As a business owner, one of the top issues you likely face on a daily basis is time management, since you wear many hats that range from sales to bookkeeping. On that last point, you need to be careful: messy bookkeeping can make it harder to get approved for business credit and loans, as well as defend against a tax audit. It can also result in disastrous consequences to your cash flow, and threaten the very existence of your business.
Here are some key things to avoid when it comes to managing your books.
1. Mixing Personal and Business Finances
This is one of the most universal rules when it comes to running a business. For corporations and partnerships, there are very specific laws and regulations that dictate how a business’ financials must be maintained. For smaller businesses, however, where the business’ revenues and expenses are reported on personal income tax returns, there are no such regulations. In practice, you could just pull cash from the drawer or account at any time. Unfortunately, this can lead to uncertainty in the business’ finances, and insolvency if cash flow is interrupted.
It’s critical that business accounts are established and maintained that are separate from the personal bank accounts of the owner. Equally important is that details of expenditures and revenues are tracked accurately. This gives you and your financial consultant the ability to assess business financial strengths - and weaknesses - more accurately. Separate accounts also make it easier to prepare for tax season. Likewise, having a separate credit card for only business purposes can greatly ease the process of tracking business expenses.
2. Not Reconciling the Books
At the heart of every business is revenue and expenditures, hopefully with the former exceeding the latter. Account reconciliation is like the old function of balancing a checkbook: the process ensures that checks and other payments have been processed correctly, and that deposits have also been made. Depending on the number of transactions your business has, this process shouldn’t take too long, but should be performed at least once a month. In addition to helping you identify and rectify common mistakes, reconciliation can also help you spot check fraud and employee fraud.
3. Trying To Do It All
Most small business owners have a do-it-yourself attitude, which feeds their entrepreneurial spirt. But at some point, the decision will need to be made to hire real employees to assume the mantle of responsibility when the owner can’t.
So, when is it time to hire an employee?
When the tasks you’re doing are no longer the best use of your time. When you say to yourself, “I should be out getting new clients, instead of sitting here reconciling the accounts/sorting products/sending emails.”
The bottom line is that you only have so many hours per day. Plus, you’ll quickly realize the benefits from hiring specialists, whether it’s a bookkeeper, marketing person, or just help at the counter.
4. Using a Spreadsheet or Outdated Software
Whether your business is completely mobile, or you’ve set up shop in your garage, cloud accounting systems are more efficient and convenient, and can streamline many functions. At the end of the day, better accounting equals a healthier and more profitable business. Cloud accounting systems and business workflow systems like BQE CORE help ensure that income and expenses are properly recorded, while integration with financial institutions and inventory software can greatly improve efficiency and accuracy. Using a solid accounting system to maintain your books will also make tax preparation much less painful. So, throw away the spreadsheets. Both you and your accountant will be thankful for the decision later.
5. Not Going Paperless
Just as automation technologies can help streamline business and accounting functions, paperless document management helps keep financial records more accurate and findable when they are needed. A pile of paper on your desk will inevitably lead to lost or forgotten bills, invoices, to-do lists, and other errors. Paperless document storage systems also have the added benefit of accessibility from anywhere and at any time.
6. Not Automating
Technology has made many things much more efficient, which can lead to a tremendous amount of time - and financial - savings. This is especially true for recurring payments and receivables, since they can be set up to require only a quick review. Even non-recurring Accounts Payable and Accounts Receivable items can be handled using automated solutions that streamline tasks, provide detailed tracking and reporting, and often include cloud document management.
7. Not Maintaining Business Expense Reports
Receipts and records of the payments your business makes are a key component of maintaining the books. While these receipts will be necessary if you are ever audited by the IRS or need to justify business expenses, they will also come in handy when verifying and reconciling accounts. Fortunately, there are several apps that can help you keep up with, and properly manage, your receipts.
8. Forgetting to Track Cash Expenses
Ideally, most expenses your business incurs will be paid using a check or a credit card, since both offer an additional method of documentation for tracking purposes. There will be times, however, when cash payments are necessary. Although these types of expenses will usually be for small amounts, it’s imperative that you record them as well. Why? Because they will add up, and if they aren’t properly tracked, that cash will be coming directly out of your own pocket, and you won’t be able to take the deduction as a legitimate business expense. It can also result in not having a clear picture of what it actually costs to run your business.
9. Not Hiring A Professional
As a small business owner, you may be the best at what you do, but odds are, you are not an accountant and probably don’t have much bookkeeping or taxation experience. While many small businesses go it alone at first, getting advice from a seasoned accountant early on can help you and your business get started on the right foot. From setting up the most beneficial business entity type and creating a business plan to budgeting, preparing financial reports, and periodically balancing the books, using an accountant can help stack the odds in your favor.
Here’s another way to think of it: if it takes you 8 hours to balance the books each month, and it would take an accountant (or someone at his firm) 2 hours to do it - and to do it better - isn’t that worth the cost? Plus, with all the time you end up saving, you can be out making more money for your business!