How Small Businesses Can Avoid Bookkeeping Mistakes
Written by Bindi Gethen
Bookkeeping isn’t exactly the most glamorous task that comes with running a business. It doesn’t have the thrill of a successful sales pitch, the satisfaction of delivering a flawless product, or the buzz of brainstorming a new marketing campaign. Yet, it’s as crucial as any of those tasks.
So what are the common bookkeeping mistakes of small businesses? They range from guessing financial figures and neglecting receipts to mixing personal and business expenses. These seemingly minor errors can compound over time, creating a domino effect that could destabilise your business.
Common Bookkeeping Mistakes of Small Businesses
1. Doing Guesswork
Running a business is like playing chess. Each move, if planned and executed correctly, brings you closer to a win. But unlike chess, the stakes are real. Guesswork in your bookkeeping is akin to making blind moves on the chessboard. It’s a risky strategy that often leads to unforeseen financial challenges.
No matter what your preferred hat is to wear, the business owner hat should always take precedence. So if you don’t have a good grasp of your financial matters – frequently guessing your monthly revenue, expenses, and records – you’ll be unprepared for one of the worst-case scenarios: a sudden rise in costs and a decline in sales.
It’s easy to fall into the trap of assuming your business is doing well based on an influx of customers or a busy schedule. But without accurate, data-driven bookkeeping, you’re navigating your business blindfolded. Keep in mind that bookkeeping is about confronting the numbers as they are, not as we wish them to be. It requires a healthy dose of humility to accept the reality presented by our financial records and to act accordingly.
2. Throwing Away Receipts
Think of receipts as puzzle pieces. Each one forms part of the bigger picture of your business’s financial health. Discarding them is like losing those pieces. You won’t get to see the full picture.
Receipts may seem like clutter for you, but they’re a lifesaver. To make a robust system for tracking and storing receipts, you can either designate a drawer for paper receipts or use a mobile app to digitise and categorise them. This habit may seem tedious initially, but the benefits it brings in accurate bookkeeping and tax savings are significant.
Pro tip
Each receipt represents a piece of your business expenditure and, therefore, a potential tax deduction. By throwing them away, you’re inadvertently increasing your tax liability.
3. Neglecting Tax Obligations and Privileges
Taxes can be complicated and, frankly, overwhelming, but they are an essential part of running a business. Neglecting them is like ignoring a ticking time bomb – it’s only a matter of time before it explodes.
We hear countless stories of entrepreneurs who put their tax obligations on the back burner. When they finally decide to catch up, they get caught off-guard by the amount of back taxes, fines, and interest that had piled up. Their business, once flourishing, was suddenly on the brink of collapse.
You don’t need to have the same story. You don’t even have to be a tax expert. All you need is the willingness to learn the basics, ask for help when needed, and stay updated on changes in tax laws. This way, you can be sure you’re fulfilling your obligations and optimising your privileges.
4. Mixing Business and Personal Expenses
Imagine putting all your groceries, toiletries, clothing, and office supplies in one bag without any separation. It would be challenging to find what you need when you need it. This is what happens when you mix personal and business expenses.
To illustrate, let’s look at the experience of one of my past clients who ran a clothing e-commerce store. Initially, she didn’t think much of using her personal account for some business purchases. However, as her business grew, the blurred lines between personal and business expenses began to cause issues.
Her year-end accounting was a nightmare. Her personal expenses were entangled with her business costs, and untangling them consumed a significant amount of time and energy. When our bookkeeping team did an initial finance audit, we saw that she was actually overpaying taxes because she couldn’t determine which was which. This made our task slightly more complicated, but it’s alright – it was nothing we couldn’t handle.
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5. Using Manual Accounting Systems
Businesses that still use manual accounting software – especially in an era where automation is key – are no different from those who insist on using a typewriter in a world of laptops.
Manual methods are not just outdated. They can also limit the growth and efficiency of your business. While it might seem cost-effective in the beginning, it often leads to problems as the business grows.
So don’t let tradition hold you back. Learn more about bookkeeping software in this article. Here at The Bookkeeping Studio in Australia, we like to leverage the synergy between Xero and Hubdoc.
Modern, automated accounting systems offer a more efficient, accurate, and scalable solution. They not only reduce the risk of human error but also save time by automating routine tasks. Moreover, they provide real-time insights into your financial situation, aiding decision-making.
Pro tip
Transitioning to a digital system may initially seem daunting, but the benefits – accuracy, efficiency, and real-time insights – are worth the effort. Remember, you’re not just changing your system; you are setting up your business for scalability and future growth.
6. Not Preparing for the Worst
Every business, no matter how successful, is vulnerable to unforeseen circumstances. Yet, many small businesses neglect to prepare for potential financial setbacks.
Business may be good today, but please don’t be overly confident. Preparation can take many forms: setting aside an emergency fund, securing insurance coverage, diversifying income sources, or regularly reviewing your business strategy, among others. These practices help create a safety net for your business.
I understand that nobody starts a business expecting to face a crisis. However, crises do occur, and the businesses that survive are often those that prepared for the worst while hoping for the best.
This isn’t a matter of being pessimistic; it’s about being pragmatic. The unexpected doesn’t have to spell disaster if you’re prepared.
7. Handling All Bookkeeping Responsibilities on Your Own
Running a small business often feels like a juggling act. However, taking on all bookkeeping responsibilities yourself is like adding more balls to the act – sooner or later, something will drop.
As your business grows, so do your financial responsibilities. Managing everything on your own can result in long nights, stress, and eventually, errors in your financial records. It also means less time spent on what you did best – building your client relationships.
While it’s completely logical to take on all bookkeeping tasks to cut costs, this can lead to costly mistakes and even missed opportunities. You’ll be spreading yourself too thin. Outsourcing virtual bookkeeping services may seem like an additional expense, but I suggest that you think of it as an investment – one that will pay dividends.
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Stop Trying to Fix All Your Financial Problems by Yourself
Bookkeeping is not merely a task to be completed and checked off your to-do list. It’s a fundamental part of your business’s financial framework. Neglect it, and you’re prone to having a weak financial foundation.
At The Bookkeeping Studio, we’ve made it our mission to guide small businesses away from common bookkeeping pitfalls. We understand that every small business owner has a dream – a vision of what their business could be – which is why our services are designed to support that vision, not hinder it. Have one less problem off your mind today.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
