Biggest Bookkeeping Mistakes Business Owners Make & How to Fix Them
If there was ever a “Holy Grail” blog post of what NOT to do when it comes to your business finances, this is it! If I could share this with every business owner on the planet, so that they could save themselves time & money, I would. Let’s get right into it….
Not separating your personal & business finances. I see this happen a lot with sole proprietors because their tax professional is using all of the same data when filing their taxes.
BUT comingling funds can cause two things to happen:
1.) You never know exactly how well your business is performing. If you are including personal expenses like your trips to home goods to purchase those cute throw pillows for your living room couch with your trips to office depot where you are actually buying office supplies, you will not have a clear picture of business performance.
2.) If you ever get audited by the IRS, it can be a bit of a nightmare to go in after the fact and separate the two, so it ends up costing you more time and money than if you just separated them from the get go.
My suggestion is that you go to your banking institution and open up a business checking account, savings account & credit card that you use only for business purposes. This will provide you with the clarity you need to make better financial decisions in your business and escape any headaches down the road.
Bank balance accounting – Often times before business owners get their books set up in an accounting software they use their bank statement as their financial “guide.” This leaves you with ZERO control over how much you are spending & what you are actually spending on which can be make or break the business. For example my client Jane Doe came to me in early 2019 without being set up in accounting software for 2018 and she had no idea how well her business was doing. We got her set up and all of her financial data in QBO, ran a profit and loss statement and I found that she had spent 15k just on travel meals. She was not aware and was honestly flabbergasted. We reworked her budget so that she would only spend 5k a year on meals and add the rest of that money into her marketing efforts. The following year she added an extra $100k in revenue to her bottom line.
My suggestion is to get your business into a software like Quickbooks online, analyze the data as a reference for creating a monthly budget, and make sure you are updating things on a weekly basis if not more, to stay on track.
DIY Accounting – First I’d like to say I am NOT opposed to doing your OWN bookkeeping IF you have accounting knowledge and understand how to properly use the accounting software. But often times what I see are business owners who don’t have this knowledge try to do their own books to “save money” and then come to me with a bit of a mess on their hands. Historical cleanup of messy books will cost a business owner anywhere between $2000-20,000k depending on severity. Therefore it is a costly mistake.
My Suggestion for those who cannot afford a bookkeeper on a monthly basis yet is to invest in one to get you set up in the software and provide you with some training on how to keep up your books until you start to scale. Let’s do the math…
Monthly bookkeeping service provided by a bookkeeper $350 x 12 = $4200
Getting your books set up with training = $1000
Although an investment of $1000 may seem like a lot, it will not only save you a few thousand that first year, but it could also save you MUCH more if you let your books get messy.
Not setting aside money each month for taxes – If you don’t have that money accessible to pay the IRS it can become detrimental to your business.
My suggestion would be to have a tax savings account that you transfer 25%-30% of your revenue into each month. Talking to your CPA for tax planning can help with this process as well.
Not keeping up with your accounts receivable - Oftentimes business owners do one of three things. They get so busy that they forget to send an invoice to their clients and money slips through the cracks, send it late OR send it but forget to follow up on past due accounts. This is obviously BAD for cash flow.
My suggestion is that you set aside time once a week to send invoices out and follow up on any past due accounts once a month. If you are set up in QBO and are signed up with merchant services you can send invoices (and get paid) and also send out reminders to past due accounts without any awkwardness.
Not having a budget in place for your business – Not having one in place can be a bit of a crap shoot. The best way to have control over money is to have a plan in place. Now most people cringe at the B word, but I like to think of it as a road map for success.
My suggestion is to run a profit and loss statement for the past 6 months to get an idea of what you are spending in each category, take the largest number out of those statements to use as your guide & set aside time each week to make sure you are sticking within that budgeted number.
Thinking that a great bookkeeper will be inexpensive – There are two things that I believe a business owner should not skimp on..
1.) Marketing – right, we need a great marketing campaign to bring in new prospects that turn into clients which turns into revenue
2.) A great bookkeeper to take care of that revenue and make sure everything is running smoothly. They should not only be taking care of your day to day transactions, they should know how to prepare financial statements and meet with you once a month to go over those numbers in a way you can understand. This helps you make better informed financial decisions, and helps you reach those revenue goals and milestones.
My suggestion is to be ready to invest anywhere between $250 - $2500 per month depending on your specific needs.
Ghosting your bookkeeper - If you have taken the step to invest in a great bookkeeper, it’s important that you keep an open and prompt line of communication with him or her. In order to stay on track and have accurate and timely financial information, it’s critical to stay on top of this. Your relationship with your bookkeeper should be like a partnership, a collaboration and if one side fails to communicate, you won’t be reaping the benefits of that investment.
My suggestion is to answer any questions your bookkeeper might have same day or within 24 hours for best results.
Throwing away your receipts – Receipts are a drag but they are still required to save for a minimum of 3 years in case you are ever audited.
My suggestion is to take a picture of your receipts and upload them to a digital folder like Drive or Dropbox by month & year or if you have QBO you can upload a picture of the receipt to the app and match it to its corresponding transaction which makes things SO much easier and less time consuming.
Not paying yourself a regular salary - I see a lot of business owners that pull money out at random which is really tough on cash flow. When you take money out randomly, it will be difficult to plan for recurring bills or unexpected expenses.
My suggestion is that you pay yourself a set amount either once or twice a month and stick with it.
Phew! That was a lot? But I believe that every one of these are instrumental in keeping your business afloat and healthy. If you have any questions or need help getting your financial ish together, schedule a free discovery call here.
Until next time,
Galynne