The road to business failure is paved with unrecorded business transactions and poorly organised books.
Well-kept financial records will put you on the path to success and provide the foundation for business growth. Bookkeeping shouldn't be a distraction that keeps you from doing things needed to grow your business.
"Book keeping is the system where you put business transaction information in an organised manner so that you are able to know for a particular period of time how much revenue was collected and how much expenditure your business incurred," explained Samuel Oyombra, a certified public accountant.
Accurate accounting records are essential to a company's sustainability and even financial institutions will rely on this information to determine your creditworthiness.
"Most lenders don't give financing unless they study the financial history of the business how it's performing, where it's standing, and where it predicts to perform in the future with this new proposed funding that information can only be generated from a proper book of accounts. One of the most common mistakes is called error of omission where some business transactions are omitted from books of accounts," he said in an interview with KTN News.
Oyombra also advises entrepreneurs to desist from mixing personal and business expenses as it muddies the accounting process and can mark the start of business woes.
By avoiding the nine pitfalls listed below, you can arrive safely at your destination: a profitable, flourishing business.
- Procrastination
You've just got to do it. If you don't keep your books straight, every possible outcome is disastrous. You could have tax problems that strangle your business. You could be fined, assessed a penalty, or have the IRS place a lien on your business. The solution: Just do it.
"You need to be constantly looking at how you are performing you don't need to wait until the end of the year to know how you've performed you need to review your performance every month and quarter ... that enables you to even pay yourself," said Oyombra.
"A big mistake businesses do is thinking they can do this themselves I would advise they hire a professional accountant," he added.
When you keep putting your bookkeeping tasks off to the side for later, you're eventually faced with a mountain of receipts to work through. That's a recipe for disaster - deadline pressure only makes a costly error more likely.
The solutions: Find a way to make bookkeeping a habit. Mark it on your calendar and keep the appointment. Whether you hire a bookkeeper whose sole responsibility is to properly record your income and expenses or use software to quickly capture and organize receipts and financial documents, you are saving time that could be used better.
- Errors of size or importance
Fittingly, small business owners often focus on the big stuff - the most important things to keep the business moving forward. This strategy is less helpful when it comes to bookkeeping. If you're being audited, you will need to produce receipts for all expenses, no matter the size.
The solution: Maintain everything. To keep it all organised and save space, take advantage of solutions that let you capture and organize digital versions of your financial documents simply and effectively. With the actual data automatically captured for your tax accountant or bookkeeping program, there's little risk of transcription errors and an increased likelihood that you have what you need.
- Not preparing for the worst
If you keep your books physically, those files and receipts are subject to damage from fire, floods, coffee stains or being misplaced. If your books are kept in a spreadsheet, your hard drive could crash, your laptop could be stolen or lost or you could accidentally delete vital data. Anything that you have one copy of could disappear forever.
The solution: Back everything up. If your business is small and simple, printing or copying vital records and keeping them off-site is clunky but workable. If your books are in computer files or spreadsheets, always make a backup copy to an external hard drive, thumb drive, or cloud-based platform.
Capturing financial documents and storing them in the cloud or in remote digital storage means you will have the data you need and the supporting documents behind that data - this will also make it easier to recover should a disaster happen.
- Not reviewing your books and accounts
Entering your invoices, receipts and checks into your books is a job only half done. Whatever you enter into your accounts should be checked. The fancy word for this is reconciling. While it's rarely difficult, it's tedious and sometimes even intimidating.
It's important because it will help find errors, both large and small. If you accidentally added a zero to an invoice when entering it, you might think you've got more money coming in than you do. An error in inputting a receipt might cause you to take a bigger deduction on your taxes than you are entitled to and leave you open to fines and penalties.
Missing an error in your checking account could lead you to lose track of the actual funds you have available.
The solution: Review and reconcile. Do it regularly or insist that your bookkeeper do so. If you've captured and organized your invoices and receipts digitally, this is an easy task to stay on top of.
- Mixing business and personal
Misidentifying a personal expense as a business expense and then deducting it could lead to IRS fines, penalties and worse.
Alternatively, misidentifying a business expense as a personal expense means you don't take all the deductions to which you're entitled, and therefore you'll pay more tax than you should.
The solution: Maintain separate banking accounts and credit cards for personal and business use. Take advantage of tools that make it easy to identify business and personal expenses when reviewing/reconciling expenses - including when you have both types of expenses on a single purchase receipt.
- Cash inflows and outflows
You can't improve what you don't measure. Every decision you make about your business will be better made by having accurate information available.
The solution: Set up the income and expense categories for your books with analysis in mind. Loans have monthly payments but may have a larger final payment. Expenditures for raw materials may change seasonally. A below-average sales month may indicate a problem making payments in 30 or 60 days. Once those accounts are set up, scan or photograph paper receipts and save emailed receipts to the proper bookkeeping account.
- Not staying on top of the business
Doing nothing about bookkeeping isn't the only bad way to run a business. Doing the books but not looking at the results could be even worse.
The solution: Regularly look at essential accounting reports like cash flow, balance sheets and expenses, whether you pay your accountant to produce them or run them automatically from your financial management platform. When you have up-to-date financial records, you have the fuel you need to drive your business ahead.
