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7 Bookkeeping Mistakes You Should Never Make

03 Jul 2017






You should not ignore this warning: never make these top seven bookkeeping mistakes.

Those that did, probably joined the 90% population of small businesses that failed. 
 
Reportedly, 90% of small businesses fail due to poor cash flow. But many don’t fully realize that the biggest contributing factor to poor cash flow cramping a robust financial management practice, is a good bookkeeping.
 
Bookkeeping is definitely not one of the most glorious jobs. And most of the time, it is being ignored by entrepreneurs. 
 
But good bookkeeping is a prime factor for a healthy, growing business.
 
Here’s a quick 60-second bookkeeping tip from the financial advisor, Mark Kohler. He pointed out how you can avoid the biggest bookkeeping mistake.
 
If you watched the video, Mark discussed his two recommendations that can save you thousands of money. But to stay on top of your business, there are more things you should consider about bookkeeping and we listed our top seven bookkeeping mistakes that you should never make.
 

1. Never combine personal and business funds

If you are a starting a small business, the first thing you should do is to open a business bank account and credit card account. Make sure you separate your personal expenses from your business expenses. Deposit all your earnings from your business transactions in your business bank account.
 
If you make the mistake of combining your personal and business funds, you take the risk of creating problems when you are doing your financial reports. You will have serious difficulty in tracking your cash flow and actual income. When that happens, your financial report may have reliability issues.
 
The other consideration for you to keep your personal and business funds separate is for purposes of loan eligibility. Your transactions from your business account serve as proof of your earnings. More importantly, the obligations you have for your personal credit will not affect your business credit records that gives you higher chances of getting your loan application approved.
 
We hear this too often from small business owners:

“We don’t have enough funds in our business account; so I paid using my personal card.”

That’s never a good excuse. If you don’t have funds in your business account, transfer the money from your personal account to your business account and record the transaction. This way, you keep everything in the books.
 

2. Never use a wrong bookkeeping method

First off, do you have a proper bookkeeping system in place? If you don’t, that’s a real problem.
 
But if you do, are you applying the correct bookkeepin method?
 
We know all too well the story of solopreneurs and small business owners wearing different hats, including bookkeeping. But that could probably be the biggest mistake you could make.
 
As you don’t have any  bookkeeping background and you only rely on what you read online, you could get your business into trouble when you use a wrong bookkeeping method. We’ve seen this too many times and it never ends well for any type of business.
 
So, if you are still using a quick-and-dirty system for your bookkeeping practices such as keeping receipts in a small box and using spreadsheets to manually record your transactions, you are creating a world of problems as you leave room for consistent common errors in manual data entry. Later on, you will realize how deep in trouble your business sinks into especially when tax filing season arrives. Not to mention, it is going to be costly for you in the long-term.
 
It is important to start right at the beginning of your business operation. For accurate tax filing, a proper system in place using the correct bookkeeping method is critical.
 
But what is the correct bookkeeping method? There are actually two methods you need to acquaint with:
  1. Cash bookkeeping method
  2. Accrual bookkeeping method
In cash bookkeeping method, you record transactions based on actual cash flow such as recording receipts when you receive them and recording expenses during the time when you actually pay for it. If you are a sole proprietor and you have no inventory, this is the easier method you can use because you can see the actual cash on hand.
 
Meanwhile, the accrual bookkeeping method is rather complex. You record revenue and expenses as they happen, and not exactly on the period when you earn or spend cash. For corporations, this bookkeeping method is required under GAAP. 
 
But even small businesses should switch to accrual bookkeeping method when you begin to grow your business. It’s important to recognize when you should switch. If you are worried that you have too many things to study and you don’t have adequate knowledge, you can always employ a good financial advisor who can help you break down the complicated principles for you in simple terms.
 
