Not Keeping Personal and Business Finances Separate

One of the most common mistakes small business owners make is mingling personal and business finances. While it may seem easier and more convenient at first, combining personal and company accounts will cause major headaches at tax time. It also makes it much harder to get an accurate picture of your company’s financial health when personal expenses are mixed in.  

The best practice is to set up separate business checking, savings, and credit card accounts. Never deposit business income into a personal account or pay business expenses from a personal account. Keep the finances 100% separate. Business credit card statements should be paid from the business checking account, and balances should be reconciled monthly.

Taking the time to properly set up your business accounts will pay off tremendously down the road. Keeping careful separation of finances also shows lenders you operate in a professional, business-like manner if applying for financing. Don’t fall into this common trap of linking personal and business finances.

Not Maintaining Complete Documentation  

Maintaining organized, complete documentation of all financial transactions is a critical bookkeeping practice. Every expense, invoice, bill, receipt, and cash transaction should be carefully documented and kept on file. Failing to do so causes a few major problems:

– Inability to accurately complete tax returns

– Transactions omitted from financial statements  

– Difficulty tracking accounts payable and receivable

– Issues securing financing due to incomplete records

– Revenue inaccurately recorded leading to wrong tax liability

Get in the habit of diligently filing away every receipt, both paper and digital, to back up all transactions. An organized record-keeping system makes tax time infinitely easier. It also provides essential documentation if you get audited. Take the time to develop a record storage process early on.

Every transaction on your books should have a paper trail behind it. Small expenses are often where missing documentation occurs most. Don’t assume you’ll remember what that random $50 charge was come tax season. Take an extra minute when making each purchase to file the receipt or invoice properly. Thorough documentation is the foundation for accurate bookkeeping.

Sloppy Record-Keeping and Data Entry 

Sloppy, inaccurate record keeping is another common issue that plagues small business owners. This bad habit manifests in a few ways:

– Missing or incomplete entries 

– Truncated or wrong amounts entered

– Transactions entered twice or duplicated

– Incorrect dates recorded 

These errors throw off your books and distort an accurate picture of your finances. Bad data entry habits lead to improper financial statements, invoices, taxes, and more. Garbage in, garbage out.

Avoid sloppy records by taking your time and double-checking all data entry. Review transactions for accuracy. Set up checks and balances assigning separate individuals responsibility for bookkeeping tasks. Utilize software features like transaction approvals. If taking payments, carefully process and record each one.

Clean, meticulous data entry might seem tedious but it’s a critical foundation of proper bookkeeping. Invest time and care into this responsibility. Making a habit of recording each transaction carefully will pay dividends.

Not Performing Regular Bank Reconciliations

One of the quickest ways to detect errors in your books is by frequently reconciling bank accounts. Failing to reconcile accounts regularly is a huge red flag. You want to be sure your records match up to the actual bank balances and transactions.

Strive to reconcile accounts at least once a month as a best practice. For busy accounts, reconcile more frequently. When you reconcile, carefully match each transaction on your books to the corresponding bank statement transaction. Make adjustments for any discrepancies.

Bank reconciliations safeguard balances from fraud, billing errors by vendors, or duplicate payments. They also uncover accidental booking errors on your part. Set calendar reminders to complete this essential procedure each month. Make it part of your regular close process. Don’t cut corners here.

Recording Transactions Incorrectly 

It’s remarkably easy to simply record transactions incorrectly. Rushed or sloppy bookkeeping leads to transactions booked to the wrong accounts or with wrong amounts. These errors throw off your books.

A few examples include:

– Recording a vendor bill in Accounts Receivable instead of Accounts Payable

– Entering payroll as a debit instead of a credit 

– Inputting an incorrect amount that doesn’t match the invoice      

– Misplacing decimal points on amounts

The best solution is to slow down. Review transactions carefully before submitting them. If you have questions on the proper booking, take time to research the correct accounting treatment. Common accounts like payroll or rent should be committed to memory.

If you make a mistake, immediately correct the entry. Leaving it magnifies the distortion in your books. Making corrections keeps the records clean. Double check postings regularly to catch errors while they are small. Recording transactions properly is a fundamental bookkeeping skill.

