As a CPA who works with small business owners every single day, I can confidently say this: most bookkeeping mistakes are not made because the business owner is careless or bad with numbers. They’re made because business owners are busy doing all of the things.
Today, I’m hoping you’ll take a few minutes to think about your bookkeeping and make sure you’re avoiding these top 5 bookkeeping mistakes that could cost you time and money. I’ll also make sure to tell you how to avoid and fix these mistakes so you can get back to doing what you love.
Bookkeeping Mistake #1: Mixing Business and Personal Finances
This is, without a doubt, the most common bookkeeping mistake I see, and it usually starts innocently but then turns into a huge mess.
Why this is a problem:
Mixing finances makes bookkeeping harder, tax prep more expensive, and raises red flags if you’re ever audited. It can also jeopardize legal protections if you own an LLC or an S-Corporation.
Example:
I work with a freelance graphic designer who used to run all of her expenses through her personal checking account. When tax time came around, she had no idea which Amazon purchases were for her business and which were personal purchases. She spent hours sorting through bank statements, and she was still worried that she may have missed deductions.
How to avoid it:
If you have a business, you must open a separate business bank account as soon as possible. It’s also a good idea to open a business credit card. Even if your business is very small and you’re just starting out, keeping your business money separate will save you tons of time and stress later.
Mistake #2: Not Making Bookkeeping Part of Your Routine
To my great dismay, many small business owners treat bookkeeping as a once-a-year task. They hand over a shoebox full of receipts (true story) or a Dropbox folder full of images and PDFs of invoices and receipts (another true story) and hope for the best.
Why this is a problem:
When you do your bookkeeping months after the fact, mistakes are easier to make because your receipts, invoices, and payments are harder to find and account for. Aside from taxes, if you’re not regularly looking at your numbers, then you don’t have a good pulse on how your business is really performing.
Example:
A small boutique owner came to me in March with zero bookkeeping done for the prior year. By the time everything was cleaned up, she discovered that she owed significantly more in taxes than she expected. She’d already missed the opportunity to plan ahead and make quarterly estimated tax payments, so she ended up borrowing money to pay her tax bill on time.
How to avoid it:
Make bookkeeping part of your schedule. Set up a bi-weekly (ideal), weekly, or even monthly (better than nothing) calendar reminder to clean up your books. Or, if you’re being real with yourself and know that you won’t be able to stick to a schedule, then bookkeeping is a great area to outsource to professionals.
Bookkeeping Mistake #3: Categorizing Expenses Incorrectly
Gusto, QuickBooks, and other accounting software makes it easy to categorize transactions, but easy doesn’t always get the job done right, especially if the categories haven’t been set up correctly to start with.
Why is this a problem:
Categorizing your expenses correctly helps you understand where your money is going. Not doing this means you can’t make educated business decisions and you risk properly reporting your deductions on your tax return.
For instance, if you categorize everything as “Miscellaneous” just to get the task done, you run into the same problems you would have if you didn’t categorize your expenses at all.
Example:
A social media consultant client of mine accidentally categorized all website development costs as “Advertising” and all software subscriptions as “Office Supplies.” Not only were these categories incorrect, but the deduction amounts were thrown off too because of the incorrect categorization. These errors also caused confusion when reviewing financial reports for her business, and they could have caused major issues during an audit.
How to avoid it:
Invest a little time into learning the basics of common expense categories for your business type. When in doubt, you should ask your CPA or a bookkeeper instead of guessing at the correct category to use.
Bookkeeping Mistake #4: Ignoring Reconciliations
Many small business owners think of this step as “old school” or unnecessary, but it’s actually still very important to reconcile your bank and credit card accounts to make sure your accounting records match your statements.
Why is this a problem:
If you don’t reconcile, errors and missing transactions can go unnoticed for months. This can lead to incorrect financial reports and errors on your tax filings and estimated payments.
Example:
A wedding photographer that I work with noticed that her income seemed lower than expected, but she couldn’t figure out why her math wasn’t mathing. I worked with her on reconciling her accounts, and we discovered the problem was that during her busy season, she overlooked several client payments that had been deposited but never recorded in her books.
How to avoid it:
You should reconcile your bank and credit card accounts monthly. Most accounting software can even walk you through the process step by step. Just set up a calendar reminder, and get it done. Think of this as an easy way to double-check your calculations.
Bookkeeping Mistake #5: Ignoring the Numbers
Even when small business owners have gone through the steps of doing the bookkeeping and checked it off as done, they sometimes never even look at their financial reports. They focus on their bank balance and hope that a good amount means things are going well.
Why is this a problem:
When you ignore your financial reports, you aren’t getting the full picture about whether your business is succeeding. Ignoring these reports means you’re making business decisions without all of the facts, and that can be costly. It also can hinder your growth and future success.
Example:
A small bakery owner felt profitable because she always had money in the bank. However, when we reviewed her profit and loss statement together, we discovered her margins were shrinking due to rising ingredient costs, and she needed to raise her prices. If we hadn’t looked at the reports, she would have continued to make less money for the same amount of work.
How to avoid it:
Review your profit and loss statement and balance sheet regularly, even if you don’t understand everything at first. You’ll start to notice trends and patterns that can help you make smarter business decisions. And if you have questions about what you’re seeing, a CPA can help explain what the numbers actually mean.
Abridged by Amy
If you’re guilty of one or more of these mistakes, don’t worry. You are definitely not alone, and it doesn’t mean that you’ve failed or that you’re not capable of running a successful business. I truly hope you understand that all of these mistakes can be fixed!
Just remember that good bookkeeping isn’t about perfection. It’s really about consistency and using tools and processes that work for you so that you can make better business decisions and feel less stressed when it comes to taxes and the money side of your business.
If bookkeeping is stressing you out or you simply don’t have the time to focus on it, then working with a CPA or bookkeeper can be one of the best business investments that you can make. It can free you up to focus on growth while knowing that your numbers and paperwork are handled correctly.
