Most entrepreneurs and small business owners would tell you they started because they were passionate about their idea. They figured out a way to get others to believe in the same vision and focused on making it scale. But to achieve this goal, there is seemingly endless behind the scenes work, and much of this is in the bookkeeping. Most entrepreneurs are not professional bookkeepers, so just knowing where to start can be overwhelming.
We have been helping entrepreneurs and small business owners keep track of their bookkeeping for years, and in this time we have seen some of the most common mistakes made. So we made a list of the top small business bookkeeping mistakes. Hopefully you can avoid some of these common pitfalls when it comes to your business finances.
1) Co-mingling. Mixing business and personal.
Mistake: Most entrepreneurs let expenses rack up over a period of time then sit back one weekend with bank statements, credit card statements, and receipts trying to rack their brain to figure out which are their business vs. personal expenses. Unintentionally but without fail, business expenses get missed and personal expense get included, mudding up the picture of how the business is doing.
Simple Solution: There is a 4 step fix to co-mingling!
- Step 1 – get a business bank account
- Step 2 – only use the business bank account for business
- Step 3 – get a credit card that you only use for business http://acuity.co/credit-cards-for-entrepreneurs/
- Step 4 – only use the credit card you selected for business
Cash is king so your bank account and credit cards are a great place to start the division between business and personal. You just made that weekend pastime of cleaning up the bookkeeping a little easier because you have a complete record of everything between your business bank account and that credit card statement.
2) Wasting time with data entry.
Mistake: Some entrepreneurs are spending hours typing revenue and expenses into excel or their accounting software. Don’t worry, some bookkeepers still make that mistake.
Simple Solution: Better Technology. Data entry is a thing of the past with both Quickbooks Online and Xero. Both the accounting packages that we recommend will allow you to link your business bank account and credit card directly to your accounting software. You can say goodbye to the hours of data entry, as each expense and deposit is uploaded with the touch of a button. As an added benefit Quickbooks Online and Xero will learn what expenses are typically associated with the vendor and make the first attempt at assigning the expense category.
3) Trusting technology a little too much.
Mistake: Some entrepreneurs, particularly ones that are tech savvy, have already figured out the top two mistakes but tend to trust the technology to a fault. They assume the technology tool is functioning as designed so they set it and forget it. The thinking – a company as big as Intuit can’t mess this up right? Don’t tell that to our bookkeepers who found, last October, duplicates across over 50 different clients. http://acuity.co/duplicate/
Simple Solution: Trust but verify! Bank and credit card reconciliations help you verify the technology tool you picked is working properly. Quickbooks Online even has a feature to help facilitate the reconciliations, just select the gear icon and pick “Reconcile” and it will walk through you the process each month when you download your statement from your bank or credit card.
- Side benefit: Going through the process helps identify business rules that you might need to change to make sure things go smoother in the future. Bank reconciliations have led us to helping clients streamline business rules about using technology tools (Stripe is the big one lately) and help entrepreneurs understand how data is flowing through the different technology tools they are using.
4) Account creep.
Mistake: Two main problems with account creep. In the first place there is not much good guidance about how many accounts to set up in your accounting system, so entrepreneurs start out with a handful of specific expense like “cell phone” when they are setting things up. Then they want to make sure you capture enough detail for taxes at the end of the year and when they get a land line later they add “phone bill” as a separate account. Before they know it there are hundreds of expense accounts for no good reason.
Simple Solution: Stop adding accounts! At the most filing your taxes requires 10-15 accounts. The only other consideration for most businesses should be if capturing the accounts differently will help lead you to make better business decisions. Don’t overcomplicate your bookkeeping, keep it simple.
- Lets take a look at a few common examples of accounts with recommended account numbers. Note how few are required for tax purposes.
- 4000 Revenue Source 1
- 4100 Revenue Source 2
- 5000 Cost of Goods Sold Source 1
- 5100 Cost of Goods Sold Source 2
- 5500 Payroll – (required for taxes)
- 5510 Payroll Taxes
- 5520 Employee Benefit Programs – (required for taxes)
- 6000 Sales and Marketing
- 6030 Outside commissions / partnerships
- 6060 Advertising – (required for taxes)
- 6080 Travel
- 6090 Meals & Entertainment – (required for taxes)
- 6500 General and Administrative
- 6510 Rent – (required for taxes)
- 6520 Professional Fees – (having separate makes filing 1099s easier)
- 6540 Utilities and technologies
- 6360 Insurance
- 6370 Office Supplies
- 6380 Recruiting
- 6385 Employee Events – (100% deductible where meals and entertainment is 50%)
- 6395 Taxes, Licenses and Permits – (required for taxes)
- 6399 Miscellaneous
- 6600 Charitable Contributions – (required for taxes)
- 6700 Bad Debts – (required for taxes)
- 6800 Depreciation Expense – (required for taxes)
- 6900 Interest Expense – (required for taxes)
These just list a few of the top small business bookkeeping mistakes, but if you have questions or want to find out more, just give us a call. We would love to answer any questions you may have or at least help point you in the right direction.