Keeping your finances in order is crucial for the success of your business. Even if you’re running a small operation, bookkeeping is a critical component that cannot be overlooked. While it may not be the most exciting task, it’s important to ensure accuracy to avoid costly mistakes that could hurt your business in the long run. As the person responsible for completing these tasks, it’s important to recognize that you may not have the same level of accounting expertise as larger businesses that can afford to hire specialized professionals.
That’s why it’s crucial for you to educate yourself on the common bookkeeping mistakes that small business owners often make. By learning about these errors and taking proactive steps to avoid them, you can effectively manage your finances and set your business up for success.
Not Keeping Low-Value Receipts
According to Business.org, one common bookkeeping pitfall is not keeping low-value receipts. While the IRS may not necessarily need these receipts, they can be helpful if the business undergoes an audit. This is particularly important for you if you run a small business, as many claimed deductions are likely to be the total of several smaller purchases. As a small business owner, you may either keep physical copies of these receipts in one safe location or scan and upload the receipts to a preferred digital accounting software.
Failing to Track Reimbursable Expenses
Failing to track your business’s reimbursable expenses can result in costly consequences. Your company may miss out on tax deductions and pay more in taxes. To prevent this mistake, consider using expense-tracking software and recording expenses as soon as the business accrues them.
Incorrectly Classifying Employees
If you hire various professionals, such as employees, consultants, contractors, or freelancers. you must correctly identify your employees, but classifying these professional can get confusing. Incorrectly classifying employees and contract workers may lead to severe negative consequences, including lawsuits and tax penalties.
Having Communication Issues
One of the keys to effective bookkeeping is regular communication between the person responsible for the bookkeeping duties and everyone else within the small business. A lack of clear and consistent communication can confuse and lead to errors. If, for instance, someone buys additional supplies or pays out a bonus without informing the bookkeeper, the resulting inaccuracies from the lack of communication can be costly to the business.
Failing To Complete Reconciliations
One way to identify your business’s financial well-being is to reconcile the company’s books with its bank statements. Reconciliation is a complex but crucial process that can help you determine your business’s available cash and identify most financial errors before problems escalate. A common bookkeeping mistake is avoiding reconciliations, completing them incorrectly, or failing to complete them regularly. You can avoid this issue by researching how to reconcile the books correctly and by regularly setting aside time to complete the reconciliations.
Not Storing Physical Financial Documents
Having paper records on hand can be a disadvantage if your business undergoes an audit. Keeping your business’s financial records on computer servers or in the cloud can help improve the company’s daily operations. However, this does not work well for audits, as tax authorities expect a physical paper trail. Due to this, you may want to store physical backups of your financial documents for a minimum of seven years, keeping these records well-organized to make audits as easy as possible.
Not Collecting or Deducting Sales Tax
Determining sales tax can cause issues for the majority of small businesses. One common mistake with sales tax involves forgetting to deduct the tax from your business’s sales, causing larger tax bills later. In addition, you might not be aware of the rules regarding collecting sales tax for online transactions. To avoid these errors and remain compliant, you should stay updated on the latest developments regarding sales tax collection.
Failing To Resolve Issues with Petty Cash
Most small businesses use petty cash for incidental purchases. One person handling all petty cash transactions can help ensure appropriate money management. This can also prevent theft, fraud, and abuse by improving accountability. In addition, you may want to implement clear petty cash policies for your employees to avoid confusion and to ensure that receipts are submitted for all petty cash transactions. These policies can make it easier for you to accurately declare your business’s deductions when completing or preparing your tax returns. Another way to help prevent mistakes is to set periodic limits for petty cash transactions and to review the transactions at the end of each period to ensure that the receipts and outstanding cash match the initial petty cash funds. If errors are found, there will be time to rectify the issue before taxes are due.
Incorrectly Categorizing Expenses
Keeping clear accounts is vital to efficient bookkeeping, and correctly categorizing expenses is an important part of this process. A common bookkeeping mistake for small business owners is placing expenses in the wrong category or using the same categories. You can avoid this common bookkeeping pitfall by limiting the number of categories used in your business accounts by only using standard categories to keep the books simple.
Not Seeking Assistance
As a small business owner, it’s likely that you wear a lot of hats in order to keep costs down. When it comes to bookkeeping, doing it all yourself can be counterproductive. If you lack the financial knowledge and attention to detail required, you might miss costly financial errors in the company’s books. To prevent this common bookkeeping pitfall, consider asking a trusted colleague or friend to check your work or delegate the task to a company employee with the skills required to complete the task effectively. Better yet, outsource your bookkeeping to an experienced professional.
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As a small business owner, we understand that you have a lot to juggle. That’s why we’re here to support you as your Personal Family Lawyer® with expertise in family business planning. We want to help you protect your legal and financial rights, so you can focus on running your business with confidence.
If you need additional advice and support in ensuring you have the right LIFT (Legal, Insurance, Financial, and Tax) systems in place, don’t hesitate to contact us. We have the expertise and experience to provide you with the legal guidance and answers you need to protect your business and achieve your goals.
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The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.