Here is the second part of our article on the most common bookkeeping mistakes small business owners make.
If you think you might be making any of these, or just have general questions or happen to be looking for a San Diego bookkeeper to help you with your own business please don’t hesitate to give us a call so we can let you know what we can do for you and how we can help.
6. Not Knowing the Difference Between Profits and Cash Flow
A business can have positive cash flow in the short term but still be unprofitable; conversely, it can have negative short-term cash flow but still be profitable in the long term. The first scenario is common among small businesses because they often have to pay suppliers before they get paid by their customers. The second scenario is common among point-of-sale and cash-based businesses, such as retailers and restaurants, that pay their vendors on terms.
To have an accurate picture of your company’s true financial condition at all times, work with an accountant to produce regular financial statements. These consist of a balance sheet, income statement, and profit and loss statement, which should be produced at least quarterly.
7. Using the DIY Method of Bookkeeping
Many small business owners pride themselves on their ability to wear a many different business hats, including the accounting and bookkeeping hat. However, this is one area where small business owners are usually much better off hiring a specialist rather than trying to do it themselves.
Accounting and bookkeeping can get very technical and complex. The money spent to hire a trained bookkeeper or accountant, even on a part-time or contract basis, will usually come back to the owner many times over given the time savings and all the mistakes that will be avoided.
8. Not Saving Receipts for Small Purchases
The IRS requires that expenses for business travel, meals, and entertainment that are greater than or equal to $75 be substantiated with a receipt in order to be deductible. So many business owners don’t bother saving receipts for expenses less than $75.
Doing this can be a big mistake. While such receipts may not technically be required by the IRS, they are extremely helpful as backup documentation. When it’s time to sit down with your accountant and start working on your annual tax return, having a receipt for every deductible business expense, no matter how small, will help ensure that you don’t overlook any potential deductions.
9. Not Implementing Adequate Internal Controls
If proper checks and balances aren’t implemented in a business’s accounting system, bookkeepers may have opportunities to commit fraud and embezzlement. Losses from internal fraud can significantly cripple a small business, or even lead to bankruptcy.
The best way to guard against embezzlement by a bookkeeper is to implement solid internal financial controls. This includes segregating financial duties so that no one employee has unfettered control of every aspect of the business’s finances. If it isn’t practical for you to hire more than one bookkeeper, you should personally oversee the bookkeeping work and keep tabs on it yourself.
10. Relying Too Heavily on a Paperless Work Environment
To reduce expenses and be better stewards of the environment, many companies today are trying to go paperless. In the realm of bookkeeping and accounting, however, there’s simply no substitute for paper documentation and a paper trail, when needed.
There are many instances in which paper documentation of financial records will come in handy or be required. An IRS audit is one example — you don’t want to be unable to produce requested financial documentation because it was lost in your computer system, or your system is temporarily down. While being environmentally conscious is important, bookkeeping isn’t an area where you should skimp on the paper.