The more important consideration when identifying which is the correct bookkeeping method for your business is the accuracy of matching your revenue to expenses. Using cash bookkeeping method makes this a little difficult to achieve because you will only see profitability of your business when expenses are low and it seems unprofitable on periods when you incur hefty expenses. Meanwhile, accrual helps you determine the long-term profitability of your business when you incur costs that you can identify under your assets.
 

3. Never overlook petty cash funds

If you keep petty cash funds for purposes of loose change or to pay for incidental business expenses in small amounts such as payment for postage stamps or basic office supplies, get your petty cash custodian to have a simple petty cash bookkeeping system in place.
 
We get it, your petty cash fund is small and you keep it informal. Still, you must not ignore the importance of properly bookkeeping every little amount that you spend on your business.
 
You can better avoid abuses and prevent theft if you keep a log of cash that comes in and out of the petty cash reserve. Log the designated beginning dollar amount and require employees to prepare and submit a petty cash slip every time they request for money from the reserve. At the end of business day, make sure your custodian is responsible in keeping the balance of your petty cash funds, which means when the reserve has been exhausted, the petty cash slips should total the same amount as the beginning amount in order to request for fund replenishment.
 
There are a few things you should remember in managing your petty cash reserve.
  • Keep your petty cash fund small to discourage theft among employees but enough to cover your monthly incidental business expenses that does not require frequent replenishment.
  • Prepare a petty cash policy and list the expenses that can be covered by the petty cash funds. Then, orient your employees. You can specify expenses such as paper towels, coffee and any other relevant business-related purchases; and you can even add a limit to the maximum amount that can be pulled out of the funds for an item. For example, any petty cash transaction should only be under $25 in amount. This reduces the risk of petty cash disbursements on activities that are non-business related, according to Umair Danka in his article published in the Institute of Internal Controls Advisors.
  • Always keep a log of every transaction that required funds from the petty cash reserve. Every employee requesting funds should be responsible to submit a petty cash slip and submit receipts whenever possible.
  • Assign a petty cash custodian to control the funds that gets out of the reserve. This limits the access to only one authorized employee. The custodian holds the authority to approve or disapprove disbursement requests and ensures that all expenses are logged and all receipts are filed.
  • You can trust your employees but never leave cash unsupervised on top of the table. You are encouraging theft of a highly liquid asset. You should have a safe or a locked drawer where you keep the funds giving access to only your petty cash custodian.
  • Always keep record. Your petty cash may seem small but when you add the total cash refill over time, it makes up a significant amount of money.
 

4. Never rely too heavily on modern technology

We have always advocated to embrace modern technology and go for automation in the name of ease and speed. But going paperless under the argument of embracing modern technology is another story.
 
And that’s a big mistake you should never make.
 
Technology has evolved in many ways that made business transactions so much easier and quicker to complete. For those of you using cloud storage for your records, that’s fine. We have nothing against. It’s one of the best practices we even recommend that allows you to access your records anywhere, anytime.
 
But, hey… have you ever considered what happens when the system breaks? When files get corrupted or lost for whatever reason.
 
The seemingly smart move is to backup your files. And nothing can better replace paper documentation. In the event of disputes, paper trail provides the evidence to win your claims. You may even find out later that paper documentation is even required to meet certain standards such as in ATO investigation.
 
So, don’t simply embrace a paperless business setting.
 
And please don’t make an argument on reducing expenses or becoming an environmental ambassador. You can still practice these in other aspects of your business. Just not in bookkeeping. Otherwise, there may be tragic consequences that could kill your business and never be able to come back to life again.
 
It is as important to know that we are not dismissing the value of electronic data backup. You should indeed secure multiple backups of all your records and documents.
 
If you are using QuickBooks, we can even help you.
 
Large companies always perform backups for their documents. It can be automated so you don’t have to worry about it every time you have added new entries. If you are using the desktop version of Quickbooks, there are cloud storage systems you can check out that will help you perform a weekly back-up.
 
We hope, we made it clear that you need to backup your documents and ideally create multiple digital copies. But still keep paper documentation.
 

