There is something special about starting your own business and becoming your own boss. As much as starting a business is special, it can be equally as stressful. Understandably, most small business owners don’t consider the bookkeeping side of business or have it as an afterthought. There are many facets to operating a business, and as tedious as bookkeeping is, it is one that can be the difference between success or loss of your investment. Are you curious if you are accidentally making some mistakes or are new to business ownership? Here are 7 common mistakes that small business owners make.
Lack of a Business Plan
From one-person operations to multi-location corporations, a business plan is essential. Knowing what your business goals are and an idea of how you are processing your bookkeeping can make the difference between a failed or successful endeavor. Your plan should also show schedules for employees, duties assigned to specific people, and a layout of who oversees what and when they are to be delivered.
Non-Separation of Personal & Business
It is important for any business, regardless of size, to use separate banking accounts and expenses. The most significant reason to keep them apart is for record keeping of deductions and tax breaks. When you are co-mingling the two, it becomes harder to prove business versus personal expenses. It is also a liability because if the IRS performs an audit and finds there are insufficient records, there is a chance that actual business expenses can be marked as personal due to non-separation and mismanagement.
Failing to Classify Employees and Contractors Correctly
Bookkeeping doesn’t just pertain to reconciliation and categorization. Some businesses hire employees or work with independent contractors, and there are differences between the two. Correctly determining whether a person is an employee, or 1099 contractor is important because it changes whether payroll taxes are withheld from the individual’s payments. This also changes possible tax liabilities on your side as the small business owner hiring them.
Forgetting your Sales Tax Liabilities
It is easy for many new small business owners to forget or not know about any applicable sales tax liabilities. Not staying up to date on sales tax filings can result in many penalties and fees, thus costing the business money that could have been avoided. One way to make sure you are ahead of this is to call your local department of revenue. I have always had great experiences talking with the representatives of various states departments and have found them to be very helpful with all questions.
Misusing Petty Cash
While petty cash can be used for pretty much anything a business might need, this does not mean it is ‘free money’ or that expenses paid with petty cash don’t have to be recorded and properly documented.
Keeping track of petty cash can be as easy as a register in a cash box. Detailed records and notations are especially important when using your petty cash funds.
Not Having a Budget
It is very common in new startups that limited cashflow is a hurdle in the beginning stages of business growth. Knowing your budget and having a clear picture of your expenses gives you the best chance of making educated decisions for purchases and allowances. A big mistake is starting your new venture without one at all. As you get to know your budget, it will also be easier to make important and strategic decisions.
Not Having a Bookkeeping Backup
Technology is great when it works properly, but what about when it doesn’t? It is important to have the physical copies of receipts and important documentation, as well as multiple digital copies stored in a few different secure ways ensures that if one medium of documentation is destroyed you have a backup. Cloud-based systems such as Dropbox are great, and even having a physical USB storage drive stored in a safe is another option. Having various backups is going to decrease the risk of losing important information and documentation.
Are you guilty of any of these common mistakes? If you are, it is never too late to implement better bookkeeping practices! Let us know if you have any questions.
