Common Bookkeeping Mistakes Made by Small Businesses

Common Bookkeeping Mistakes Made by Small Businesses

Consistent, accurate bookkeeping is vital to the success of every business. It delivers financial visibility that guides decision-making and enables businesses to remain tax compliant throughout the year. For bookkeeping to be done correctly, it requires a certain level of knowledge and experience, which can be intimidating for small business owners – understandably so.

Here at Xendoo, we have had the honor to work with thousands of small business owners. Through our partnership with them, we have relieved the financial struggles that they face every day.

Some business owners give DIY bookkeeping a shot, only to find how quickly it can cut into their valuable time. Others may hire an inexperienced friend or family member to take care of their books, which leaves room for error and confusion, and, at times, hurt feelings. Some, already juggling countless other business responsibilities, simply put bookkeeping off until tax season arrives.

In this playbook, we will share the most common bookkeeping mistakes we have encountered, and how to avoid them, so you can increase the accuracy of your books!

Mixing Business and Personal Spending

When first starting out, many business owners may tap into their personal funds to keep the business running. While this seems harmless at first, it can lead to bookkeeping complications down the road, when utilizing one account for both personal and business expenses.

Mixing personal and business spending is referred to as commingling. It can look like:

  • Using one bank account and credit card for personal and business needs
  • Receiving customer payments through a personal bank account
  • Using business income to pay for personal expenses (and vice versa) without proper documentation

As personal and business expenses pile up under one bank account, it can take hours to sort through them all properly. It can also be difficult to remember which expenses are business-related after time has passed, and important information could be left out of the books by mistake. This creates an unclear picture of financial position, and could lead business owners to make big changes based on inaccurate data, or under or over-report their earnings to the IRS and pay more in taxes.

The best practice is to keep a separate business bank account and credit card. Doing so saves countless hours of stress and confusion while bookkeeping, ensures that only relevant expenses are recorded, and ultimately provides the financial visibility needed to make decisions for growth.

Disorganized Record Keeping

Organized record keeping plays a key role in business success. According to a study from the office supply store Staples, 53% of thriving small business owners describe their workplace as very organized. On the other hand, 3 in 4 business owners believe that disorganization negatively impacts company productivity.

What do disorganized records look like, and how do they affect business owners? Below are a few common examples:

  • Commingled funds. When personal and business transactions mix together, it is difficult to tell the true financial position of the business.
  • Unreconciled bank accounts. Bank reconciliation is a crucial step in the bookkeeping process, as it is an opportunity to correct errors before the financial statements are created. If it is not performed, errors will carry over into future accounting periods and further complicate the books. Unreconciled bank accounts also show incorrect bank balances, which affect cash and spending decisions.
  • Manual bookkeeping and accounting. According to Viewpost’s SMB Emerging Trends in Accounting Report, 18% of small business owners rely on manual data entry and Excel spreadsheets to perform bookkeeping. Without a streamlined accounting software in place, business owners do not have timely access to their financials, and it may take serious digging to track down crucial information.

Disorganized records make it unclear how much is being spent each month and how profitable the business is. Tackling a pile of receipts may feel overwhelming, but by making a few changes in the bookkeeping process, business owners can increase their financial visibility for long-term success.

By implementing cutting-edge bookkeeping software, business owners can rely on accurate data and enjoy ease-of-access to their financials. Instead of thumbing through a filing cabinet, they can simply log in to their software and check on business performance. Because transactions flow digitally from the bank account to the bookkeeping program, business owners can save time on tedious work and achieve financial peace of mind, knowing their financials are up-to-date and organized.

Software is only one part of the equation! Bank reconciliation must also be performed to match each bank account transaction to its corresponding entry in the books and correct any issues. This keeps the books standardized and error-free each month.

Finally, consider partnering with an online bookkeeper. They will work with you to clean up your books, and ensure they remain organized going forward. With a clear picture of your financial position and the guidance of a trusted expert, you can have access to the actionable insight needed to grow your business.

Procrastinating Until You Can’t Stand It Anymore

Small business owners juggle countless responsibilities. Between customer service, making sales, strategizing for growth, networking, marketing, HR duties, and more on the daily to-do list, it can be difficult to find time for bookkeeping. This is why some business owners procrastinate until tax season.

Bookkeeping also requires a certain level of financial expertise, and may feel intimidating for new business owners. They worry that mistakes could be made if they do the bookkeeping themselves, and it gets put off.

As the weeks pass by, the catch-up work snowballs. Eventually, they face a year’s worth of expenses (or more) that need to be sorted through in a matter of days. In the scramble to get caught up, they may not have enough time to locate and correct errors through bank reconciliation. They may even forget to record tax-deductible expenses and miss out on tax savings.

If this scenario sounds all too familiar, you are not alone! Through our years of working with small business owners, we have discovered that 25% of business owners are behind on their bookkeeping.

To avoid the stress of procrastination, the best practice is to do your bookkeeping at least once a month, or once a week if possible. If you are at a point where you cannot fit bookkeeping into your schedule, consider partnering with an online bookkeeping service like Xendoo, so you can focus on core business tasks!

Missing Filing Deadlines Because the Books Were Not Done on Time

Tax season can sneak up on all of us, especially business owners. As they put their passion, time, and effort into growing their business each day, the books may fall behind. With months’ worth of catch up bookkeeping to do, they often miss the tax filing deadline, which results in hefty fines. In fact, for each month that their taxes remain unpaid, the IRS charges a late fee of 0.5% of the tax owed after the deadline has passed.

