7 Bookkeeping Mistakes Small Businesses Make

A small business is usually run by a single person who is mostly managing every task of the organization. The one-man show scenario increases the chances of errors in different processes of the business. One of the key processes is bookkeeping because no business can escape it even though it’s the most dreaded and non-glamorous task. To avoid the crippling errors due to mismanagement of bookkeeping we have listed down 7 common mistakes small business owners make which eventually become bigger and may cause financial headaches.

Bookkeeping seems simple at first sight but small business owners often make bookkeeping mistakes especially at the start of their entrepreneurship. The main reason for it is being non educated in basic accounting procedures. A lot of small businesses make a mess out of bookkeeping which may result in heavy losses. The good news is that although it is suggested to hire a professional bookkeeper, you do not need to become a certified accountant. It is possible to avoid the bookkeeping pitfalls with the awareness of the common things that small business owners overlook and that negatively impacts the operations.

We have identified the most common bookkeeping mistakes that can be fixed and avoided. Keep them in mind to recognize any fault in the financial reporting. Let us move forward with the 7 common errors of bookkeeping in small businesses and learn to correct them.

Mistake 1 – Mixing Business and Personal Expenses:

This is the most common mistake, especially with new business owners. Whether new or old, big or small every business person should get in habit of keeping their business accounts completely separate from their personal accounts. Initially, it doesn’t seem to cause any trouble but as the business grows it may result in major financial issues.

The golden rule is to never combine business and personal matters, most importantly the finances. Business funds should always be used solely for business purposes. Similarly, never use personal money for business expenses. Most importantly, never declare personal expense as a business expense it may land you in huge tax problems. If you are unsure, make a quick call to your CPA to save yourself from adjusting a year’s worth of books down the lane.

Here are some tips to help you avoid this pitfall:

1. Always have a separate business bank account which has specific tools to help you to keep your books in order.
2. Keep a separate business credit card dedicated to business dealings and purchases.
3. Label the cards with prominent stickers to avoid confusion between personal and business cards.
4. It is advised to keep a small amount of cash in a business checking account for rainy days so that you are not tempted to use your personal money when the business’s main accounts are depleted.

After all the above, if you find yourself paying personal bills from business accounts or vice versa due to any other reason, then reimburse the amount as soon as possible.

Mistake 2 – Neglecting to Save Receipts of Minor Purchases:

Most of the small business owners make the mistake of throwing away receipts without realizing that it can lead to overspending, or not being able to show proof to the CRA when they are audited. They should keep track of every purchase… even the minor ones to be prepared if CRA questions any expense. So in case of an audit, keeping the receipts in a folder or box is necessary. Otherwise, you would not be able to support the deductions made on the tax return. A fine can also be charged.

Some tips on how to keep the receipts safe:

1. Use an app to store the receipts digitally (Hubdoc, Receipt-Bank)
2. It is advised to keep the receipts for seven years to be safe.
3. Take a snap of the receipt and save in cloud (Google Drive, Evernote, or Dropbox)
4. Alternatively, you can upload the receipts directly on the accounting software currently in use.

Mistake 4 – Going Paperless, No Hard Copy Backup:

Since everything is becoming digital it is difficult to keep the paper culture alive. This calls for being extra-cautious and makes sure that a hard copy backup of the records is also been kept. Because on the computer there is an open chance of losing all your data like in the case of a hard drive crash.  

But if you keep printed copies of your records then it does not matter what happens in the virtual world, you will have all your records at your fingertips.

If any technical problem arises during tax season then the tax authorities ask for a paper trail that consists of clear visible documents. Hence it is suggested to keep a hard copy record of your daily operations and back up your financials for at least seven years.

Mistake 5 – Doing it yourself:

Small business owners do not like the boring task of maintaining their books but still insist on doing it themselves. Instead of wasting time in managing the finances, they should utilize the time to grow the business. They must leave the finances for the experts.

Bookkeeping requires specific skills to ensure the job is well done. A professional can carry out bookkeeping quickly and efficiently as he/she possesses the expertise to fix errors even the minor ones which are often overlooked.

An expert bookkeeper is well aware of the tax laws and changes. It is good to have a professional for having an expert hand which will save you a lot of time and money.

Mistake 6 – Hiring an Inexperienced Bookkeeper:

The best way to avoid mistakes of doing it yourself is to outsource the entire task of bookkeeping altogether. But keep in mind is that hiring a bookkeeper that is incompetent and doesn’t possess the expertise of bookkeeping will turn out to be an expensive mistake.

The ideal bookkeeper must understand basic accounting and bookkeeping concepts and can help you grow your business. Look for someone who can arrange your books properly and strengthen your business’s financial pillars.

Hiring a bookkeeper who has experience in your business’s niche will get your books done faster. He/she may have bookkeeping tricks and tips on their fingertips specific to your industry resulting in efficient and economic bookkeeping. Have a look on the article about how to choose a good bookkeeper before hiring anyone.

It is better to hire someone who is specialized and can go deep into our books and have a plethora of advice on improving your business. Many small business owners focus on the cost of hiring a professional but instead they should emphasize the qualifications of the candidate and make sure the person they are hiring should be reliable and highly competent to handle the sensitive documents properly.

Mistake 7 – Being Careless with Petty Cash:

A petty cash drawer is used for small purchases like office supplies and other minor expenses. It is crazy that most of the small businesses lose track of petty cash. If you make this mistake then you will end up spending much more than the anticipated amount on such small purchases.

Small businesses should dedicate a custodian to keep track of the petty cash and maintain a check on purchases. In this way, the potential of fraud and abuse of funds can be minimized.

In addition to this, make clear policies in spending petty cash and generate a receipt on every purchase to maintain a clear document for claiming the tax deductions.

Conclusion

All the above-mentioned mistakes are completely avoidable. Educating yourself or simply hiring a professional to help you keep track of all your finances and maintaining the books.

Although most of the mistakes are minor, they can turn into bigger problems in no time if not corrected professionally.

Consider hiring an expert and free up your mind. Centrosome Bookkeeping services is a bookkeeping firm which offers automated data entry for your business. We are based in Ottawa, Canada and help small businesses with bookkeeping in Canada and the Unites States.

To learn more about the services we offer at Centrosome Inc. Please click here Or read what our clients are saying about us, here. If you have any questions about how we can help you, contact us.