From one-person entities to JSE-listed companies, no business can escape the dreaded task of bookkeeping. While it’s definitely not one of the more glamorous parts of the job, bookkeeping is at the heart of small business success, which means errors can be crippling. To avoid the financial headaches that come with bookkeeping mismanagement, it’s important first to be aware of the pitfalls that can ensnare you.
Here are 7 of the most common bookkeeping mistakes small business owners make when approaching their company’s finances:
1. Failing to track reimbursable expenses.
Neglecting to track your reimbursable expenses is like flushing money down the drain. Not only can you lose money, but you can also lose tax deductions, which is essentially the same thing. Again, there are plenty of small business accounting apps and programs available to make this process easy and consistent, e.g. Quickbooks, Xero, OMNI, SMEasy and Sage to name but a few. Try to get into the habit of tracking your expenses as you accrue them – the longer you go without tracking, the more likely your expenses will become overlooked. Tracking reimbursable expenses is just as important as saving your smaller receipts – one allows you to maintain a paper trail in the event of an audit; the other allows you to track the financial health of your business.
2. Not communicating.
Whether you choose to hire a part-time bookkeeper or outsource the work to a professional, communication is the key to effective bookkeeping, because it keeps everyone on the same page and minimizes errors. One of the more common mistakes, for example, is paying someone a bonus and not reporting it to the bookkeeper. Another is buying supplies and not providing telling the bookkeeper or supplying receipts.
3. Neglecting to reconcile.
Reconciling your books with bank statements is a fundamental aspect of determining your financial health. It’s important to make sure it’s done properly and consistently. Reconciling your books helps you identify how much money you have on hand at any given time, and it also allows you to discover bank errors before they become major problems. Reconciliation can be complicated, however, which is why hiring an experienced bookkeeper is highly recommended.
4. Not having a paper backup.
When it comes to audits, a paperless office can actually be a major liability, especially in the event of technical problems. Taxing authorities like SARS want to see a paper trail that includes clearly visible documentation and a well-organised system of paper backups. Apps that save your receipts can make day-to-day operations easier, but it’s still important to keep a backup of your financials for at least five years.
5. Failing to collect or deduct the appropriate sales tax.
Due to the explosion of e-commerce over the last 10 years, sales tax – or VAT – has become a complex issue for many small businesses. Historically, the mistake they most often made was simply failing to deduct sales tax from total sales, which would translate into lump-sum surprises come tax time. Make sure you and your bookkeeper are familiar with the latest rule changes, so you can remain in compliance and limit your overall tax liability.
6. Mis-categorisation or overcategorisation.
Maintaining a clean and organised chart of accounts is critical for your bookkeeping. While most expense categories are fairly standard and straightforward, the mistake many business owners make when doing their own bookkeeping is creating duplicate categories or failing to enter expenses into the appropriate category. Use general bookkeeping guidelines for standard categorisations and create as few new categories as possible. A professional bookkeeper can help you clean up your books and ensure your chart of accounts is lean and clean.
7. Trying to do it yourself.
Most small business owners hate doing their own books yet insist on doing it themselves. Competent, professional bookkeepers have the required skills to do the job quickly and efficiently, and they have the necessary expertise to locate subtle errors that might otherwise be missed. As professionals, they’ll also be aware of the tax changes that could affect your day-to-day financial practices. In the long run, having a second set of eyes on your financial records is extremely beneficial and will save you time and money.