According to research from QuickBooks, 33% of self-employed individuals fall behind on their taxes, but it is never too late to get caught up! Whether you are behind a few months or a few years, online bookkeeping services like Xendoo provide catch up bookkeeping to bring your financials and your taxes up-to-date.

To keep your bookkeeping on track and ensure you are ready for tax season, mark your calendar with the filing deadlines that apply to your business:

Mark your Calendars

  • March 15, 2022: S-Corporations and Partnerships (Multi-member LLCs)
  • April 18, 2022: Personal and Business Tax Returns, including Sole Proprietorships, Single-Member LLCs, and C-Corporations
  • Extended Deadline: September 15, 2022 (extension must be filed by March 15, 2022): S-Corporations and Partnerships (Multi-member LLCs)
  • Extended Deadline: October 17, 2022 (extension must be filed by April 18, 2022): Personal and Business Tax Returns, including Sole Proprietorships, Single-Member LLCs, and C-Corporations

Partnering with an expert to get the books caught up keeps business owners from paying excess late fees, missing deadlines, and enables them to sleep better knowing their taxes are taken care of.

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Hiring an Inexperienced Bookkeeper or Doing it Yourself

Many well-meaning business owners hire friends or family members as bookkeepers, or choose to do it themselves. While this may seem like an effective way to save money, it could create costly errors. One incorrect entry could mean spending additional time to fix weeks of work. Tax deductions could be missed, and income could be over or underreported to the IRS. Plus, as the business grows, the financials become more complex. An inexperienced bookkeeper may not have the knowledge needed to recognize new growth opportunities and scale with the business.

An experienced bookkeeper is a crucial investment for success. By placing confidence in an outsourced finance professional, business owners can:

  • Take their time back. Business owners do not go into business to hone their bookkeeping and accounting skills. They want to pour their time into meeting the needs of their customers. Outsourced bookkeeping gives business owners more time to focus on what they love – growing their business.
  • Maximize tax savings. A professional bookkeeper ensures that every tax-deductible expense is accounted for. When tax season arrives, business owners can rely on their up-to-date and accurate financials to maximize their tax return.
  • Secure investments and funding. Investors and creditors want to see detailed financial records in order to gauge the success rates of the businesses that apply for funding. A professional bookkeeper can prepare the data needed to present to investors, so business owners can prove that their company is thriving and able to pay back the loans it receives.
  • Enjoy peace of mind. Trusting an expert to handle the finance complexities brings significant relief to small business owners. Instead of hoping for the best from an inexperienced bookkeeper, they can expect excellence from a professional.

Business owners wear multiple hats. Bookkeeper does not have to be one of them. With an experienced bookkeeper in their corner, business owners can make confident, informed decisions faster and effectively strategize for the future.

Not Reading the Financial Statements

The financial statements are essential to the health and growth of every business. Think of them as report cards that detail how money moves within the business from different perspectives. They can be used to analyze and set goals for business performance, track financial trends, and keep business owners aware of their financial position.

An experienced bookkeeper is a crucial investment for success. By placing confidence in an outsourced finance professional, business owners can:

The three financial statements are:

  • The Balance Sheet, which provides a snapshot of the company’s finances. It reports the company’s assets, liabilities, and equity – what the business owes and is owed.
  • The Profit and Loss Statement, also known as the Income Statement or P&L, records the revenue and expenses incurred during a specific period of time.
  • The Cash Flow Statement illustrates how cash flows into and out of the business over a certain period of time.

Visit our blog for an in-depth look at the financial statements.

In order for the financial statements to be reliable, the bookkeeping should be performed regularly. As business owners juggle different responsibilities each day, bookkeeping may fall behind, and the financial statements may be overlooked. This produces a lack of financial insight, and business owners may miss solutions for costs, spending, and business growth.

The solution is to keep the bookkeeping up-to-date, so the financial statements can be assessed on a regular basis. Most businesses perform a monthly review, others opt for quarterly or annual reviews. The goal is to evaluate them as often as needed to ensure the business is on track to achieve its goals, maintain financial health, and uncover new ways to scale.

Overlooking Tax Deductions

Unless they have a secret double life as an accountant, business owners may be unsure of what qualifies as a tax deduction, and expenses may be overlooked. For example, many do not realize that they can deduct the state or local sales tax paid throughout the year on their tax return.
Even “small” expenses can add up, but if they are not recorded in the books, business owners may miss out on tax savings.

Some common small business tax deductions include:

  • Office furniture and supplies
  • Equipment and equipment repairs
  • Home office
  • Advertising and marketing
  • Education and training expenses
  • Gas mileage
    • If you use your car for business purposes, be sure to track your miles. For 2022, the standard mileage rate is 58.5 cents per mile. For example, if you drive 12,000 miles in the tax year your deduction would be: 12,000 miles x $0.585 = $7,020

Less is not more when it comes to bookkeeping. It is crucial to note every expense in order to claim all the deductions you qualify for. Consider partnering with a professional online bookkeeper. With a watchful eye on your financials, they are able to recognize the deductions that can save you money, both big and small, so you can maximize your tax return.

Your Expert Bookkeeping Team

You are not alone as you navigate your finances. At Xendoo, we believe every business owner deserves an expert bookkeeper that is dedicated to their success. We provide online bookkeeping, accounting, and tax support to small business owners, so they can take their time back and focus on what matters most – growing their business.

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