Top Five Bookkeeping Mistakes Made By Small Business Owners
Hey hustlers – if you are a seasoned entrepreneur, you know that good bookkeeping is at the heart of your business’ success. Check out these ten things that most business owners are doing wrong and shortcut your way to saving money and reducing your risk:
- Improper classification of employees. This is the big one, folks. State labor boards all over the country are cracking down on the recent proliferation of workers classified as independent contractors/consultants/freelancers. This can lead to big ole’ fines and back payments owed to worker’s comp and unemployment. Check out this article in The Guardian for a great analysis of this issue, and check out the IRS 20 Factor Test on Employment Status to see if you may be mis-classifying your workers.
- Not reconciling bank statements each month. A lot of businesses wait until the end of the year to reconcile their books, and they are losing money! Hiring a bookkeeper to do this monthly will put another set of eyes on your finances; I can’t tell you how much money I’ve saved my clients simply by catching fraudulent transactions, or automatic payments for services they are no longer using. You will also not have a 100% accurate profit and loss or balance sheet without reconciled statements.
- Keeping paper receipts and invoices as backupMost people assume that the IRS requires hard copies of records, but they have actually accepted scanned receipts since 1997. The rule states that scanned receipts are acceptable as long as they are identical to the originals and contain all of the accurate information that are included in the original receipts. There is absolutely no reason to keep shoeboxes full of receipts, invoices and statements; check out our blog post on both the direct and indirect expenses of a paper filing system.
- Poorly organized Chart of Accounts. Good bookkeeping is for 2 purposes only: to keep you prepared in case of audit, and to give you data insights into your business. The categorization of expenses is important for the latter. There are fairly standard categories for expenses, but expenses are often entered into the wrong categories or into too many categories are created. On the flip side, I also see company chart of accounts that use far too few categories – if you have a “general admin” category that has $10k worth of expenses, out of a $100k total operating budget, you as the business owner are not getting specific information as to how that money is being spent.
- Doing it yourself! For some reason, there is an entire army of business owners who hate doing their books, but insist on doing it themselves. A bookkeeper can not only take mundane day-to-day tasks out of your brain bandwidth, they can also provide insights and suggestions for reducing expenses.