Since most small business owners are their company’s sole employee, they often act as the company’s bookkeeper— along with all of the other hats they wear.
However, unless you’re trained in accounting, doing your business’s books on your own is a daunting task. Still, you can’t ignore the financial recordkeeping of your business—the IRS will definitely take issue with that strategy. Here are some common mistakes to avoid.
1. Overwhelming Yourself with Bookkeeping
For most small business owners, the accounting aspect of the company is not why they started their business. Accounting is a specialized skill requiring experience and education. Especially if you wait until April to figure out your business’s financial situation, bookkeeping can be overwhelming. At best, faulty business accounting can lead to ing out on maximum deductions. At worst, it can trigger an audit and lead to accusations of fraud. Bookkeeping services exist to organize and compile your business’s financial documentation so you can focus on growing your company.
2. Blending Personal and Business Expenses
An easy way to completely confuse your bookkeeping is to mix your personal and business expenses. It might seem trivial in the moment—maybe you need to use your personal credit card to buy business equipment because the cost would max out your business credit card. It’s a slippery slope, though, and can lead to tax woes later on. If your business does not have the money you need, you should transfer the money to your business bank account so there is a proper paper trail.
3. Conflicts of Interest
A third-party bookkeeping service is recommended because it removes any appearance of a conflict of interest. This separation can be particularly important if you have close business partners. Even inadvertent errors could be seen as an attempt to cook the books in your favor. As objective as you try to be with your bookkeeping, you have at least one bias: you want your business to succeed. This desire can color how you do the math, even on a subconscious level. An independent bookkeeper has no biases and, therefore, can provide a clear-eyed snapshot of your financial situation.
4. Losing Receipts
The IRS wants hard copies to prove your expenses are accurate. Beyond avoiding the wrath of the taxman, keeping receipts is important for maintaining a paper trail for your business. Maintaining receipts needs to become a habit for everyone at your company. Additionally, these receipts should be kept around long after Tax Day is over—it’s typically recommended that you keep business receipts for 10 years after filing.
5. Losing Track of Minor Expenses and Petty Cash
Spending a few bucks on office supplies every week seems like it would not make any sort of dent on your balance sheet, but a few dollars per week multiplied by the 52 weeks in a year can quickly add up. Keep a record of your minor business expenses to receive the maximum deduction—it can also help you determine if too much money is seeping away with these small, repeated purchases. Similarly, many offices have a petty cash drawer for incidentals—this petty cash drawer can develop a hole in your pocket if you lose track of it.
6. Disposing of Hard Copies
It saves space and promotes a “green” way of doing business, but going paperless when it comes to important financial documentation can cause huge gaps in your bookkeeping. Without hard copies, a hard drive crash could wipe out all of your records, and many banks only keep digital copies of transactions for a certain period. Merely hoping that there are records of all your pertinent business transactions online somewhere will lead to confusion during tax time. When it comes to bookkeeping, paper is still the gold standard.
7. Taking Charitable Deductions for Your Business
Individual taxpayers can deduct a certain amount of charitable donations from their personal taxes each year. It seems that a business should be able to deduct a donation to a charity, too—especially donations of a product or sponsoring a softball team. However, this isn’t the case. There’s no charitable deduction option for companies. If your business usually receives some form of recognition in return for a donation, the IRS will usually consider these charitable donations a marketing expense.
Procrastination can turn bookkeeping into a seemingly insurmountable task. It might seem fine to delay your bookkeeping and then reconcile all of your records in a one-night binge, but this can easily wreak havoc on your books. When you procrastinate this chore, you are more likely to lose receipts, misclassify newly purchased assets, and forget the details of your expenses. This information is key to keeping your records accurate. Aim to reconcile transactions weekly and look over cash flow data every month. You should do a detailed check-up of your financial situation quarterly.