7 Bookkeeping Mistakes Small Businesses Must AvoidRamon Ray
Contributed by Carole Anne, the bubbly head honcho of Key Admin – A professional bookkeeping business in Australia.
As a small business owner, you can expand your business by ensuring its financial health. However, with so much to do, it is a very tough ask.
Paying attention to the financial side of the business along with the administrative responsibilities is very challenging. It is not easy to ensure that your books of accounts are in perfect shape. Yet, much of the success of your business is based on good accounting practices.
According to a study, about 82% of small and medium-sized businesses fail due to poor cash flow management.
Error-free bookkeeping is essential for the success of small businesses. A slight mistake can cause financial losses to your company and can lead to regulatory fines as well.
Here are seven bookkeeping mistakes usually made by small businesses and some tips to avoid them.
Using a Single Bank Account
The most common mistake that small business owners make is not opening a separate account for business transactions. Considering the small size of their business, they use the same bank account for both personal and professional dealings.
It is usually difficult to separate business transactions from personal expenditures, especially if you wait till the end of the year. It is also possible that you may end up paying more taxes due to the overlap of personal and business transactions.
If you use a single account for business and your personal expenses, get a new business account. Also, have separate debit and credit cards for business.
Incorrect Record Keeping
A common issue with SME businesses is overlooking minor expenses. You must ensure that you record each transaction, no matter how small it may be. Otherwise, you will fail to record several tax-deductible expenses.
Ideally, keep all receipts filed in a separate folder until the transactions are posted. There are many apps available that can help you scan copies to ensure the receipts are not lost.
A well-maintained record saves a lot of time and effort when filing taxes at the end of the year or preparing for an audit. At the same time, you may save some money on your tax bill.
Wrong Categorization of Expenses
It would be best if you categorized expenses correctly for a financially healthy business. Costs incurred by small businesses are generally clear and straightforward. However, if an amateur keeps your books, mistakes can take place.
Improper categorization can lead to incorrect calculation of expenses and eventually profits. You may end up paying more taxes than you should. At the same time, you may pay less and risk penalties from the tax department in case of an audit.
Ensure that someone with the required experience maintains your books. Using these guidelines and tips will surely save you from bookkeeping mistakes.
Not Maintaining Data Back-Up
Like large enterprises, small businesses are also adopting cloud backups. According to one survey, as of 2019, 94% of small-sized organizations had switched to digital backups.
Digitally backed up data has several benefits,
- It saves time
- It helps reduce the cost of manual record-keeping
- It offers easy accessibility to record round the clock
- It requires less storage space
- It allows better communication
However, it has some disadvantages as well, such as security risks. Technical problems can also temporarily hinder access to data.
You can also backup your essential data on physical hard drives and place them at a safe, remote location. If the data in the cloud is lost, you will lose all your business information.
You can also go old school and keep hard copies of the records along with the digital ones.
Untracked Petty Cash Management
Small businesses commonly use petty cash. However, it is easy to lose track of it, and you may incur unknown expenses. Eventually, you will have missing expenses which you cannot claim to lower your taxes.
To avoid such problems, you can make a system to record petty cash and the amount spent. One easy way is to maintain receipts of the expenditures made out of petty cash. Keep all those receipts in a petty cash box.
Not Hiring an Experienced Bookkeeper
Another common mistake that most small businesses make is that the business owner tries to keep books to cut costs. While you can do simple financial tasks yourself, hire the services of an experienced bookkeeper for complex accounting tasks.
According to one survey, 60% of business owners admitted not having enough accounting knowledge to manage finances.
By outsourcing bookkeeping, you can focus on more critical business matters. A bookkeeper will cost your business, but it will save a lot of time and money in the longer run.
Not Communicating Consistently with Bookkeeper
Once you have hired a bookkeeper, don’t forget to supervise them. Stay in close communication with the bookkeeper to stay updated on the financial health of the business. Since bookkeepers are experts at their craft, try not to micromanage them.
The outsourced bookkeeper can maintain records efficiently only if you provide essential information on time. Have a weekly meeting and discuss the finances and steps they can suggest to improve the workings of the business.
Even though some of the bookkeeping mistakes mentioned above may seem like small ones, they can result in significant problems in the long run.
If you have made any of these mistakes, you can always correct them. These amends can help you by making your business more profitable.
Contributed by – Carole Anne is the bubbly head honcho of Key Admin – A professional bookkeeping business in Australia. She’s a BAS Agent Member of the Institute of Certified Bookkeepers, a Certified Xero Advisor, Advanced QuickBooks Online Advisor and has an Advanced Diploma in Business and Finance.
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