Mistake #1: Comingling- Mixing Business and Personal Spending.
“I paid for that business flight with my personal credit card…”
There are several reasons why buying personal items on business cards or thru business accounts or buying business items on personal accounts is a bad idea:
- Missed expenses and write-offs
- Breaking the corporate veil
- Extra work to make journal entries
People will say to me, “My business didn’t have the money to pay so I just used my personal account.” The answer is simple – transfer the money into the business bank account and BUY the actual expense from the business. It’s all then recorded by the business account. The movement of actual money and how the purchase/transaction gets paid is crucial.
Mistake #2: Trying to Do it Yourself.
“You mean, I should get some help to do this right?”
Many people don’t take actual accounting as seriously as they should. Businesses fail due to poor financial management. People think bookkeeping is “so easy” – but they’re wrong. A lot of people don’t know all the tax deductions (such as: which meals are 50% deductible vs. 100% deductible) and don’t know how to categorize things correctly. If the entries are not done correctly, then obviously, the reports will be wrong.
Mistake #3: Not Setting Up a Bookkeeping System Properly.
“What system?”
Have someone:
- Set up the entire system (chart of accounts customized for your business.)
- Enter initial balances etc. for you.
- Give you a weekly checklist of items to do each week, and then,
- Oversee your work on a monthly basis.
This way, you can ensure the accuracy from the beginning and can learn along the way because you’ll have someone to oversee and let you know of the mistakes.
Setting up the software and accounts and system is the KEY to making sure that things are done correctly. If you need help with this, my company offers this service. We call It TFO or Total Financial Organization, and it allows you to get organized and stay organized when it comes to your finances.
Mistake #4: Not Entering Transactions and/or Reconciling on a Regular Consistent Basis.
“I’ve got a box of receipts for the last 5 months, this is going to be a tough night!”
The further you get from the expense (or the income), time-wise, the harder it is to catch errors and fix errors. If the transactions aren’t done correctly then the financials won’t be correct either.
Mistake #5: Not Entering or Writing the Expense Details.
“I know we had a board meeting in Hawaii… now I need to show what topic was discussed, when and by whom!?”
Obviously, receipts and statements and all related documents are needed in case of an audit. I suggest scanning in everything and using a simple document storage program like Dropbox. Alternatively, QuickBooks Online (my software of choice) allows you to upload documents right into the program to keep with the transactions they relate to. It’s easy to drag and drop right into the program.
While your receipts don’t have to be physical scraps of paper, you do need to save them for all expenses over $75. (Even for expenses under that amount, you still need a paper trail, such as entries in a notebook or smartphone. )
Frankly, it’s just good to get in the habit of saving receipts for everything! If you are ever audited, you’ll want them. If you’re not, receipts can come in handy when double-checking your work or clarifying exactly what was purchased.
Mistake #6: Not Backing Up Data or Saving Back-Ups Long Enough.
“I KNOW I have the information around here somewhere!”
The system should be set to automatically back up the data after new entries are made.
If you choose a desktop version, make sure that your computer is backed up at least weekly onto a cloud storage system or some other “offsite” system.
How long should you keep records? If the program is used correctly then the records will be there “forever.” But there isn’t a “long enough,” and the numbers and records never go away. Sometimes I say, “Keep everything for 10 years and you are good!” According to the IRS, the Period of Limitations that apply to income tax returns:
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Mistake #7: Not Looking at Financials on a Regular Basis.
“Am I supposed to DO something with this!?”
The purpose of accounting is so that one can use the financials in determining the profits of a business as well as its net assets. They are used for budgeting, future planning and financing.
Don’t fall for the limited idea that the purpose of bookkeeping is to get your taxes done. Understanding every aspect of each of the reports on a regular basis is KEY to knowing what is going on with your financial picture!
Review your cash flow statements monthly. Notice trends, and where improvements can be made. If you’re not sure what you’re looking at, ask for help from the accountants or lead bookkeepers on your team.
Mistake #8: Hiring “Bad” Bookkeepers for “Cheap.”
“I got what I paid for… and worse!”
Many business owners don’t seem to realize that this is probably the most important part of the business, and it needs to be handled by top professional accountants and the most trustworthy bookkeepers and financial organizers.
While it may be easy to spend less upfront, in the long run, hiring the wrong people could cost a lot more. This is an area where the cheapest bid should not get the job!
Mistake #9: Asking the Wrong Questions when Hiring a Bookkeeper.
“Next time I’ll be more specific!”
A key reason that even smart business owners hire the wrong bookkeepers is that they don’t know what to ask. Unfortunately, even when someone is willing to pay for a good bookkeeper, they can still end up disappointed, because they don’t what to look for when it comes time to hiring a bookkeeper.
Some questions to ask when interviewing a bookkeeper:
- Do they know industry? For instance, a real estate bookkeeper will do things differently from a restaurant bookkeeper, and bookkeeping for a financial advisor is different still. An experienced bookkeeper in the field of your company is best, although some bookkeepers with a lot experience can handle many types of industries.
- Can they set up the system from scratch vs. simply “follow” a system that is already in place? You may get a bookkeeper who can follow a system someone else put into place, but can they create it if the system isn’t already there? (You might need two people…)
- Software is key. Do they KNOW the software they’ll be using? Even CPA’s don’t know how to use the software all the time; they may understand bookkeeping or the basics of accounting, but they don’t know how to use the software to do the day-to-day bookkeeping. I have seen people think they can just “wing it,” but without using the software properly- nothing will be right.
- Since the bookkeeper does the day to day, they are responsible for categorizing items correctly. I would ask for a general chart of accounts they use and see if they have items like 50% meals and entertainment vs. 100% meals and entertainment, or if they know the difference.
- How often will they be working on the account? They need to be working on your books at least weekly, or you will not have up-to-date books.
If you avoid these 9 common mistakes, you’ll find that bookkeeping will truly support you in guiding your business to success. Happy Bookkeeping!
Article Reference: https://partners4prosperity.com/common-bookkeeping-mistakes-business-owners-make/
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