Do you run a startup and need help managing the bookkeeping for your business?
Even if you have the bookkeeping knowledge, chances are you’re still making some mistakes. While it’s easy to ignore and think to yourself “I’ll handle this later”, you have to understand the costs of doing so.
There are certain business operations like tax filing, sales, and accounting that serve as the foundation for every new business. Unless these critical functions are successful, your startup will have a very hard time surviving. After all, these manage your cash flow and cash flow is the blood of your business.
Another one of these critical functions is bookkeeping. This involves recording the daily financial transactions of a business.
If you don’t know the financial state of your business, how could you improve it?
Just like with marketing and sales – you need to measure everything.
Why is bookkeeping important?
All entrepreneurs and business owners need accurate financial reports in order to evaluate how well their business is performing. This helps you plan future strategies to grow and expand. Without a strong bookkeeping and accounting system in place, it can be very difficult to make sound strategic and financial decisions.
But the thing is, nobody like bookkeeping. It’s boring.
In all the excitement, entrepreneurs are busy growing their business, closing new deals, and making more money…
All while ignoring their financial recording process.
This mistake could lead to:
- Wrong tax reports
- Possible legal ramifications
- Miscalculated profit margins (this is a very costly mistake)
- Poorly forecasted revenue
- And an endless list of headaches waiting to happen
In the end, any one of these mistakes will cost your business a lot of money and your employees a lot of time.
Although it is recommended that you seek out professional bookkeeping services, being aware of the most common bookkeeping mistakes can also help to prevent errors. In this article, we will be discussing some of the most common bookkeeping mistakes that startups end to make and how they can be avoided.
Not Separating Personal and Business Finances
One of the worst mistakes that small business and startup owners make is failing to have separate bank accounts for their business and personal finances.
Many entrepreneurs that do not set up a separate bank account for their business transactions will end up with legal and financial problems. Having just one bank account for both personal and business transactions can make it hard to track specific entries, particularly when preparing taxes. Thought you could claim business tax benefits? Good luck sifting through all your personal spending.
Because of this, you will need to rely on your memory in order to track down the debits and credits that are associated with your business, which is often nearly impossible to do.
According to the remedial massage therapists, Peak Performance Massage, this has been the most important change, saying that “when buying oils, towels, and other equipment for business, it was impossible to look through my bank account and figure out what I can write off as a business expense and what I couldn’t. Creating a separate business account has made everything so much easier”.
If you’re finding yourself struggling to remember what was spent on business and what was spent for your own personal use – you need to get a separate bank account set up. That will allow you to have a record of all of your company-specific transactions and make year-end tax preparations much easier as well.
Failing to Have a Bank Reconciliation Statement Prepared
A bank reconciliation statement is used to help you reconcile your business bank account statement with your financial records. The goal of the statement is to help you avoid any discrepancies that might arise between your bank statement and transactions that are recorded in your accounting records.
Most owners of startup companies operate their businesses on a cash basis. Usually, they monitor the outflow and inflow of money carefully but do not reconcile the transactions that are made through their bank accounts. They might forget to record bounced checks, income expenses, or interest, for example.
If statements are not reconciled, it can result in discrepancies showing up in your most essential financial reports – your balance sheet and profit and loss statement. It is very important to prepare a bank reconciliation statement to help avoid future tax and financial problems.
Poor Record Keeping
When you ask owners of startups what their biggest problem is for their tax preparation and bookkeeping, there is one common answer that you will likely receive — tracking small expenses and finding lost receipts.
As previously mentioned, bookkeeping is a very time-consuming job. The majority of startup owners are busy with business development as well as other essential functions, so when it comes to recording transactions — they have a tendency to procrastinate (don’t worry, it’s normal!)
Not having an efficient system for filing documents also results in receipts getting lost. Proper documentation is necessary for CA audits and to generate accurate financial reports. Installing invoicing software of having small lock-up boxes throughout your work area can make it convenient to scan and save important receipts. Also, take the time to do weekly accounting and bookkeeping. Hiring a bookkeeping service also can help you get an effective record-keeping system developed.
4. Improper Management of Petty Cash
Petty cash refers to small amounts of money that are set aside to fund small daily transactions. Many startup owners tend to overlook how important it is to manage this money since it is not a large sum. They do not get a tracking system set up to make sure they don’t miss out on expenses when preparing financial statements or performing accounting tasks.
According to the startup business lenders Max Funding, this is a common occurrence, noting that “we see startup owners putting hundreds of small purchases on their cards and completely forget to document it. This could be paying for an email service, testing out some new software, or paying a small invoice. The result could be thousands of dollars unaccounted for every single month”.
Although petty cash might appear to be a small amount of money that is spent in one day, over the course of months or even years, it can add up and create problems in your financial reports. That is why it is important to get a system set up to track and record those small transactions. It is easier to record and track the expenses when you obtain receipts and have an electronic system.
5. Confusion about Payroll Taxes and Neglecting Sales Tax
Many owners of startup businesses view taxes as something that only occurs at the end of their fiscal year. However, that overlooks other critical tax payments, including payroll and sales taxes.
Make this mistake and you’ll find paying expensive fines and going through unnecessary stress because you failed to deal with these taxes properly.
Depending on the nature of your goods, services, and business, you might need to pay sales taxes quarterly or monthly.
The majority of small business owners are confused about payroll tax preparation. They don’t understand the differences between employees and independent contractors. If you fail to accurately calculate and pay the taxes you owe, you can be held liable and also be charged expensive fines. These problems can be prevented by becoming knowledgeable about the tax laws that relate to your business or you can hire an accountant or tax service in order to prevent heavy fines and losses.
6. Doing Everything On Their Own
Financial figures are fairly manageable when your startup is first launched. However, as you continue to progress, those figures continue to expand and may add up to thousands of dollars. It can become difficult to track and record all of the numbers, especially when there are so many other essential tasks that you need to deal with.
Many business owners attempt to do everything themselves. This can result in costly errors being made which result in large losses. There are numerous reasons why outsourcing your business’s bookkeeping and accounting tasks to professionals is a good idea. A professional accountant will have the expertise necessary to save you time and money.
This is a common occurrence, the commercial architects at All Image Architects highlight the importance of hiring a professional bookkeeper, saying that “spending hours every month fixing up numbers in a spreadsheet was extremely unproductive. After paying for a bookkeeping service, we ended up saving money. The professionals did it in a fraction of the time we took and didn’t make the mistakes that we kept making as well”.
They will also be up to date on all of the laws that pertain to the financial management of your business. They can also eliminate the hassles of having to keep up with your bookkeeping so that you are freed up to focus on other critical tasks to make our business successful.
Now that you are aware of the most common bookkeeping mistakes, it is time for you to review your company’s bookkeeping system.
Address any existing issues that you have and make sure to revamp your system so these potential mistakes can be prevented. Hiring a bookkeeping service can be helpful in strengthening your bookkeeping and accounting system.
Plus, you can use software like Taxxo to save time with your bookkeeping, with features like document management, client invoicing, automated document importing, and so many more features.