5. Never ignore basic account reconciliation

Many small business owners make this mistake: ignoring to reconcile accounts. A monthly account reconciliation is another essential business activity.
 
Keep in mind that you must have proper bookkeeping of your business transactions in place for you to determine whether your business is growing profitably. If your financial statements suggest that your business is falling into an unhealthy trend, then you might consider rethinking about selling your business or closing it down.
 
The bottomline is that your financial records will help you make sound business decisions.
 
But there are other important reasons why you should properly account your business transactions such as standard rules of business law and tax filing. And one of the important things that you need to fulfill to keep a reliable financial report is a regular accounts reconciliation. 
 
What is account reconciliation and how do you reconcile accounts?
 
Account reconciliation is the process of comparing two sets of your financial records:
  • Your bank account; and
  • Your book of accounts

It’s critical for your business health that these two records match. If they don’t, you may need to further investigate the issue as it could be indicators of fraud attempts.

Fraud Audit and Investigation Texas

To reconcile your accounts, you simply have to pick up your bank statement and compare it with the transactions recorded in your books of account. Your bank statement is usually mailed to you monthly or download statements from your online banking access.
 
If you spot any discrepancies in the record, investigate it further.
 
The recommended interval to perform accounts reconciliation is on a regular monthly basis. 
 
You should also read:

 

 

6. Never make uninformed decisions

For your small business success, decision making plays an important role. You can either grow or break your business.
 
Your first duty is to make sure all your business decisions are not based on assumptions. Embarking on a business is like going to war. And so, we find inspiration from the insights in the book by Becky Sheetz-Runkle, The Art of War from Small Business.
 
 

“Many entrepreneurs, small business leaders, and visionaries make assumptions about the market, their customers, and their opportunities. They allow these assumptions to govern their decisions. This is the path to uninformed decision making, at best, and catastrophic decision making at worst.” ~Becky Sheetz-Runkle

Indeed, you can make catastrophic decisions if you continue making uninformed decisions. So, let’s test your knowledge.
 
What is the difference between cash flow and profit?
 
If you have no idea, your business could be in trouble.
 
Profit does not mean cash. Your business may be earning a profit but you may not see the cash on hand yet in the current period. You will only see this in your financial report when you record your transactions and run your analysis to make your forecast or budget.
 
It’s always best to keep informed and get on top of your numbers. If you don’t, well… you may be seeing a positive cash flow but in reality, your business could be running out of cash soon because you are not earning any profit.
 
So again, profit is not always cash.
 
Meanwhile, you could be seeing a negative cash flow but could get profitable in the long term. When you keep yourself informed about the principles of bookkeeping, you have better chances of achieving business success. But know that a lot of successful business owners attribute their success to other people that helped them take their business to the top. 
 
Simply put, you need help. Get it.
 

7. Never hire bad bookkeepers for cheap

Of course, no one ever succeeded in business doing it alone.

If there were... perhaps, a chosen few. It’s either you’re lucky or a genius to do-it-yourself and find yourself on top of business success.

If you don’t get lucky and you’re not a genius, don’t worry. You can still achieve business success if you are on the right track. Just never hire bad bookkeepers for cheap. This is not to say that you have to spend a lot of money hiring the most expensive bookkeepers.

But don’t hire the wrong people to do your bookkeeping for you.

Find the professional ones who can really help you set up your system and record your transactions properly and correctly. Remember to go back to your objectives. Get help where you need it. And when you get help, choose the qualified professionals who knows what they are doing. Not some amateur bookkeeper just because they offered you the cheapest bid for the job and you are trying to cut costs.

We can guarantee you that bookkeeping done wrong could cost you closing down your business. That’s a fact and not something made up to sell a service.

The most important for a small business owner to realize is that bookkeeping is the foundation of your business success.

When you entrust your books to the wrong bookkeeper, you have to be prepared to spend more or embrace the reality that your business lives on a shaky ground and could fall at any time. It’s always wise to strengthen the foundation of your business success.

Start with a qualified professional bookkeeper.

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