Most small business don’t have enough time to dedicate themselves in maintaining proper records which results in poor bookkeeping. The tedious and mundane task of bookkeeping can often take up hours and hours of time. This is the primary reason that well over one-half of all small business owners do not keep their finances up to date on a monthly basis. Bookkeeping, as mundane as it may appear, is actually your biggest secret weapon when it comes to business management and growth.
- Improper record keeping: improper receipts and record keeping is very common among small business. They often forget to lose receipts and fail to record small expenses that seem to be insignificant.
If you’re audited, they will request two things:
- Proof of purchase (receipt)
- Proof of payment (bank or credit card statement)
So, make sure you have both. Oftentimes, they’ll ask for your bank statement and request a sample of receipts from your list of expenses.
- Using the same card for personal and business purchases: It is often seen that small business owners tend to make business and personal purchases using the same card which makes it difficult in maintaining a proper record of the business purchases.
If you always keep your business and personal expenses separate, your bank statements are an exact record of your business. This also helps you to avoid forgetting to track your expenses and missing out on valuable tax savings!
- Improper Categorizing: Many small business owners make this mistake when doing their own bookkeeping is creating duplicate categories or failing to enter expenses into the appropriate category. Accurately tracking income and expenses in the correct categories ensures proper measurement of profitability. Knowing the different tax treatments of each income and expense category can result in significant tax savings, as well.
- Improper bank reconciliation: Bank reconciliations are completed when you match your bank account balance to your accounting records. It seems simple enough, right? If you have a lot of transactions and you need to do this manually, it can be quite tedious. There’s room for error, and it’s a painstaking and time-consuming task.
Reconciling your books with bank statements is a fundamental aspect of determining your financial health. It’s important to make sure it’s done properly and consistently. Reconciling your books helps you identify how much money you have on hand at any given time, and it also allows you to discover bank errors before they become major problems. Reconciliation can be complicated, however, which is why hiring an experienced bookkeeper is highly recommended.
- Differentiating between Capital purchases and expenses: There are many tax grey areas in expenses, one common mistake that business owners make is writing of a large capital asset as an expense.
The difference is:
- A current expense is a day-to-day operating cost of the business.
- A capital purchase is one that gives a lasting benefit or advantage for longer than a year.
- Improper petty cash management: Business owners often operate with a small amount of petty cash, but they have little or no knowledge of how to track it. Be sure to set up a system which allows you to track the cash kept on hand for the business and what it is being used for. This ensures accountability and limits the potential for fraud, theft and abuse. To that end, businesses should have clear policies regarding petty cash purchases and every purchase made with petty cash should have an accompanying receipt for the expense to maintain clear documentation for deductions come tax time.
- Failing to classify employees properly: Small businesses often have a combination of both employees and independent contractors. With so many independent contractors, consultants and freelancers around these days, it can sometimes be difficult to determine who is on staff and who is not. Make sure these are properly classified to avoid misfiling and labor penalties.
- Time wastage: Many business owners try to do bookkeeping themselves or do not have the professional help they need. Although we all know that time is money, many business owners do not put enough VALUE on their time. Most small business owners hate doing their own books yet insist on doing it themselves.
Competent, professional bookkeepers have the required skills to do the job quickly and efficiently, and they have the necessary expertise to locate subtle errors that might otherwise be missed. As professionals, they’ll also be aware of the tax changes that could affect your day-to-day financial practices. In the long run, having a second set of eyes on your financial records is extremely beneficial and will save you time and money.
We at Fair and Square, make sure that your time is invested and utilized properly. We are committed to provide the best accounting service possible on a timely basis with personal service to each client, helping them with their plans and being available to help and solve simple as well as complex problems.