Bookkeeping is the recording of financial transactions performed by a company over a period of time. It helps know the financial health of your business.
Since a business that is not solid fundamentally and financially is vulnerable to failure from all sides, failing to keep an eye on your books can be an unforgivable mistake to make.
I have spent years managing small business finances and have spoken with thousands of business owners throughout my decade-long career. And it has made me realize that there are countless businesses that make the same accounting errors as if it were some sort of a universal tendency.
So, I have come up with a list of bookkeeping mistakes that you must avoid when managing your company finances. Let’s dive in.
1. Not bookkeeping because your business is too small
If you own a company, you already know how important it is to be meticulous about the accounting side of your small business. It is one of the determining factors of your success.
A successful business means proper bookkeeping – ensuring all transactions are correctly recorded and accounted for.
But it is rather typical for entrepreneurs to put off accounting and bookkeeping tasks or assume that they can do it on their own. This leads to incomplete or inaccurate information, which in turn affects the overall health of the business.
The truth is, many small businesses generally forget about the fact that bookkeeping is a crucial task that shouldn’t be ignored if you want to run a successful company.
If you think your business is too small and you don’t need to worry about bookkeeping, think again. Because no matter the size of your business, you need to set a good financial foundation.
And bookkeeping may not be something that most business owners wish to spend time on. It is also not a fundamental qualification for any given small business owner to know how to do it. But it still provides an essential insight into how well the business performs financially.
More important than just being aware of your direct financial performance, bookkeeping is a tool that enables you to keep track of important financial data. Such data can be used as a measure of the future success of any business and can predict any possible future problems.
2. Mixing personal and business funds
Mixing funds can make your life crazy complicated and legally vulnerable.
That’s why it is important to get used to separating your business from your personal finances as early as possible because you never know when a situation will arise where you might end up needing to do it.
Besides, mixing business and personal funds is an easy way to get yourself in trouble with the IRS. Because while you enjoy tax deductions on business expenses, it is unlawful to claim it on mixed funds.
So, it essentially is not the wisest approach to growing your business.
Regardless of the size of your business, you should have a separate bank account for your business transactions. Your business bank account should be used only for business – not business and personal transactions.
In addition to that, mixing personal and business funds may cause you to spend out of your personal money even when the expenses are for your business and vice versa. As a result, you will be unable to hold anyone responsible for the loss of income if it occurs.
3. Not recording your income and expenses
It’s no secret that small business owners work hard and often go through a lot of personal change. This can take its toll on your accounting and filing practices. If you find yourself not recording your transactions, stop now.
Whether you manage your business’ finances in excel or have accounting software, the temptation of keeping track of your transactions can sometimes be avoided.
But the more you ignore this, the more it will cost you in the long run.
The most common reason for indicating your income and expenses are tax purposes. But saving your business from the government is not the only reason why you should record your income and expenses.
It is easy to get caught up in a vicious cycle. Because the more you don’t keep track of your expenses, the more they build-up, and the harder it is to do bookkeeping properly.
The solution?
Develop a review system to keep track of your income and expenses. Create a simple folder where you can keep receipts or transaction records. You can even use third-party systems like QuickBooks Online. All you have to do is enlist a bookkeeper’s help to set it up correctly.
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