Bookkeeping is an essential part of any business. Without it, there is no way of adequately implementing strategy, and hardly a chance to survive. Yet it is also a dreaded part for most business owners.
On top of managing their business logistics, bookkeeping requires perfect precision, organization, and hours worth of time to complete correctly. Asking for both will lead to a mistake, which always costs money in the world of business.
The bookkeeping process has a gruelling 8-steps to it, each with their deadlines and revisions. With that in mind, it is easy to see how tackling bookkeeping without proper experience or a well-rested mind can lead to these common mistakes.
Common Small Business Bookkeeping Mistakes
The common bookkeeping mistakes seen here can quickly occur from being overwhelmed with other duties, often resulting from bad habits.
Trying to Do Everything Yourself
Perhaps the biggest mistake an owner can make is trying to accomplish bookkeeping by themselves, on top of running their business efficiently. Some people think they can do this for a while; however, the consequences and loss of time are far too detrimental.
Humans are prone to making errors and are especially bad at multi-tasking. An article explains how, “Dividing attention across multiple activities is taxing on the brain, and can often come at the expense of real productivity” (Chow 2013). This comes down to common sense, as multi-tasking, by definition, overwhelms the brain with too much information while eating away time.
Thus, reducing multi-tasking in as many ways possible minimizes the risk imposed by expensive errors. The best way to minimize multi-tasking is to give a specific person the job of bookkeeping.
Not Keeping Paper Copy of Documents
Paper is mistakenly thought to be a dead technology in the age of smart-phones and cloud storage. Yet it is still just as important, if not more so, than digital backups of documents. In an audit, the CRA and other government authorities will demand physical proof of documentation. Failing to provide the proper forms in the case of data loss can result in catastrophic financial devastation.
Much like how gold will always hold its value during an economic collapse, physical documents will keep you stable when technology fails. Don’t leave your information literally up in the air.”
Not Having Separate Bank Accounts
They say you should never mix business with pleasure. In the case of bookkeeping, this rings true. Not having separate bank accounts for business and personal needs can confuse your expenses. It can become challenging to determine the difference between the two. Not knowing your actual business expenses can lead to calculation errors, which can put your business on the wrong track.
Not Labelling Employees Correctly
Not distinguishing between employees and third-party contractors can cause some financial issues. Mislabeling employees and contractors can lead to additional taxes being paid in the future or even lawsuits.
Ensure you label precisely who works under you as an employee with benefits and freelance or temporary contractor.
Reconciliation is used in bookkeeping to check if two financial records are congruent with one another. Specifically, Reconciling involves checking that the amount of money spent equals the amount of money leaving an account.
Consistently reconciling accounts will reveal bank errors early on and display how much money you have at a given time.
On top of being precise with calculation, bookkeeping has monthly deadlines that need to be met. Forgetting about these deadlines is easy to do, even though it spells disaster for the future.
Not having a bookkeeper can mean spending entire days panicking to get the right calculations in time for those deadlines. Of course, panic increases the chances of error, which only adds fuel to the fire.
In line with the fact that humans are imperfect at multi-tasking, bookkeeping is like a cycle that never goes away. Ignoring it means making once small tasks into herculean labours.
Disorganized Record Keeping
Disorganization is the antithesis of bookkeeping and anathema to a business. Not properly organizing documents can lead to losing receipts and other important information. It also makes the accounting cycle a nightmare, as it requires sorting through all of the data for a correct reading.
Even losing receipts under 70$ makes quite a significant difference in the number of deductions you can claim.
In other words, disorganization can double your workload by providing inaccurate and confusing data. It also puts you at risk for when the CRA decides to audit you.
How are Bookkeeping Errors Minimized
It’s possible to minimize bookkeeping errors by doing the opposite of all of the things listed above. However, a few straightforward methods narrow the strategy down to minimizing multi-tasking, and being organized.
Use Accounting Software
Technology is automating every part of our lives, and it should be used to its fullest extent. Using accounting software like Quickbooks makes bookkeeping tasks much more manageable.
The program does all of the real-time calculation and data updates to concentrate on more important concerns. The program even simplifies the organization since it only requires the correct data input.
Save Every Receipt and Document
Physical documentation is critical in bookkeeping. Having a tangible paper trail will inform you of your business’s expenses while providing safety in an audit.
There is no other reason for not keeping tight records of your business’s expenses. Just remember how expensive mistakes can be.
Guide Your Financial Goals with a Budget
Running a business without specific goals is similar to putting the cart before the horse. A budget clarifies financial limits to reach goals within a reasonable amount of time. Not doing so may result in overspending, which can get in the way of things.
Thus, tracking spending and monitoring your business’s health is integral to achieving the growth you desire.
Hire a Professional Bookkeeper
The best method that combines all of the previous advice is to hire a bookkeeper. Bookkeepers have the advantage of focusing on one subject that they know very well.
It is no surprise that fewer errors are made by bookkeepers who know their trade, use accounting software, and are not distracted by other duties. Hiring a bookkeeper is akin to achieving peace of mind in one area of your life and is well worth the additional cost.