Having worked with a variety of small business owners over the years, I’ve seen a lot of bookkeeping mistakes (and sometimes some bona fide big time messes). Many of those mistakes are quite innocent, not a big deal, and easily fixed. But if not corrected, over time they can snowball out of control and prevent you from being able to really see your true financial picture.
Entire volumes could be written about “Accounting for Non-Accountants.” But who wants to dig through an entire book on, let’s face it, a fairly boring topic?
The following list is what I consider to be the top three most easily fixed bookkeeping mistakes made by small business owners.
Mistake #1: Mixing business and personal expenses
Mixing expenses is a really easy mistake to make. I see it happen most often with solopreneurs who use one checking account or credit card to pay for everything — and by everything, I mean groceries, office supplies, cat food, and office rent.
The problem with this system is that all those expenses (some of which are business-related and some of which are personal) are unhelpfully commingled together in one account and have to be manually separated.
I admit that I did this myself when I first started my business, knowing that I happen to keep meticulous records and that I could easily separate business from personal as I went along. For me, this wasn’t a huge deal. But I’ve since made it easier on myself by implementing the very first tip I give to any new entrepreneur.
How To Fix It: Maintain a separate checking account and a separate credit card for your business
Use your personal account for the groceries and the cat food. Use your business account for office supplies and web hosting services. With this one simple step, you’ve made it substantially easier for yourself and your accountant because all your deductible business expenses are kept tidily separate.
Mistake #2: Not reconciling bank accounts regularly
So you’ve opened up a business checking account and gotten yourself a great new travel rewards credit card specifically for your business. Smooth sailing, right?
Yes, to a degree. But do you know exactly how much cash you have in that shiny new business bank account? Do you know which checks have cleared? Do you know if that one particular client actually sent money by PayPal like she promised?
These important tidbits about cash flow are gleaned by reconciling your accounts. (Reconcile means “to bring into agreement.” In other words, verifying that the idea of how much cash your business has actually matches the reality of what’s in your bank account.)
How To Fix It: Reconcile your accounts
every monthregularly versus trying to remember everything at year end
Sometimes the bank makes errors when you deposit a bunch of checks, or sometimes you might forget to subtract banking or PayPal fees from your check register. It’s easier to remember and correct all this stuff at the time instead of trying to do it all months later.
Heck, some people reconcile their accounts every day just so they know their exact cash flow — which is extraordinarily easy to do if you use Xero Accounting Software. Here’s a list of six reasons why you should.
Mistake #3: Too many expense categories
Remember Occam’s Razor, also known as the Law of Economy? In bookkeeping we might invoke it to say, “Expense categories are not to be multiplied without necessity.”
In all earnestness and because they think it’s a good idea, small business owners will maintain many more expense categories than are really necessary for accurate and adequate record keeping. There’s no need to keep separate categories each for paper, postage, and your monthly Xero subscription when those could all be categorized simply as “Office Expenses.”
How To Fix It: Limit expense categories to no more than twenty
I think Part II of IRS Form Schedule C is a good starting place. All businesses are different, but the expense categories listed on Schedule C generally work for everybody. If your business grows or becomes more complicated, your list of expenses can be added to or changed. But that task falls into the “cross that bridge later” category. Start small and simple.