Bookkeeping is a crucial but often neglected aspect of running a business. This task is very important for dividing a company’s single income stream into multiple flows.
Bad bookkeeping practices can lead to discrepancies in finances, taxes, and lost investment opportunities. Whether a business is small or medium-level, finance management is paramount in sustaining any establishment.
Here, we will discuss and eliminate the 7 common bookkeeping mistakes that can be made in bookkeeping so that your company can always be in a favorable financial standing.
1. Failing to Keep Accurate Records
Bookkeeping is all about detailed record keeping and without proper record keeping, there is no effective bookkeeping. Unfortunately, not every owner is thorough with every transaction having detailed logs of receipts for sales, purchases, and other related papers.
This could be related to a myriad of things, such as receipts not being saved, sales or purchases not being inputted, or even a lack of documentation altogether. When records are incomplete or inaccurate, financial statements become unreliable. In such situations, taxes can easily become a topic of a very large headache.
In addition, errors in financial records can have dire consequences in matters like loans or grants.
How to avoid it:
- Accurate accounting management has to be adopted into the company to properly manage all streams of income and expenses.
- Every transaction, sale, and purchase must be logged into the system right as they occur.
- Receipts and other important backup files must be saved, whether digitally or physically.
- Accurate financial reports must be made so that the transactions are easily referenced and categorized.
- Ensure accuracy by regularly reviewing financial statements.
- Account software can help you comply with tax liabilities as well as give you an accurate picture of your business finances.
2. Mixing Personal and Business Finances
A common bookkeeping blunder is mixing up business and personal finances. For some small business owners, this appears to be convenient but can be detrimental.
Attempting to manage personal expenses and business expenses in one account makes it very difficult to distinguish between what is personal and business related.
This can lead to messy financial records, missed write-offs, or be possibly flagged for tax audits. Moreover, in case of an IRS audit of your business, intertwining the accounts could trigger red flags.
How to avoid it:
- Obtain business bank and credit accounts for your business.
- Transact all business deals through business accounts.
- Business accounts should be used for business expenses, which include travel, meals, and supplies.
- To ensure clarity, do not mix personal spending with business-associated expenditures.
- Monitor transactions to ensure proper account balance.
- Establishing the separation of personal assets from the negative consequences of losing money to business finance by ensuring proper distinction.
3. Ignoring the Importance of Reconciliation
Bank reconciliation involves matching your books of accounts to your bank statements. Many business people do not reconcile their accounts often enough.
There are problems like missed bank charges, unrecorded transactions or a bank transaction already recorded on the books that can result from internal processes not being carried out.
These errors can result in cash flow projections which are inaccurate and in some cases even cash flow problems. Also in the most unfortunate example, there might be fraud or theft which goes unnoticed at least until the reconciliations stop being done.
How to avoid it:
- Reconcile your accounts regularly, ideally monthly, or weekly for businesses with higher transaction volumes.
- Ensure your accounting records match your bank statements during reconciliation.
- Investigate any discrepancies immediately to resolve errors.
- Use accounting software with automatic reconciliation features to save time and reduce human error.
- Set aside dedicated time each month to perform reconciliations and keep records up-to-date.
- Keep a close eye on bank fees, charges, and other small discrepancies that could affect your financial accuracy.
4. Not Keeping Up With Invoices
Invoices play a significant part in financial record keeping. Nevertheless, many entrepreneurs forget to invoice or fail to do so altogether.
This oversight leads to sending invoices late or failing to pay attention to invoices that have already been sent which site can create payment delays and subsequent impacts on cash flow.
The business might also lose out on funds that it should have collected by failing to issue or correctly manage invoices.
How to avoid it:
- Develop a clear and effective invoicing strategy for your business.
- Remember to send invoices immediately after a sale or service.
- Issue invoices with specific payment terms and due dates to avoid ambiguity.
- Set up automated follow-up reminders for unpaid invoices.
- Consider implementing a system that propels faster payment processes, such as automatic payment options.
