5 Common Bookkeeping Pitfalls – and How to Avoid Them
Although most entrepreneurs recognise the importance of careful financial management, few want to spend their time dealing with numbers. Unfortunately, not keeping a close eye on your income and expenses can be very costly and stressful for a business owner.
Here are five of the most common bookkeeping pitfalls, and some simple tips for getting back on track.
Mixing business and personal
All too often, entrepreneurs adopt a “buy now, sort later” approach to expenses, using the same credit card for personal and professional purchases. At the end of the month, they are left poring over bank statements, trying to sort things out.
“How were things paid, which card was used, did you pay cash, did your partner pay for it – working these things out is a time consuming waste of resources.”
Mixing business and personal expenses costs extra hours of bookkeeping each month, and muddies your overall financial picture if you are not accurately reporting all costs incurred.
Avoid this pitfall by using a separate debit card and bank account for business, and being disciplined about separating expenditures. The initial pain to set it up is worth it in the long run.
Neglecting to track reimbursable expenses
Receipt-tracking is a necessary part of business ownership. You need to keep track of receipts to understand spending patterns and effectively manage your company’s finances. And if you want to claim deductions at tax time, you’ll need to keep those receipts (in some form – we prefer electronic via the likes of Receiptbank or Hubdoc).
But far too many business owners take a haphazard approach to collecting and organising receipts – especially while on-the-go, where a whopping 50% of their expenses are generated.
Keep in mind a shoebox is not a fabulous receipt storing solution – as paper based receipts will fade generally within 3-6 months.
Not taking advantage of technology
Are you still relying on manual accounting methods? Cash books ledgers, excel spreadsheets or worse yet, hand written notes on various scraps of paper?
While basic spreadsheet tools can get the job done, they leave the door wide open for human error. Mortgage loan giant, Fannie Mae, once uncovered a $1.1 billion error on their Excel spreadsheet, citing “honest mistake” as the cause.
What’s more, manual methods simply can’t match the technological benefits offered by software like QuickBooks or Xero. These systems track invoicing, link with your credit card, Paypal and business account, organise expenses, and generate insightful financial reports. So whilst the initial cost can vary between $15 and $60 a month, if used correctly ad accurately, it provides insights into your business you simply can’t generate with manual methods.
Not keeping accounts up to date
Let’s be frank. Most business owners don’t look forward to that weekly appointment with “the books.” In fact, many entrepreneurs cite bookkeeping as their most dreaded responsibility and will find a host of reasons to avoid it.
“But ask yourself this – why are you avoiding it? Do you find it difficult, does it take ages, do you not know how to record something, does the paper stress you out, does the ATO give you nightmares? “
All of these things can be easily fixed with one of our training sessions. For most startup business owners, we suggest dedicating one hour a week to keep things on track. This will increase in line with your business increasing. But keeping on top of the tasks weekly saves you having to spend and entire weekend once a month to get it done.
Doing it all yourself
It is completely understandable for budget-conscious entrepreneurs to try to cut costs by handling bookkeeping on their own. However, taking advantage of professional help – even on a part time basis – can generate substantial savings of time and money over the long term.
“Just last month we did a full GST audit for a client, and discovered they had overpaid GST of $8k over a period of 12 months. By getting us to review, prepare and amend the BAS’s lodged, even with our fee, the client received $6k back in her pocket. I would call that a win wouldn’t you?”