Posting to the Wrong Account

Along the same lines, a frequent issue comes from posting transactions to the wrong general ledger accounts. When you set up your Chart of Accounts, take care to establish accounts that accurately reflect your business’s activities and structure. Make sure account names and purposes are clear. 

With a detailed Chart of Accounts in place, the key is consistently posting to the proper accounts. Examples of wrong postings include:

– Putting a vehicle expense in Repairs & Maintenance instead of Auto Expenses  

– Recording an advertising charge in Marketing instead of Advertising

– Posting payroll taxes to Payroll Expense rather than Payroll Taxes   

To avoid this, review your Chart of Accounts regularly so account purposes stay fresh. Take time when posting to verify you have the right account. If unsure, look it up in your Chart of Accounts before submitting the transaction. 

Posting incorrectly makes a mess of your books. With a clearly organized Chart of Accounts and focus on accuracy during data entry, you can avoid errors. Taking the extra minute to validate correct account usage prevents future headaches.

Missing Supporting Documents

We’ve touched on the importance of maintaining complete documentation. Issuing payments without obtaining supporting documents leads to major problems. Never pay vendor invoices, contractor bills, or process reimbursements without proper documentation.

Common situations where documentation goes missing include:

– Paying contractor invoices without corresponding time sheets or work records

– Issuing employee expense reimbursements without receipts 

– Relying on vendor invoices but failing to obtain proof of delivery receipts

Lacking supporting documents makes transactions much harder to verify. It enables fraud and abuse if employees or vendors know you pay without complete documentation. Always obtain materials, time sheets, expense claims, or other documentation to validate payments.

Make it a policy to hold payments until you receive supporting documents. Don’t process transactions based solely on emails or requests. The paper trail is a critical management control. Enforce documentation requirements for every payment without exception. Proper supporting documents prevent problems.

Ignoring Depreciation Tracking 

If your small business owns fixed assets like vehicles, machinery, or equipment, tracking depreciation is essential. Depreciation is a tax deduction that allows you to recover the cost of assets over time. Failing to account for depreciation leads to:

 – Missed tax deductions, resulting in higher tax bills

 – Inaccurate Balance Sheets since fixed assets lose value over their useful life

 – Difficulty justifying investments in new equipment

Set up detailed fixed asset records to capture key information like purchase dates, costs, useful life, and depreciation method. Depreciate assets over time on your books according to IRS rules. Track depreciation schedules and deductions carefully.

Routinely review fixed asset accounts, update schedules, and record depreciation. Factor depreciation impacts into financial statements and cash flow projections. Don’t gloss over depreciationtracking. As a small business owner, you want to maximize tax deductions legally available. Proper depreciation accounting also improves accuracy of financial statements to better inform decisions.

Failing to Track Inventory

For small businesses that manufacture or resell products, inventory should be closely monitored and managed. Failing to properly track inventory leads to: 

– Inability to create accurate financial statements

– Increased risk of shrinkage through loss or theft

– Excess supplies and costs from overstocking 

– Lost sales from inventory shortages

– General lack of insight into the state of inventory

Invest in a dedicated inventory management system. Log all purchases and inventory received. Perform routine cycle counts to verify inventory levels and locate discrepancies. Update inventory records each time items are sold. 

Compare recorded inventory to actual stock levels monthly. Analyze the data to adjust purchasing patterns and optimize inventory. Proper inventory accounting is essential for product-based businesses. It provides valuable visibility that helps minimize costs and maximize profitability.

Skipping Periodic Reviews and Audits

The best way to catch bookkeeping errors early is by performing regular financial reviews and audits. Failing to examine your books periodically allows mistakes to compound, leading to bigger issues down the road.

Schedule time at least monthly to thoroughly review financial records. Perform mini audits examining documentation and verifying entries. Look for red flags like unsupported transactions, duplicate payments, or incorrect amounts.

Conducting these periodic reviews helps you identify where strengthening internal controls or bookkeeping processes could improve accuracy. It’s much easier to fix a $100 error than wait until that error has multiplied to cost you thousands.