- Utilize invoicing accounting software to make it easier to monitor invoices sent and paid.
- For existing overdue payables, automatically send reminders for payment notification.
- Diligently go through your accounts and google under receivables to see how much is still unpaid on your invoices.
5. Neglecting to Track Tax Deductions
A business could use tax deductions to lessen the taxable profit it makes, however, many companies do not track these deductions throughout the year.
Business deductions can include things such as travel, office supplies, home office expenses, and business meals.
If you do not monitor these deductions carefully, you might end up paying more than you should, which would affect the profit performance of your business.
How to avoid it:
- Make sure to document all the business expenses, including receipts.
- Employ accounting software that tracks expenses and tax-deductible expenses.
- Consult with the tax professional to get all the business deductions that you have available to you.
- Keep your records organized and current for the tax season.
- Check your expenses from time to time in order not to miss out on any deductible items.
- By maximizing these deductions, you save money on taxes because your taxable income is reduced.
6. Using Outdated or Inadequate Accounting Software
Still, many small businesses will be using manual bookkeeping, either on a spreadsheet or on paper. This is one of the most expensive mistakes some of them may make.
These processes take a lot of time and they are also error prone. Additionally, they also do not have the enhanced capabilities that your business requires as the company expands.
Using such outdated approaches can result in delays in the production of financial statements, reporting tax amounts to the authorities, or following the legal requirements that change with time.
How to avoid it:
- Put your money into a sophisticated accounting application that is suited to your business.
- Select a service that connects to your bank accounts for easy tracking.
- Select software programs that minimize manual intervention and input mistakes.
- Check if the program permits the users to generate financial reports in real-time so that they can have a more accurate depiction of the finances.
- Look for services like EasyBooks, QuickBooks, Xero, or FreshBooks to help you with your bookkeeping.
- Adopt cloud-based applications to protect, access, and update your financial information.
- Check for updates for your application and install them to gain access to new and improved features.
7. Not Having a Budget
A plan or a budget for how the company is expected to spend is the best way to gauge the financial health of the business. However, most entrepreneurs go through the painful process of all the bookkeeping and set a budget and most do not even stick to it.
Lack of budgeting makes expense control and planning for the future very impossible. There are no targets to work on and cost-cutting measures become so difficult.
Budgeting is a very effective way of ensuring things do not go out of hand and financial targets are met, costing less, and alleviating financial suffering.
How to avoid it:
- Draft a plan or a budget on how a business is expected to make so much money, fixing expenses e.g. rent, useful assets, and variable expenses like promotion.
- Always revisit and change the budget to accommodate the current state or situation of the business or the market.
- Keep track of expenses to know the state of the business.
- Utilize the budgeting capabilities found in your accounting software to assist you in tracking your expenditures.
- Make sure to create a budget plan that includes all your financial aspirations and update it whenever necessary.
- Review your budget from time to time, so that it meets the needs of your business growth and goals.
How Easyfiling Can Avoid Common Bookkeeping Mistakes
Easyfiling can assist in avoiding hitches in accounting by providing excellent services, tips, and appropriate software. Some of the things that they can help with are the following:
Accurate Record-Keeping: The team at Easyfiling does not overlook any piece of information. They ensure that every transaction is documented and organized in a manner that makes sense. This minimizes the chances of mistakes of leaving out information or adding unnecessary information.
Timely Filings: Easyfiling advocates for filing taxes and forms on time as this not only avoids penalties but also makes business people more responsible.
Custom Solutions: Because Easyfiling provides custom bookkeeping services, there is no way any business can cite overlooking some important aspect of their finances.
Seamless Integration: Easyfiling works with different types of accounting software. This means that there is less of a chance of erroneous data sorting because information will be remotely uploaded.
Expert Support: Easy filing allows you to consult with a variety of accountants and other professional paraprofessionals so that you can double-check your financial records and business decisions and avoid great financial losses.
With Easyfiling’s assistance, business owners can focus on running the business, making money, and using the finances after knowing that everything is accurately done without the risk of errors.
Nabin Adhikari
