Accounting and bookkeeping can be a tricky, confusing part of running your company. Unless you have an accounting background or know someone who does, it can be an area where you may feel you’re in over your head. However, this shouldn’t deter you from having great books.
With that in mind, we’d like to share the most common accounting mistakes that we’ve seen over the years to help you avoid encountering the same problems.
Not Reconciling Your Accounts EVERY Month
This is one of the most frequent mistakes that we see, and it can cost a major headache down the road.
The difference in the stress level of a businessperson who waits until the end of the year to finish all of their books versus a company that only has to reconcile one month when December comes around is quite noticeable. And it’s easy to minimize that stress, too.
But let’s say the program your business uses doesn’t have a reconciliation tool. In that case, you should print out your monthly bank statements for each of your accounts and mark each of the transactions off as you see them. If a transaction on your bank statement is missing from your bookkeeping tool, you should resolve it quickly.
Identifying Payments to Owners as an Expense
As a sole proprietor or single-member LLC, it’s important that you don’t categorize your payments to yourself as an expense. Doing this will result in lowering your overall profit and will give you a false number on your income and ultimately on how much income you’ll need to pay taxes.
According to Quickbooks, the best way to record these payments is to put them on an equity account that is called “Owner’s Draw.”
Forgetting to Save Your Receipts
If you want to count something as a business deduction, you’re going to need to save every single receipt that you have, regardless of how much something costs.
If you see saving receipts as a chore, many mobile solutions allow you to snap a quick picture of your receipt, immediately allocating the expense into your books.
Whether you like to save physical copies, use digital copies, or both, saving your receipts is incredibly important in case you ever get audited. Having them all organized in one location will allow you to find and identify past expenses.
Making Personal Purchases on Your Business Account
This might sound ridiculous to some, but this is a fairly common mistake we see people make. It’s not a huge mistake, and it’s an easy one to fix. All you have to do is record whatever purchase you made into that “Owner’s Draw” section of your books, or you can simply reimburse your business account for the purchase.
Doing this can put you at risk for problems with the IRS, which has recently been taking a more serious approach towards business owners claiming things like a vacation as a business expense.
When the IRS takes a sample period of a few months, and they see quite a few personal expenses, they will extrapolate that whole period and put it under audit. You can get docked a pretty penny very quickly.
Some of our cards look the same but do your best never to use your business card to make any purchases for yourself. It’s only going to cause extra loss time for organizing the purchase into your business account.
Many business owners fall into believing that using their business account is just like paying themselves, but this can make things complicated, especially if you need to separate your personal and business assets.
Minor Math Mistakes
Because many people don’t particularly enjoy doing their books, they typically rush at the end of the day or month to get this task done as quickly as possible. We have even seen clients make careless mistakes in their automated programs. Not being completely aware of what you’re inputting can cause headaches down the road that could have been avoided.
It’s also important to frequently go through your previous entries to ensure there are no typos or mistakes. We’re all human; we make mistakes. It’s better to double-check yourself than to allow one small, minor error lead to a maze of accounting errors.
Not Focusing Long-Term
Running a business comes with headaches every single day. Trying to keep up with the daily problems can take up much of your time and can take your focus away from thinking about the future. That’s where accounting can come into play.
This area is not just about keeping up-to-date with present and past numbers. A huge part of accounting is being able to forecast your business’s future numbers and growth. This will put your mindset in a good place to begin drawing out future goals for where you want your company to be, and also identify the risks associated with attaining those goals.
When you’re looking into the future of your business, you’ll have other issues to consider. According to Harvard Business Review, some of these will include opportunities to increase growth within your business and also identifying long-term accounting issues that may become apparent along with this growth.
It’s also important to understand the financial strain that growing may put on your business and the possibility of needing to hire additional help in the future.
Not Taking Who You Hire More Seriously
We see all the time how a client will put the wrong person in place to handle the books for the company. Business owners will try to help out family members, try to find a cheap, inexperienced office temp, or will put themselves in this position even though they don’t have the appropriate background.
Whoever it may be, this decision can cause significant issues down the road. Trying to help a family member can cause audits or further penalties.
Even though you may be saving a little money by hiring cheaper labor, the costs of fixing their mistakes down the road can be a major headache. The lack of experience in a cheaper hire will likely keep your company from optimizing its financials and will slow down potential business growth.
If the person you hire has no idea how to categorize the expenses involved with your business operations, or can’t create correct journal entries, this is going to be the main cause of your accounting issues. These individuals will also more than likely not be experts in tax laws.
The most appropriate person for this position will be an accounting professional that will help you avoid all potential catastrophic errors involved with messing up your bookkeeping. These mistakes can include:
- Accounting method used (cash vs. accrual)
- Errors that come along with interpreting facts about assets
- Unrealistic estimates based on conclusions about certain assets
- Poor recognition relevant to the accrual of expenses
You Think Technology is the Solution
Technology – in no way, shape, or form – will guarantee that your business can avoid common accounting mistakes. Spending large amounts of money on it will not solve your problems. It’s hard enough even to master these technologies! And it’s not all relevant to your business.
The important thing is to do your homework. There is a different solution coming out every single day, and it’s hard to know which ones are best for your business. A vetting process will be appropriate to determine if it’s a relevant resource that will add to your business’s long-term success.
It’s a strategic approach that will help you not make matters harder for you and your business. A technology solution is a significant investment that should be treated as such.
Before you make a technology purchase, evaluate the advantages that it will bring to your business. Many tech solutions have added functions that aren’t necessarily important – especially to a small business. Look for a platform that offers the essentials that you need, like cash flow, invoicing, compliance, etc.
Refusing to Let Outside Help Come In
We see business owners all the time who are unwilling to let someone else have some control over a certain aspect of their business, like accounting. It’s hard to admit you don’t have this expertise, but ultimately, having this mindset and not finding professional help can lead to your demise.
As a business leader, you need to focus on the bigger vision of your business. Not allowing other people to help is only hindering your growth and scalability. Look for accounting professionals that will enable you to do what you do best.
But as was mentioned earlier, be sure you don’t find just anybody to help you with this important aspect of your business. Do proper vetting, and you won’t have to deal with major setbacks in the long-term.
Accounting and aligning financials are two of the most important tasks in any business. If something is wrong, it could destroy everything you’ve worked hard to build.
If you’re making any of these mistakes, fix them to ensure you won’t have any major setbacks in the future. If you need help, contact an accounting expert today to avoid making any disastrous errors that could cause huge problems for your business.