For larger businesses, consider hiring an external firm to audit annually. The outside perspective of auditors can catch inconsistencies an internal review might miss. Periodic audits inspire confidence your processes are buttoned up and compliant. Make them a priority, not an afterthought.

Not Balancing Accounts Frequently

Accounts like bank and credit card accounts should be balanced and reconciled frequently, at least monthly. But other balance sheet accounts should also be routinely balanced and verified. Examples include Accounts Receivable, Accounts Payable, Payroll Liabilities, Inventory, and Fixed Assets.

Failing to balance these accounts hides errors that then get baked into financial reports. Un-reconciled accounts contribute to inaccurate financial statements and prevent you from getting a true picture of your company’s position. 

Make balancing and validating accounts payable, receivable, inventory and all balance sheet accounts a regular procedure. Resolve discrepancies in real-time. These routine balance checks act as a bookkeeping control to confirm records are accurate. Don’t wait until year-end when errors will be nearly impossible to identify.

Disorganization of Records

Many small business owners aren’t naturally meticulous organizers. However, disorganized record-keeping causes reporting issues and missed deductions come tax season. Set up a clear system to organize supporting documents, vendor invoices, receipts, and other financial records.

Ideally documents should be:

– Filed sequentially by transaction date

– Organized by month or quarter

– Kept either digitally or in physical folders  

– Backed up both on-site and in the cloud

Spend time figuring out an organization method that works for your records. The IRS requires supporting documentation be kept for all transactions. Organized record-keeping also speeds up compiling tax information. 

When reviewing files, ensure documents are where they should be. Proper organization takes work upfront but saves massive headaches at tax time. Sloppy record storage often hides costly deductions that could lower your tax liability.

Unrecorded Transactions 

One of the fastest ways to distort your books is failing to record transactions like vendor bills or invoices. It’s tempting to let things slide, but every single transaction must hit your books accurately and promptly.

Common unrecorded transactions include:

– Vendor invoices set aside as “not urgent”

– Cash sales pocketed but not entered 

– Owner withdrawals of cash not tracked   

– Generic expenses allocated to a dummy account

Lax recording of transactions results in underreported income, overstated expenses, and increased IRS audit risk. Decide on a routine for quickly recording every transaction. Whether it’s daily or weekly, stick to the schedule. You want no lag between transactions occurring and hitting your books.

Identify weak spots where transactions get missed. Implement controls to ensure everything gets captured. A rigorous transaction logging process is the foundation for accurate books critical to small business success. Don’t let transactions fall through the cracks. 

Not Knowing Your Software

Most small businesses rely on accounting software for managing their books. However, inadequate software knowledge leads to common problems like:

– Posting transactions incorrectly

– Generating inaccurate financial reports 

– Filing messy amended returns after tax time

– Missed software features that could save time

– Paying for unused capabilities wasting money

When adopting new software, take time upfront to learn it thoroughly. Get trained on features, reporting, and set-up specific to your business needs. Create a cheat sheet documenting the critical functions you use most.

Learn shortcuts and customizations to maximize efficiency. Refresh knowledge before tax season. Mastering your accounting software saves significant time and money. Don’t limp along without understanding the full capabilities at your fingertips.

Delaying Taxes 

Many small business owners dread tax time. Some delay completing returns until the last minute. But rushed, haphazard tax prep leads to:

– Missed deductions 

– Not setting aside enough to cover taxes owed

– Costly amended returns 

– Penalties and interest due to late filings 

– Increased likelihood of audit

Give yourself ample time for proper tax prep. Gather documentation methodically. Review deductions with your accountant to maximize claims. Accurately calculate estimated quarterly payments. File for extensions if more time is needed.

Rushing through taxes invites mistakes that erode your bottom line. The effort invested in careful tax prep yields savings that outweigh the work. Don’t delay starting the process. Get organized early on to avoid hasty last minute prep.

Proper bookkeeping and timely tax filing are fundamental small business practices. Avoiding these 15 common mistakes saves money, time, and significant headaches for any small business owner. While accounting work might not always be exciting, embracing sound bookkeeping and record-keeping processes leads to a thriving business supported by financial accuracy and visibility.