution: Just do it.
Also read: Top 8 Online Bookkeeping Services for 2022
When you keep putting your bookkeeping tasks off to the side for later, You’ll eventually be faced with a mountain worth of receipts to sort through. This is a recipe for disaster — deadline pressure only makes costly errors more likely.
The solution: Make bookkeeping a daily habit. Keep the appointment in your calendar no matter if you hire a bookkeeper whose solely responsible for accurately recording your income and expenses, or using software to quickly capture and organize financial documents and receipts, you are saving time that could have been used more effectively.
3. Errors in size or importance
Fittingly, Small business owners tend to focus on the important stuff, the most important aspects to keep their business moving forward. This strategy is not as effective when it comes to bookkeeping. If you’re being audited, you will need to produce receipts for all expenses, no matter the size.
The solution: Maintain everything. It will help you organize it and make your space more efficient. Take advantage of these solutions that let you capture and organize digital copies of your financial documents quickly and efficiently. The actual data is automatically captured for your bookkeeping or tax accountant. There is less chance of errors in transcription and a higher likelihood that you will have what you need.
4. Do not prepare for the worst
You can keep your books physical, these files and receipts can be damaged by fire, floods, or coffee stains, as well as being lost. Your hard drive can crash if you keep your books in a spreadsheet. You could lose your laptop or be stolen. Or, you might accidentally delete important data. Anything that you have one copy of could disappear forever.
The Solutions: All things must be backed up. If your business is small, you may be able to do it yourself. It is possible to print or copy vital records, and keeping them off-site is clunky but workable. If you have books in spreadsheets or computer files, always keep a backup copy of your data on an external hard drive or thumb drive.
You can capture financial documents and store them in the cloud, or remotely digital storage. This will ensure that you have all the information you need as well as the supporting documents. It will also make it easier for you to recover in case of disaster.
5. Incorrectly classifying employees who work for you
You may need to hire temporary workers as a small business owner. This could be on a short or long-term basis. One project may be outsourced for your tax status and it is important to record the relationship you have with them. You must withhold federal income taxes from employees and pay them to the IRS. Contractors are responsible for their own taxes. However, they must report what you pay them to the IRS.
The Solution: Although you could spend hours reading the IRS website, it might not be enough to make you sleep soundly at night. An accountant for small businesses can be a great help. The accountant will be delighted to see signed time cards and contractor invoices captured and stored in one digital repository such as Neat. This will allow them to record all amounts in the correct accounts and then allocate the funds to the right people within or outside your company.
6. Not reviewing your books and accounts
It is only half the job to enter your invoices, receipts, and checks into your books. You should always verify everything you input into your accounts. This is also known as reconciling. Although it is not difficult, it can be tedious and even intimidating. It is important as it will help you spot errors large and small.
Inadvertently adding a zero to an invoice can lead you to believe you have more money than you actually do. Incorrectly entering a receipt could lead to a larger deduction than you are entitled to on your taxes. This could leave you vulnerable to penalties and fines. You could lose track of your actual funds if you make an error in your check account.
The solution: Review and reconcile. You can do it every day or ask your bookkeeper to do it. This is an easy task to keep on top of if you have digitally organized and captured your invoices.
Also read: Top 10 Tax Software for Self Employed People
7. Mixing personal and business
IRS penalties, fines, and other consequences could result if you mistakenly identify a personal expense to be a business expense. Or, you could misidentify a business expense to be a personal expense, which means you won’t get all the deductions you are entitled and you will pay more tax.
The solution: You can solve this problem by having separate credit cards and banking accounts for business and personal use. take advantage of tools that make it easy to identify business and personal expenses when reviewing or reconciling expenses – when both types of expenses are included on one purchase receipt.
8. Not properly setting up expense categories and bookkeeping accounts
What you don’t measure can make it difficult to improve. Accurate information will make every decision about your business easier.
The solution: Create the income and expense categories in your books with analysis. Although loans have monthly payments, they may have a higher final payment. Seasonal changes may affect raw material expenses. A below-average month for sales may indicate that it is difficult to make payments within 30 or 60 days. After these accounts have been set up, scan or take photographs of receipts and email them to the correct bookkeeping account.
9. It is not possible to stay on top of your business
Not only is it bad to ignore bookkeeping, but there are other ways to run a business. It could be worse to do the books and not look at the results.
The Solution: Regularly review essential accounting reports such as cash flow, balances, and expenses. You can either pay your accountant for them to create them or you can run them from your financial management platform. You can drive your business forward if you have accurate financial records.
There are many opportunities for success in owning a business, but also opportunities to make mistakes. Avoiding obvious bookkeeping mistakes and minimizing other errors are key to success. This list will help you to run your business profitably, and grow it effectively.