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.
Mistake #1: Not Keeping Low-Value Receipts
While the IRS may not necessarily need these
low-value 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.
Mistake
#2: 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.
Mistake
#3: Incorrectly Classifying Employees
If you hire various professionals, such as
employees, consultants, contractors, or freelancers. you must correctly
identify your employees, but classifying these professionals can get confusing.
Incorrectly classifying employees and contract workers may lead to severe
negative consequences, including lawsuits and tax penalties.
Mistake
#4: 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.
Mistake
#5: 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.
Mistake
#6: Not Storing Physical Financial Documents
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.
Mistake
#7: 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.
Mistake
#8: 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.
Mistake
#9: 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.
Mistake
#10: 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.
Contact Us To Learn More About Bookkeeping and Legal Advice
For Your Small Business
As a small business owner, we understand
that you have a lot to juggle. That's why we're here to support you. 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. Contact us today!
This article is a service of Ganvir Law, Personal Family Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a Business Strategy Session for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
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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
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